Stock market reaction to J&J vaccine pause is ‘pretty modest’: economist

Michael Darda, Chief Economist & Macro Strategist at MKM Partners joins Yahoo Finance Live to discuss the outlook for economic recovery after U.S. regulators called for a pause in the use of Johnson & Johnson’s COVID-19 vaccine.

Video transcript

BRIAN SOZZI: Let's stay on the economic recovery here and bring in Michael Darda. He is chief economist and macro strategist at MKM Partners. Michael, always good to see you. Definitely want to talk on the CPI data.

But a lot of focus right now this morning on what is going on with J&J, that immediate pause in the vaccine. Is this development the type where you as an economist, you will-- you may cut your second quarter GDP forecast?

MICHAEL DARDA: I don't think so. The vaccine rollout has been intensifying, and J&J already had some issues with production and distribution. And so even if the change was halted indefinitely, I think we're probably rapidly heading to a situation in the US where vaccines, if anything, are in surplus, meaning anyone that wants one can get one.

Not only that, but if you look at the people that have had COVID and recovered, plus the population that's vaccinated, we're probably rapidly approaching a threshold where reopening can intensify and broaden. And so I'm not too worried about this news, in terms of slowing the recovery much.

And I think even though the market has reacted, the reaction is pretty modest, given some of the gains that we've seen. Even J&J, the pullback today is pretty small considering this news. Just keep in mind that these statistics, if we've had six people that have clotted out of 6 million doses, relative to the amount of cases that have been reported for COVID in the US and the deaths, you've actually got an 18,000 fold higher probability of dying of COVID and clotting from the J&J vaccine. So let's just keep it in context keep, in my opinion.

MYLES UDLAND: So Mike, before we got this news out of J&J, we were certainly all awaiting that CPI data, and how we're thinking about inflation here. And I'm curious, first what you make if anything of this data, if it surprises one way or the other. But second, just the state of the conversations you're having with folks today around their worries over inflation.

We've seen the back up at the long end of the curve. We've seen some stabilization in rates. So how are those conversations unfolding today?

MICHAEL DARDA: Great question. So in terms of the contemporaneous data, basically the CPI came in line with expectations. 6/10 on the headline, 3/10 in the core, just slightly above expectations but nothing too surprising. We are moving into an environment over the next few months where we're going to see some pretty notable pressure on headline inflation, headline CPI.

I think that's widely expected. Meaning if we get two more months where we get 5/10 of a percentage point increases in the headline number, we're going to be up about 4% inflation on a year to year basis. So we haven't seen anything like that since you got to go back to 2008. Now, that was the beginning of the Great Recession.

I think the key differentiating factor here is the economy's in a strong upswing now, not on its way down. And so for the Fed, what they're going to be more concerned about is labor slack, as it continues to diminish significantly this year, and critically pressures on core inflation. You mentioned the core rate is running at 1.6 year over year.

So before the Fed really does anything, at least on rates, they're going to want to see that PCE, core PCE deflater, which tends to run a little below the CPI statistics, at least at if not above 2%, and expected to stay there, with a pretty fully recovered labor market. So that probably takes us into 2022, in terms of any potential Fed rate hikes.

That's a little earlier than the consensus is expecting. But it's all going to be driven by the intensity of the recovery, and how these inflationary pressures play out regarding the core rate. That's really the critical variable for the Fed.

BRIAN SOZZI: So Michael, we have some signs of inflation building. We have the J&J news. Are these, you know, these are the type of events that light the fuse for this corrective market shakeup that you write about?

MICHAEL DARDA: Yeah, really important one. I do think we have some risk in financial markets, in the equity market. More concentrated than what we think of as the NASDAQ stocks, since the valuations there are trading at 50% plus premium to what we saw in the last six years of the last business cycle, when rate structure was a bit higher than it is now, but not dramatically higher. A little over 2% on the 10-year Treasury.

That's probably where we're headed with the V-shaped recovery, if it continues. So I do think we have some stock market risk concentrated in the super highly valued growth names, in particular if long-term interest rates continue to move higher.

You mentioned that they've stabilized recently, that is true. But in my opinion, that's probably a pause. And the next phase here will be higher market interest rates as this recovery continues to intensify and broaden.

MYLES UDLAND: You know, Mike, we're talking about the beginning of a recovery, and coming out of that recessionary environment we were in a year ago. Interestingly today, Bank of America's latest fund managers survey, 2/3 of respondents say that the market's looking like a late stage bull market. I mean, is that mean kind of setting the table for the next way that consensus just finds itself flat-footed as we get through the cycle? Everyone thinking, it's got to be the end, it's got to be the end, because it's been such an intense bounce off those lows?

MICHAEL DARDA: Well, I think what folks are looking at is the combination of high valuations, still low but rising discount rates, and a very intense V-shaped rebound in a lot of questions over where inflation is headed. And that fragile equilibrium, I think, is a risk. A V-shaped recovery is exactly what you want when you're coming out of a ditch.

But if it goes too far and we overshoot and overheat, what does that mean for market interest rates in an environment where valuations have exploded to the upside? I mean, you have higher valuations in equity markets than anything we saw in the last cycle. In particular, for those growth stocks in the NASDAQ 100. And so I think we could be-- we could be running into some troubled waters for some of these hyper valued growth names in an environment where inflation and market interest rates continue to head higher.

BRIAN SOZZI: And Indeed. We will, in fact, be on the lookout. Michael Darda, chief economist and macro strategist at MKM Partners. Always good to see you.