The Haverford Trust Company Co-CIO Hank Smith joins Yahoo Finance’s Seana Smith and Adam Shapiro to discuss the Fed's decision on interest rates amid the coronavirus pandemic.

Video Transcript

SEANA SMITH: I want to zero in on the market's reaction to as this. As it stands right now, we were seeing solid gains across the board before we had [AUDIO OUT] this decision. And now right now the Dow up just around 483 points, so well off of its highs of the day. S&P and NASDAQ also holding onto gains. For more on this, we have Hank Smith from Haverford Trust Company.

And Hank, just what is your reaction to what we heard from the Fed today?

HANK SMITH: Yeah, look, I don't think there was any surprise in the Fed's statement, keeping rates low for an extended period of time, all tools on the table. No surprise there. And I think the market is selling off a little bit. But I don't think it really has anything to do with the Fed's statement.

ADAM SHAPIRO: Hey, it's Adam. I'm curious-- well, we just heard from the former economist from the Dallas Federal Reserve Bank. When you look at how markets are reacting and all of this liquidity is in place, there've been guests on Yahoo Finance who said it's very possible, despite all the headlines, we could still test the March 23 lows because we're nowhere near out of the woods yet.

And it's not the Fed's job to get us out of the woods. It's the Fed's job to keep the pipes open. So where do you see this headed?

HANK SMITH: Yeah, so that's an interesting point. We have never had a four week bear market associated with a recession. And so far that's what we've had, a four week bear market followed by a four week bull market with the stock market in this epic, titanic battle. On the one side, we're about to see the greatest quarterly contraction of GDP growth in the country's history and, on the other side, the greatest policy response, monetary and fiscal, amounting to 18% to 20% of GDP.

And the stock market is caught in the middle of this. So consistent with all other bear markets, it is very likely that we're going to have a retest. It doesn't mean we're going to get right down to the March 23 low. But we're going to have a downdraft from these levels at some point in the not too distant future because, as you said, we have weeks, if not months, of negative headlines to deal with.

SEANA SMITH: Hank, how big of a pullback do you think we could see them?

HANK SMITH: Well, I don't think we're going to test-- actually go down to the March 23 lows simply because of the enormity of the monetary response here and, as the previous guest pointed out, the correct monetary response.

And they did it in lightning speed, in two or three weeks and in a magnitude five, six, seven times greater than what they did in '08. And so that is a solid backstop. But you could easily see a 20% move down from these levels.

ADAM SHAPIRO: Hank, it's Adam again. And I'm focusing on equities. But as we watch this earnings season, as we see some companies cutting dividends-- they're suspending those payments right now-- is it making the job of chief investment officers and other analysts that much more difficult? Or are we going to get a pure market as a result of this because we won't have the stock buybacks to cloud what's actually happening?

HANK SMITH: Well, we're a quality of manager that focuses only on dividend paying companies. I never thought in my 30 year career with Haverford Trust that we would have to do a stress test on all of our companies in terms of the viability of them continuing to pay a dividend. But that's exactly what we did several weeks ago.

And it's going to reveal the truly strong companies and high quality companies but also companies whose earnings can hold up in this type of environment. And this is an extraordinarily unique environment because we've never had a government mandated shutdown of 30% of the economy.

ADAM SHAPIRO: I'm just curious. Those stress tests, can you share with us some of the results, some of the companies that might have hit it out of the ballpark by your test?

HANK SMITH: Well, we've had two companies during this crisis increase their dividend-- Johnson & Johnson and Dollar General, two clear beneficiaries of this challenging environment.

And one company that we have owned, and we liked very much, did suspend their dividend, and that was TJ Maxx, a best in class retailer that has decided to conserve cash. I think that was the correct move.

And when the economy begins the normalization process, we think TJ Maxx will be a huge beneficiary of the destruction in the retail sector.

SEANA SMITH: Hank Smith of Haverford Trust. Thanks so much for joining us this afternoon.