What is responsible for the stock market rally?

Jason Ware, Albion Financial Group CIO, joined Yahoo Finance to discuss the current state of the stock market and why it may be out ahead of the current economic climate.

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MYLES UDLAND: Jason, I guess let's just start with maybe how you see this debate. And I don't even know if it's a debate. But it's certainly the first thing anyone wants to talk about with respect to the stock market is how can the stock market be behaving the way it is with the real economy in the kind of shape that we see with the labor market data, and we're less than two weeks out from another grisly jobs report? How have you kind of been thinking, maybe explaining to folks your thinking right now?

JASON WARE: Hi, Myles. Good to be with you. And that is the central question, and it's the central question because it's so perplexing as to how, as you noted, we can be having such a strong rally in the stock market.

I mean, we are now above the 200-day moving average on the S&P with today's move-- you know, bounced 35-plus percent off of the bottom. Meanwhile, the economic data is so terrible.

And I think the way that we think about that is-- it's fairly simple. And it's that the economy is a discounting mechanism looking out about 6 to 12 months. And I think the current information that we're all consuming on a daily basis and seeing these just terrible jobs numbers and manufacturing data and retail sales across the board-- these are some pretty startling data points.

But the stock market is less concerned about what those economic reports show, because they're really rearview mirror. And the economy and stock market's looking out of the windshield, and saying, well, you know what, we have the virus-- at least it seems like we have it under control to some degree. We're managing it.

Meanwhile, we're seeing some encouraging data and some reports on the health care front with regards to vaccines, et cetera. We've bent the curve. And maybe as we reopen the economy, we can get back on the rails here. And if, in six months, we're starting to recover, then the market is out ahead of that.

SEANA SMITH: Hey, Jason. It's Seana. I guess my question then, following up on that, is do you think Wall Street at all is underestimating, then, the economic weakness that we're getting, where some of the supply shots that we were seeing play out here in a number of industries, because you mentioned we could possibly see this second wave. And if that does, in fact, come to fruition, we could see a major sell-off, and then again in the markets.

JASON WARE: Yeah, I think that's a good point. I think expectations have risen over the past few weeks. And they've risen in lockstep with the stock market.

And that's not unusual. That typically-- we see that correlation pretty closely over the short and long run. But I think, to your point, the economy's not gonna just suddenly reopen. I think a V-shaped recovery in earnest is probably off the table. And most folks understand that.

I think the most optimistic among us might think that's still a possibility. But by and large, I think the expectations in the market are for a gradual, more U-shaped recovery in the second half of the year. If that fails to emerge, then I think the market is going to struggle to to some degree.

But I also think that the economy doesn't have to open broadly for this to continue to progress. And what I mean by that is, in most recessions, coming out of recession, the economy doesn't all just instantly come back online. We have some industries and sectors that come on quicker than others.

We saw that in 2008. We saw that in 2001. I mean, I don't think we had a tech IPO for like two years after the tech bubble burst.

So we're gonna see-- it's gonna be lumpy. It's not gonna be even. But I think to the extent that it's showing progress, and we're starting to see less bad data relative to expectations, that that will be good for the market over the medium term.

SEANA SMITH: And then you rightfully point out that now the tech companies are utility-like, in their value, in the way that they're operating, and the kind of ubiquity of all of them. Can you name a couple that you're particularly bullish on and the ones that you're not so hopeful or optimistic that they'll survive on the other side of this?

JASON WARE: Sure. That's a really good question. And as we're looking at the, quote unquote, "utility-type" technology companies-- you know, Microsoft has emerged as an enterprise utility. I mean, obviously we've all used Windows and Office products for a long, long time. But the new work-from-home model cannot happen in any kind of effective way and productive way without Microsoft. And they've become more important now than ever, we would argue, with 365 and Azure Cloud.

I think Amazon, with their cloud business and their e-commerce business on the consumer side, has emerged as a must-have. I mean, again, this was a tailwind that happened long before the virus. We were all ordering more of our goods off of Amazon and cloud usage was going up. But I think those positive trends for Amazon and Microsoft have accelerated during this recession and during this lockdown of the economy.

And then there are other parts of the technology space that have had bigger challenges. I think semiconductors, while we've seen a nice bounce off of the bottom, there are still a lot of que-- there are probably more questions than answers regarding the trajectory of many semiconductor companies over the near term, just given some of the gumming up of the supply chain across the globe as this virus has impacted all of these economies. So know they're definitely going to be-- and I hate using the phrase winners and losers, but that's what it is. I think those that have secular growth and that are high-quality and that are gonna get stronger through the recession and on the other side of this will be the areas you want to stick to as an investor.

MYLES UDLAND: And now, Jason, obviously, OK, Microsoft down 1% today-- I don't think that's gonna make you rethink your thesis. But when you're seeing a day like this where you've got rotation in the market, and these names that have been leading are lagging, and the banks are picking up slack-- we see travel names higher-- I guess, what does that say to you about the state of the market? Is this the rotation that you would want to see for the market to remain constructive? Or is it alarming that a name like Citi is up 10% in a single day?

JASON WARE: No, it actually is constructive. I mean, you make a great point, and I agree with it. It's-- we've seen a lot of the quality parts of the market that I just described-- you know, large cap growth and technology and biotechnology lead the way higher in this reflex rally we've had since the late March lows.

But there's been a lack of participation outside of that. And to see some of these more economically sensitive names, some of these areas that were most impacted by the economic shutdown start to close the gap on that performance-- and they have a long way to go. The banks well underperformed, and obviously, the cruise lines and the airlines and the hotels have all just been terrible investments over the past few months. And I think to see them participate and some of the market move higher is actually encouraging if you look at it at the 35,000-foot level.

We're still sticking with the high-quality secular growth companies that we've liked for years and continue to like for the next several years. We're not gonna change our stripes because of a little bit of rotation in the market. But I think it's encouraging at the broader market level to see that happening.

MYLES UDLAND: All right, Jason Ware with Albion Financial Group. Always great to get your thoughts, and we'll talk to you soon.

JASON WARE: It's a pleasure. Thanks again.