Debt print shows consumers are likely to 'hang on in second half of 2023: Strategist

Truist Chief Market Strategist Keith Lerner joins the Yahoo Finance Live show to break down the latest economic data, relating to household debt, released by the NY Fed, retail earnings, the decline of New York's Manufacturing Index, and the Microsoft-Activision merger amid the economic slowdown.

Video transcript

DIANE KING HALL: Today we got overall household debt for the first quarter coming out, rising 0.9%, growing over $17 trillion, that's according to the New York Fed. That's the latest data on that front. Joining us now to break down the consumer sector is Keith Lerner who is Truist Chief Market Strategist. Excuse me, Keith. Thanks so much for joining us.

Let's get right into just this latest data that we had come out today from the New York Fed. What's your assessment of that?

KEITH LERNER: Great to be with you, Diane and Seana. Regarding the New York data, which one are you talking about specifically? The household data?

DIANE KING HALL: Yes, the household-- household credit.

KEITH LERNER: Yeah, well, I mean, I think what we're seeing a little bit is household debt is normalizing from very low levels. So I think the consumer's balance sheet in totality is still relatively healthy, but our view is as a compounding impact of these rate hikes in conjunction with tighter lending standards, we'll filter into this market and the economy in the second half and slow things down.

But I think it's going to continue to be a gradual move down, especially if you think about this year, year-to-date, we've averaged almost 250,000 jobs a month. So I think in that environment, which is still much stronger than before the pandemic, I think the consumer will hang in there. But again, we expect a gradual decline or pullback as we move into the second half.

SEANA SMITH: Keith, when we talk about sticking with New York here with the manufacturing activity, that number that we got out this morning, certainly we did see a slump in activity. And you were saying that maybe the momentum that we had seen, the resiliency in the consumer, might start to see that picture shift a little bit. What do you see just in terms of manufacturing and how that's going to factor into this economic slowdown?

KEITH LERNER: Well, I think we've had this divergence already in the overall economy. And folks that are looking at the manufacturing side, a lot of that data has been weakening for some time. We've had this divergence between manufacturing that's been weakening versus the services that has stayed relatively strong. I think we see things like the Empire reading this morning, those regional surveys tend to be extremely volatile, but I think the message is, that continues to be the weak side of the economy. We expect that to continue to be some weak.

I think later on this year, we expect the services side to show more of a slowdown, as we expect initial jobless claims to actually start to perk up. And that's one of the things we're watching more closely real time on a week-to-week basis. Last week there was some funkiness in the data as far as the initial claims, but I think if you're looking forward, then too many things we're focused on initial claims, and then also credit trends. We're starting to see the fall trends move up on the margin. And again, that just tells us that things are slowing down.

DIANE KING HALL: So Keith, I got to ask you. Before we dive into the earnings in the week ahead, we've got a big focus on retail this week. But before we dive into that, let's kind broaden this out to you talk about, are we in a new bull market or are we experiencing, outside of recent trends we've seen over the past two weeks, are we experiencing a bear market rally?

KEITH LERNER: Yeah, it's an interesting question because we're about seven months off the low. And what we did in a recent publication is we outlined the bull and bear case. We are more on a defense side. So let me lay that out first hand.

But if you look at the October low, I will say, you had some things that were consistent with our market low. You had really negative sentiment. You actually found the low on a sky high inflation number as well. And you've had a nice move off the lows, but I will say other factors I think leaves in question if this is a new bull market.

Normally, the first phase of a bull market is like a rocket ship. It takes off. You're up on average over 30% by now. We're only up about 15%. Also small caps, cyclical areas of the market tend to lead. What do we see right now? Small caps are underperforming by a wide margin. Transportation stocks are underperforming as well. And then financials are also underperforming.

So if this is a new bull market, it's not nearly as strong as most bull markets at this same stage seven months off the low, and some of these more cycle areas aren't showing strong performance, and the breadth of this market is still relatively weak. So we're still skeptical. I think to keep it more simply, I think we still think we're in this broader choppy trading range, and it's not-- at this point, it's not a compelling opportunity from a risk-reward standpoint.

SEANA SMITH: Keith, what's going to get us out of this very narrow trading range?

KEITH LERNER: You know, one, maybe this debt ceiling that we're talking about, I think one of the best things for the bull case is position is still relatively short this market. So, listen, I think the most likely [AUDIO OUT] view is that this whole debt ceiling fiasco gets kicked into the fall where you actually have then the appropriations bill and the budget for next year where you're more likely to run into something like a government shutdown.

