Recession ‘not a foregone conclusion,’ says market strategist

Melissa Brown, managing director of applied research at Qontigo, and Ryan Payne, president of Payne Capital Management and host of the ‘Payne Points of Wealth’ podcast, sit down with Yahoo Finance Live to talk about the rallies in tech stocks after weeks of volatility, inflation and economic pressures in the housing market

video transcript

Here’s the closing bell on Tuesday.

[BELL RINGING]

And that was the closing bell, sponsored by Tastyworks. Let’s take a look at how things are moving here, with the Dow Jones, S&P and NASDAQ all in the green. The Dow closes well off its daily highs but is still up 643 points, seeing some buying action here after last week’s sell-off. S&P closing around 2 and 1/2%, as well as the NASDAQ. By sector, all 11 S&P sectors in green. Power by far the best performer. Discretionary consumption, technology, health care is not far behind.

For more on the markets, bring in Melissa Brown, managing director of applied research at Qontigo, and Ryan Payne, president of Payne Capital Management. Ryan, first for you. When he looks at today’s action, he sees some investor appetite here to buy. Where do you see the opportunity right now? I think a lot of people are still trying to figure out where we’re headed next.

RYAN PAYNE: Yes. And I wish my crystal ball would work. No, actually, I think, look, we’ve had a lot of volatility here in all seriousness. And I think what you want to think about here is the dynamic that has changed a lot since post-pandemic we’re in a tightening cycle with the Fed. We know that we are in a higher inflation environment. And we know that historically, cyclicals, energy and financials work much better than technology.

So I realize that today we are having a huge leap in technology. But if you want to win the war, not the battle, I think you want to branch out even more. I think a lot of investors are happy to get their tech stocks back. But if you look at the longer-term picture, the technology probably won’t work as well in the next couple of years because we’re in a very different economic environment than it was in the last 10 years. And that’s critical when you’re looking at your portfolio.

Melissa, nice rebound. But the S&P remains in bear market territory. And the NASDAQ is down 29% year to date. Do you agree with Ryan about the future of technology and strategy?

MELISSA BROWN: Well, I think you might not want to write off tech as a sector entirely. You may want some selectivity in certain parts of the technology that may actually work well. But I think in general when we see this high level of volatility, investors are more likely to flock. If you’re going to stay in stocks, you’re going to be stuck with lower volatility and lower risk rates. stocks that may not be as volatile as the market in general.

And, Melissa, investors are still digesting the comments we heard from Fed Chairman Jay Powell last week. Anything you’ve heard from the Fed that has changed your outlook for the next, I don’t know, 6 or 8 or 12 weeks?

MELISSA BROWN: Well, the Fed’s move last week was a bit bigger than expected, at least if you go back to the previous week. The expectations were that the increase was not going to be that great. So maybe that… wasn’t really a surprise that day. But maybe that was the only surprise that the Federal Reserve is being more aggressive than I think many, many investors expected before this meeting.

Ryan, is this the aggressive stance the Fed will need to move forward?

RYAN PAYNE: I think in the short term yes. I mean, everything the Fed has done is working. And they are holding back the economy. It has been a red-hot economy. It’s already starting to show with the housing market, mortgage applications are down. Commodity prices have started to come down a bit. And of course last month, we didn’t see a lower print, we saw a higher print on inflation. So the Fed is doing everything in its power, which is limited, to slow down this economy and reduce inflation.

So my hope here is — and I suspect because the Fed is being tougher now, and as the economy slows down, because with interest rates going up or the Fed raising interest rates, there’s a lag there. It’s a delay of something like 9, 18 months before it really has an effect. If the economy slows down, they can pivot and can be much more dovish later on. And I would say that it is a very, very bullish sign for the markets if the Fed can change course at some point this year if things cool down. And I think they’re going to cool off.

Melissa, do you agree? Do you think things are going to calm down when it comes to inflation?

MELISSA BROWN: In terms of inflation, I think we are still in a period where, if you look at the numbers month to month, they are still very high. That means the year-over-year numbers will also remain high for a while. So I think maybe the numbers that come out are not higher than what we’ve seen in the last couple of months. But it does not seem that they will be lower either. I think they may not seem so flashy. But I think they will still be quite high.

Ryan, you say that what the Fed is doing is working. Are you in the camp that believes we will enter a recession in the next 12 months? Goldman’s 30% say there is now a 30% chance. That’s more than a 15% chance.

RYAN PAYNE: There’s still a 70% chance we’re not. So we should focus on that.

Thanks for that.

RYAN PAYNE: No problem. Hey, I study my math. I’m in finance. No, but in all seriousness, I think it’s not a foregone conclusion. And the headlines will make you believe that. But I think the fact is that we may enter a recession. If we do, it will probably be a very mild recession. I mean, we have full employment right now. We know that for every two jobs out there, there is only one person looking. People have money in their pocket. They saved a lot of their encouragement. And I realize that they are starting to arrive now because inflation is higher.

But also, there has been a big shift from buying goods to going out and buying services. People are away from home in the economy. And just go to the airport and you can see that people are spending money. They are travelling. They go on trips, they go to restaurants. So where money is being spent in the economy has changed dramatically since we’re really out of lockdown right now. So I think the consumer will remain strong. I think you could see maybe a mild recession. Maybe, I don’t know, it’s like four or five quarters? But the reality is that it is not a foregone conclusion.

I think this is not 2008-2009 when the economy was broken. We’re just trying to slow down a very, very hot economy. And we’re trying to get a lot of that free-flowing money back. And that’s good because we’re getting out of the excess of the system like places like Bitcoin and all these disruptive technologies. So I think everything is fine. And I think when you start to think further ahead, I think we’ll still be on a very, very solid foundation here in the US.

Melissa, when we talk about the economy cooling down here, just look at housing. This morning we released the existing home numbers falling for the fourth month in a row. We still have a long way to go because prices are at a record high. But how are you, from a market perspective, how does the market view some of the cooling that we’ve seen in housing? And I guess, how do you see that impact on the market here in the short term?

MELISSA BROWN: Well, housing is such an interesting case because, on the one hand, it’s a hedge against inflation, and all of our research has suggested that that old adage is true. But on the other hand, it’s also affected by higher interest rates that drive up mortgage rates, obviously. So I think it really depends on where we come out in this set of interest rates versus inflation, and do we start to cool off inflation? If rates stay high and inflation dips a bit, real estate may not be a good place to be. But for now, it has certainly held up as a sector, even with home buying falling.

Melissa Brown, thank you. Ryan Payne, thanks for reminding us that there’s a 70% chance we’ll avoid it. You taught us something today.

Optimistic view.

Are the media too pessimistic?

I think so. Thanks for that. Maybe we are today.

I appreciate it, Ryan. It’s okay. Thanks to both of you.

Leave a Reply

Your email address will not be published.