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‘The stock market is going to go higher from here’: J.P. Morgan’s Chair of Global Research

Joyce Chang, J.P. Morgan’s Chair of Global Research, joins Yahoo Finance to discuss the economic and inventory cycle, opportunities in the market, and the economic recovery.

Video transcript

- I want to continue this market conversation now. We're joined by Joyce Chang, JP Morgan Global Head of Research. Joyce, great to have you here with us.

I want to start with something that you mentioned in your notes actually right at the top about the three cycles that we have currently going on in the market right now. Now you highlighted them as COVID, the economic cycle, and also the inventory cycle. You did mention that they were linked, however, not synchronized. I'm curious to know how you see them all interacting right now, especially as they're not working in sync at all, and how investors should really be trading with all three of these cycles in motion at the same time.

JOYCE CHANG: Well, great to be with you. Well, there really are three different cycles that are going on. The first is the COVID cycle.

And I would still call that late cycle even with the Delta variant, at least in the United States. Now this varies around the world. But I think at this stage, it is late cycle.

They hit the 70% vaccination. We're not going back to full lockdowns, even though we have these more localized concerns that are still building up and that could still play out. Then you've got the economic cycle itself.

And remember that after a recession, typically these cycles have averaged about five years for an expansion. So where are we in that cycle? Are we early cycle? Are we mid-cycle if this is a shorter cycle, given we had such a rapid turn down and we've had such a rapid upturn?

And then the final cycle, which really is in its infancy, is the global inventory cycle. It's the supply chain bottlenecks and how this will be met. So these are really three very linked cycles. But they're not synchronized. And this is why we see the markets at real crosscurrents right now.

Now, the growth cycle-- we're not late cycle in the expansion. We're still very early in the expansion. We had growth in the third quarter in the US. We're forecasting at over 8%.

So after 6 and 1/2 percent growth, still very much above trend growth. On the global inventory cycle, we are still seeing these bottleneck pressures. And we haven't seen these inventories build out yet.

But I think this still points to a growth story in the US that remains very strong over 8% growth in the third quarter of the year, looking at the full year, more than 6% growth for the full year. And we do think that the stock market's going to go higher from here. We have 4,600 as the target.

We've taken up the earnings forecast to $205. And we also think that many of these recovery plays remain attractive right now after having some volatility over the last few months. So what makes sense right now, reflation. We think small cap. Some of the oil themes make sense as well as the reopening plays.

- Joyce, I want to talk to you about the strength of that economic recovery because we're getting a lot of news today from some big name companies, adding your name to the list of those, who are delaying a return to office. This morning BlackRock and Wells Fargo said they're not going to bring employees back now until October because the Delta variant is spreading. And just moments ago, Amazon announced it's not going to bring back its corporate employees until at least 2022. If that is the case and we have more S&P 500 companies announcing a delay to the office, what does that do to the strength of the economic recovery? Are you concerned about productivity levels at those companies?

JOYCE CHANG: I think that these kinds of delays are ones that we have learned to live with. I mean, we've had a number of times where we've talked about return to the office. And this has been delayed.

I don't think it changes the overall recovery story or the consumer demand story. So everybody is watching the Delta variant. Everybody's being very careful. But we still see the reopenings continuing here.

So I do actually view some of this volatility as more of an opportunity, particularly when we see where earnings growth is at. And I think that it's not just in the US. I mean, we will see the reopening also-- it'll continue in Europe as well.

I think that Asia is going to be more cautious about the pace. Emerging markets in general will be more cautious. But we do see double digit growth in store for Europe as well. So there are delays to this as the vaccinations are getting rolled out, as we deal with these variants.

But it does not change the overall view that growth is well above trend. The consumer demand story is very much intact. And you also have household savings at a record high level. So I do think that reopening plays still makes sense at this stage in the cycle.

- Joyce, where else are you seeing opportunity right now? You mentioned actually some emerging markets. We've had actually a bit of a mixed bag at least when it comes to opinions of folks here. Some folks have pointed out as Asian markets is very attractive right now, especially considering that so many of the stocks there have been under pressure lately. Some pointing to that is a great buying opportunity.

But we've also heard from some folks who say that right now to stay away from the international trade. Where do you stand right now? And where do you see some of that opportunity still laying?

JOYCE CHANG: Well, I think that the regulatory tightening that we've seen in China is still going to play out further. And it will affect some of the other sectors that are in the new economy where you've had profitability grow very rapidly. And that's going to weigh on some of the sentiment in Asia.

So we have upgraded emerging markets. But we've upgraded some of the stories where we really thought it was much more based on value rather than on the growth story. Latin America is one area where we had upgraded both Mexico and Brazil just because we felt that this was a situation that was bottoming that even though you still have continuing challenges that are playing out with the pandemic, you still will have that they had just really degraded so much that they were looking much more attractive levels for entry.

And you will see that China was first in first out, then the US. Europe is going to I think post really strong numbers for the third quarter of the year. And in the fourth quarter, we think that emerging markets will be back. But we think outside of Asia makes more sense. Russia was another one that we had upgraded, and that's in part because of the energy story where we do see energy prices staying in the $70 range from now until the end of the year based off of the demand story.

- Joyce, we know that the Fed is looking very closely at inflation but also at the job market as it considers sort of its next move. Tomorrow, we're going to get the monthly unemployment report. What would be the sweet spot for investors that they would need to see tomorrow in that report to push this market even higher?

JOYCE CHANG: So I think that we're looking at just not things like the payrolls numbers but also the labor force participation rate. And I think that is-- the Fed has a dual mandate here. And Powell's comments have made it very clear that they have absolutely no sense of panic about inflation. I think the Fed is much more focused on the unemployment number.

I don't think that they will actually raise rates until unemployment is closer to 4%. So I think that we're looking at labor force participation rates. There's a lot of questions about whether how many jobs have actually been permanently lost because of the pandemic, how this has hit the demographics for the age group that's over 55-years-old, how this has hit women, who's been disproportionately more disadvantaged in this crisis on the employment front.

And I think the market's going to very much focus on just some of these numbers going forward. Because in the dual mandate, I think the Fed has signaled that it is putting more emphasis on the labor market conditions, that they're willing to tolerate the higher inflation prints, which we do think will stay with us.

- Joyce, you mentioned the unemployment rate. We're now at 5.9%, or at least we were in June. We'll find out tomorrow where we were in July.

And a lot of people believe that it's going to take till the end of this decade to get us back to pre-pandemic levels when it comes to the job market. But you mentioned 4% as a magic number for the Federal Reserve. What do you think it's going to take to get us there? When might we see 4% unemployment in this country?

JOYCE CHANG: I think you can see that in the 2022, 2023 time horizon. I don't think it is the end of the decade. Even by the end of the year, I think that you will be coming back to levels that are around 5%.

So I think the end of the decade is a real stretch here as far as what we're seeing because we are seeing the labor shortages play out as well. But I think the labor force participation rate, that is also very important. Are we going to have some jobs that are permanently lost? And that is something that I think not enough attention has been paid to.

- All right, we're going to have to leave that there. Joyce Chang, JP Morgan's Global Head of Research, thanks so much for joining us today.