UK Markets close in 2 hrs 3 mins

Markets expected to ‘teeter-totter’ between growth and inflation ahead of 2023: Strategist

Thornburg Investment Management Co-Head of Investments Jeff Klingelhofer and Sound Income Strategies CEO and Founder David Scranton join Yahoo Finance Live to discuss recession fears, market volatility, bond yields, and more.

Video transcript

[AUDIO LOGO]

[MUSIC PLAYING]

[BELL]

SEANA SMITH: And that wraps up what was a very down day on Wall Street. I guess the glimmer of hope there, closing off the lows of the day, just slightly. Dow off 483 points. S&P off nearly 2%. The NASDAQ, the worst performer of the three major averages, off just about 2%. In terms of the sector action, all 11 of the S&P sectors trading to the downside. Consumer discretionary, energy, both of those sectors off just over 3% today.

Let's bring in Jeff Klingelhofer. He's co-head of Investments at Thornburg Investment Management. We also have David Scranton, Sound Income Strategies founder and CEO. David, let me start with you, just in terms of the selling pressure that we saw this week, the losses being led by-- or today, excuse me-- the losses being led by energy and consumer discretionary. Just your takeaway from some of the concern that's clearly on the Street right now.

DAVID SCRANTON: Well, I think we just, you know-- interest rates came down a lot, based upon some words from Jerome Powell just recently. And maybe they came down too far. Maybe it was a little too much short-term optimism. At the end of the day, Fed President Jerome Powell said he wanted to raise rates another 1 and 1/4%. And if he changes-- if he increases by 50 bips versus 75 on December 14, it's really not that big of a difference.

And when you look at that we've had a flip now where the 10-year yield is actually below the federal funds rate, that's a concern about recession. That's why you see consumer discretionary getting hurt. So there's-- again, we're gonna be in this market where it's volatile. It's going to continue to be volatile for a while. We had a little overreaction to the upside. And of course, now we're getting a pullback.

DAVE BRIGGS: And Jeff, your reaction to today's moves, and in particular, that move down in oil, despite all the news overseas, the Russian price cap, et cetera, the EU sanctions as well.

JEFF KLINGELHOFER: Yeah, it's a market that we're watching closely because it's incredibly important because it's direct correlation with inflation, which, of course, is what Federal Reserve in the United States and other central banks globally are watching, right? It's the first order effect.

But what we see is this teeter totter between, we have to see growth slow in order to get inflation down, and we're seeing that reflected in the price of oil. We are seeing growth slowing, but we can't have it slow so much that we actually get an outright recession. And so similar to the other guest, we look forward into 2023. We expect significantly heightened volatility and, really, a teeter totter between growth and inflation.

SEANA SMITH: So, Jeff, given that significant heightened volatility, the teeter totter that you are expecting to see, what should investors be doing right now? Is it the smartest, then, just to stay on the sidelines?

JEFF KLINGELHOFER: No, I don't think staying on the sidelines is the right move today. The beauty of where we find ourselves today is we finally unwound much of the challenge that investors faced throughout the previous decade of exceptionally low and accommodative monetary policy.

So today what we're looking at, although we think the 10-year Treasury should be slightly higher than where it is, today, fixed income serves as ballast to equity, which is actually perfect for investors, right? Thus far, 2022 has been marked by extreme standout in terms of the difficulty from asset allocation.

But for investors today, we think having some equity allocation in relatively inexpensive sectors, particularly some of the income producing sectors within the international space, as well as balance within fixed income. Really like the front end US consumer focused within the securitized market in particular. And actually, we like TIPS here as well.

DAVE BRIGGS: David, what are your thoughts on that?

DAVID SCRANTON: I agree with Jeff, as far as fixed income is concerned. Of course, it depends upon where you are in your life cycle and how much risk you can afford to take, time horizon, and so on. But this is the first time we've seen fixed income yields this high in, certainly, over a decade and a half. There was a long period of time where even if you mentioned the words "fixed income," people would look at you like you were crazy, right? But not anymore.

If you have a longer time horizon, you're going to be on the equity side. This is truly a stock picker's market. And it's kind of hard to determine sectors per se, but again, it's more of a fundamental bottoms-up approach. It's the days of indexing and mutual funds really are over for the most part, at least for the next few months, until we bottom out and we declare a recession, and then we start to get into the recovery phase. For now, a stock picker's market, and I like higher dividend value plays.

SEANA SMITH: David, I'm curious there, just in terms of whether we bottom out, when exactly that would be, in terms of what you're watching to indicate that we have seen a bottom. What are some of those factors?

DAVID SCRANTON: I think we have to get to a point where we actually determine that there is a recession. I personally believe that we've gone far enough now. We will see a recession because it takes time for these-- the effects of these interest rate hikes to work through the system.

So even if they were to give us a 25 basis point jump in December, and then one in the next FOMC meeting, I think the recession is still inevitable. But once that gets announced and the Fed starts to reverse course, then we can look forward into the recovery. And then it's a whole different ball game.

DAVE BRIGGS: Jeff, do you see a recession as inevitable?

JEFF KLINGELHOFER: We do see a recession as inevitable at this point. The question is really the depth of the recession. And what we're looking for in order to really get the magnitude of that is a very close eye on the consumer in particular. When we look at credit card remits on a monthly basis and the consumer remains incredibly strong, what we've seen is the savings rate dip to one of the lowest in the entirety of the time series, right, where the consumer is still willing to dip into savings, spend COVID stimulus to support consumption.

We need to see that begin to bottom. We need to see the savings rate begin to come back up. And ultimately, we need to see the bottoming of unemployment. And we haven't even begun to see, and really, is what Chairman Powell has told us time and time again. They need to see a further weakening in the labor market, which we haven't even begun to see today.

SEANA SMITH: David, what about outside the US in terms of any opportunity overseas? Morgan Stanley now saying that they're taking another look at some Chinese related stocks. Are you seeing any reason to buy some of those beaten down names?

DAVID SCRANTON: I personally am not ready to go to China yet per se. However, with the dollar being as strong as it is today, one could certainly make the argument for making some international purchases. Now, the counterargument is, oh, gosh, we're going to have recession. It's going to cover most of the globe. And of course, the flight to quality usually is the US bond, and therefore pushing the dollar up even further. But I don't see that the dollar has that much more upside potential. So, yes, looking at international, if you know what you're doing, it could be the right time.

DAVE BRIGGS: All right, we'll leave it there. David Scranton, Jeff Klingelhofer, appreciate you both being here. Thanks so much.