We are not seeing a return to the labor market: strategist

Principal Global Investors Chief Strategist Seema Shah joins Yahoo Finance to discuss the underperforming September jobs report, how the jobs report will affect the Fed’s stance on tapering, and the role vaccinations play in the economic recovery.

Video transcript

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BRIAN SOZZI: Welcome back to Yahoo Finance Live. Let's stay on all things jobs report here. Seema Shah is chief strategist at Principal Global Investors and joins us now. Seema, always good to see you.

So I'm putting this question to everyone today. How do you-- how should one invest for a slowing economic growth environment, which I think this jobs report fleshes out, but continued high levels of inflation?

SEEMA SHAH: Hi. Thanks for having me on. Yeah, it's a tough environment. And I can understand why investors are getting quite confused by this. You know, we have a lot of discussion around this.

I think the thing is we need to take a step back and look at the overall economy. It's slow. But we're still looking at positive, probably above-trend, growth through next year. So that, to us, says risk assets should still do well.

So really, we're still overweight equities. But within this, there, of course-- there's a lot of concerns building up, one being around inflation, and, two, maybe that inflation is starting to impact consumer spending and how people are feeling.

So with that in mind, I think we need to be slightly more cautious. This is the time when quality companies really start to outperform. That's where you want to be focused when things are getting a bit tougher. So, you know, the strong companies, the big balance sheets, the companies which will continue to deliver quarter after quarter, even as conditions become a little bit more challenging--

JULIE HYMAN: Seema, let's take a step back for a minute and look at the jobs report from this morning and its implications. I mean, you said in your note to us in reaction to it, "This number has thrown expectations for tapering into disarray." So what does that mean? What does that mean that-- I mean, is the Fed going to now delay tapering?

SEEMA SHAH: Certainly, I think it's very difficult to know. We came into this week, and I think everyone was of the assumption that we didn't need much to-- almost to convince the Fed that it was the right thing to do to start tapering in November.

This number is-- it's definitely weaker than expected. And I think more worrying than, actually, that headline number is the fact that the participation rate has fallen. We should have been seeing it increase. We should see people returning to the labor market as you see the expiration of benefits. You see the return to in-person schooling and general COVID confidence. We are not seeing that. So I think it has to be a concern to the Fed.

Do I think it's enough to stop them from tapering? Look, I think that's a big question mark. And maybe the way to interpret that is there's a question mark. But if anything, it probably slows down the pace of normalization, which, at least, it means that interest rate hikes are probably not going to come at the end of next year. You're looking more like 2023.

BRIAN SOZZI: Seema, isn't the real problem here-- it's not necessarily when the Fed tapers, do they taper, or how do they taper, necessarily, when do they raise rates. It's that we're still in the middle of a pandemic. And is it the case, really, that this jobs report makes more people need to get vaccinated so this economy get back-- gets back to normal?

SEEMA SHAH: I think there's certainly that case. And I think you're right. I mean, look, investing during a pandemic as an invest-- or certainly, even as a central bank trying to think about how to conduct policy when the environment is still so uncertain-- and I think this jobs report really shows that in a very clear light.

It is probably true that as vaccinations increase, there'll be more confidence about returning to the market and just about generally going out and spending money. Kind of-- mobility should increase. So I think that is a dynamic that we would, hopefully, continue to see in the US.

There has been a bit of a slowdown in vaccination numbers, which hasn't helped the economic recovery. But, you know, hopefully, over the winter months, we should see some continuation.

But as I've said before, the key thing is that, even with the slowing growth rate, it's still a growth rate which is above trend. So you still have a fundamental strength in the economy. But investors have to be that much more selective now.

JULIE HYMAN: So let's go back to investing in companies with robust balance sheets who are going to be sort of resistant here. A lot of those are in the sort of tech and communication sectors. But there, obviously, has been a lot of concern around those sectors that, with rising rates, we are going to see their P/E multiples squeezed. Is that, in particular, an area you would look at or avoid or do it on a sort of case-by-case basis, as you were talking about?

SEEMA SHAH: Well, we do still really like big tech. And again, you have to be selective within big tech. You know, just, you have to pick out the really-- the strong ones. We have been fans of big tech for a while, and that hasn't changed now.

I think today's report, again, is reminding us that normalization from central banks is going to be very slow, very gradual. So with that in mind, the rising rates-- look, it's probably-- there is a bias to the upside. But it should be too sharp a move. And we're probably nearing that ceiling at this stage.

So, you know, the last two weeks have been difficult for big tech. But we think a lot of that-- that those kind of challenging conditions are starting to wind down now. And this is the strong balance sheets, positive cash flow. Companies are-- as margins potentially get pressured by rising costs, you want the companies that can withstand that kind of pressure. And that's one of the key reasons why we continue to like big tech.

BRIAN SOZZI: Seema, I hear what you're saying on tech. I mean, big tech has been just really beat down the past month and a half with the rise in yields. But, you know, when someone sees the extent of the jobs report missed today, I mean, does it argue that one should raise a little cash, perhaps go to consumer staple stocks, other dividend payers that-- a little more safer in what could be a volatile environment into year-end?

SEEMA SHAH: Well, so I agree that there should be-- there's probably cause for more caution than there was maybe three or four months ago, absolutely. But in terms of going to cash, I don't think we need to get to that point because, you know, you still have got a point where earnings growth will continue to be positive and quite impressive.

It's about positioning within risk assets-- so equities within credit-- but to a slightly safer environment. And that's one of the reasons why this idea of moving towards quality should do better in this kind of environment than what you'd have from your typical cyclical space, which is going to be more exposed to some of the headwinds that we may see from the economy, and certainly from the labor market.

BRIAN SOZZI: Great insights, as always. Seema Shah, chief strategist at Principal Global Investors, have a great weekend.