But I will say if on the upside side, I think maybe a more positive resolution. If you break above 4,200, that would bring in some technical trading. But more or less, I really think we're trapped about 3,800 on the downside in the near term, and then if we break above 4,200, I still think the upside is probably capped to around 4,300.

So I think we're here for some time, and I think really what it's going to be is how you position within the market. And for us right now, we're overweight in things like technology, communications, and also more defensive areas like staples.

DIANE KING HALL: OK, speaking of staples, you mentioned you're overweight consumer staples. We've got a big week ahead. Earnings season rolling on this week with a lot of retailers out. You've got Walmart, Target, and Home Depot all set to report their latest quarterly numbers in the coming days. Again, you mentioned you're overweight in the consumer staples. What are you expecting to see this week?

KEITH LERNER: Yeah, I think the earnings will be OK, right? I mean, again, going back to the-- if we have a 20 or 50,000 jobs or we're creating 20 or 50,000 jobs a month, that's well above the average. I think the consumer is still OK, but I think you'll continue to see this trade down, which we saw last quarter, and that was to benefit some companies on the margin, like Walmart relative to Target, just seeing that trade down.

And then I think it'll be more interested in like Home Depot if you start to see people are locked into their home with their 3% mortgages. Are you seeing folks do more renovations because if you look at the stocks there, they've been relatively flat the last couple of months.

SEANA SMITH: Keith, how do you make sense of the consumer as of late because when you take a look at the retail sales numbers that we're going to get later this week, it's actually supposed to grow for the month of April, yet like you're saying, we are starting to see the consumer-- we have started to see the consumer trade down just a little bit. When do you expect to see more of a material impact on some of these retail names?

KEITH LERNER: Our view is that you'll start to see more of a slowdown in the economy in the second half. That's consistent with when the yield curve inverted last year. That's also consistent with the lagged effect from Fed policy. And then more recently, if you think about the tighter lending conditions that also works with the lag.

So our perspective is, we'll start to see more of that pickup in the unemployment claims in the second half, and that will weigh on some of these retailers. You know, and the retailers in general tend to be more cyclical in nature. So I think right now, the economy is continuing to move forward, to kind of grind forward.

So therefore, these stocks have done the same thing, but I think as we move into that later stage of this year, we'll start to see some of that weakness manifest itself. And that's why we're right now in neutral, it's this question area, but if you think about staples as well as the discretionary, staples are less economically sensitive, and that's one of the reasons why we like that sector more relative to discretionary.

DIANE KING HALL: It's kind of a need, not a want, I get that. All right, so besides earnings, we've also got some deal flow activity in focus. Today's big headline really seems to be deal flow activity when it comes to big deals like Microsoft and Activision. You also had some big activity in energy and gold mining. In terms of Microsoft-Activision, you had news out today the European Union regulators have approved, rather, the proposed $69 billion acquisition. What's your take on how deal flow activity factors into your outlook on the market action?

KEITH LERNER: I think the ones you discussed today, they're really not related. They're one-offs on specific situations. I think as the economy slows down and some of these big companies have a lot of cash, they're going to look to how do they maintain margins, and one way to maintain margins is to do mergers and acquisitions.

So I think that will continue to stay steady, especially we're seeing this divergence within the market, right? If you think about the biggest stocks in the market are outperforming from mega-cap, are outperforming the S&P, the S&P is outperforming mid-caps, and mid-caps are outperforming small caps. So it makes sense if you have a currency, which is just stock, if you are a big company that you can use that to buy some of these companies that are still down, as I mentioned earlier, 10, 15% off the high.

So I think we'll continue to see that. That is a buffer for the overall market, and are likely to see that continue, especially if we see a slow economy and these companies want to see some growth in sales. They'll have to do it outside of just organically by doing more mergers.

SEANA SMITH: Keith, when do you think, though, that we're going to get back to those more, quote, unquote, "normal levels?" Is that something that we might not see until 2024?

KEITH LERNER: As far as the mergers and acquisitions side?

SEANA SMITH: Yeah.

KEITH LERNER: Yeah, I mean, I think one of the challenges is it's also more expensive to finance some of these acquisitions, especially on the debt side. So I think that we're likely to see that when we sort that-- when some of these companies feel more confidence on the other side that they can see that the economy is going to find the low and move up on the other side, that they will spend more capital to take over other companies.

In the meantime, I think what you'll see is more bolt-on type acquisitions. But again, the big mega-cap companies, a lot of them have cash. So I think they'll be looking for from some larger ones. But in general, I think we'll see more of these bolt-on type of acquisitions.

DIANE KING HALL: Cash is king once again. All right, Keith, thank you so much for joining us today.