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3 signs that point to a recession: Strategist

Federal Reserve Governor Christopher Waller said today that he favors holding interest rates higher for longer and needs to see several more months of favorable inflation data before pursuing rate cuts. Hennion & Walsh chief investment officer Kevin Mahn joins Market Domination to discuss the Fed's next moves and three signs of an economic recession.

"I think the Fed needs to be careful because if they keep rates too high for too long, they risk their own forecasted economic slowdown moving into a recessionary period," Mahn says. He points to several warning signs of a recession: first quarter GDP growth slowing to 1.6%, consumer sentiment slumping to its lowest level since July 2022, increasing unemployment, and an overleveraged consumer slowing down spending.

As for the future of the market (^DJI,^GSPC, ^IXIC), Mahn believes it got "a little bit ahead of itself thus far this year, pricing in the perfect execution of a soft landing by the Federal Reserve, and we're clearly not there yet." However, he says that when the first rate cut happens, stocks and bonds will both face a tailwind.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

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This post was written by Melanie Riehl

Video transcript

Investors hold steady following more higher for longer commentary from the Federal Reserve members.

Fed Governor Christopher Waller said today he favours holding interest rates steady for longer and needs to see several more months of favourable inflation data before lowering rates.

First Guest today still sees a path of Fed to get the three projected cuts in for this year.

Let's now welcome in Kevin Mann, Hennion and Walsh CIO.

Kevin.

Good to see you.

Good to see you as well, Jeff.

Let's start there again.

So stocks relatively muted today, Right?

Which makes sense.

You got NVIDIA earnings on deck.

Uh, but we did have more fed speak.

Governor Christopher Waller made some headlines effectively.

Kevin saying Listen, I got to see some more.

In fact, several more good inflation prints before I start cutting.

So it was more that higher for longer mantra.

What did you make of it?

Yes, I think the Fed needs to be careful because if they keep rates too high for too long, they risk their own forecast of economic slow down, moving into a recessionary period.

If you recall.

Just in March, the last stop plot chart suggested three rate cuts this year.

Three rate cuts next year and three rate cuts in 2026.

Add that all up you got about rates about 225 basis points lower before the Fed gets back down to their inflation target of 2%.

So why would they be cutting interest rates if their inflation target isn't being met?

Because they're more concerned with the recession than they are, with inflation staying above 2%.

Of course, they want to see more positive progress on the inflation front.

But they're more concerned with that economy, slowing too much and dipping into recession territory.

Is that to give the dots a little too much credence, though, you know what I mean?

I mean, even Jay Powell seems uncomfortable with the dots at best, right?

So there's what the dots say.

There's what the market thinks.

And then there's reality of actually going to happen, and and nobody actually knows the reality of what's gonna happen.

None of us have a crystal ball and chair.

Powell doesn't have a crystal ball.

No, definitely not.

So you know when you're looking at, if indeed you think that they're really focused on the possibility of recession.

What are some of the signs you're looking for?

That might be you mentioned.

A couple of them.

What are you watching most closely to see if some of that is coming to fruition.

Sure.

So I look to first quarter GDP growth slowing to 1.6 percent, well below expectation.

Then I look at the most recent consumer sentiment survey slowing to its lowest level since July of 2022.

We saw unemployment tick higher, the 3.9%.

And we're also seeing an over leveraged consumer now starting to slow down the pace of spending.

If they shift to servicing all of their outstanding debt at higher interest rates, as opposed to spending the economy will slower.

Kevin, let me ask you another question on this.

So I I look at commodities, right?

We were talking about this on this show.

Just the moves we are seeing.

Copper, aluminium, silver, gold.

How does the fed possibly cut Kevin in the face of those kind of moves?

I mean, at the very least, do you think it kind of just it complicates Jay Powell's job?

Uh, I think it goes back to the early seventies, right?

The last time the Federal Reserve cut interest rate before getting back to their 2% target.

Arthur Burns was the chairperson at that time when he cut rates.

What happened?

Inflation came roaring back, hit double digit levels.

Then Paul Volcker stepped in and raised short term interest rates drop to 20%.

We think five and a quarter percent is restrictive.

He raised it to 20% killed inflation, but it also brought on a pretty severe recession.

I think that's what they're trying to navigate right now, and their job isn't easy.

But I do believe that they want to cut interest rates.

They just need more data to validate that first rate cut.

But when the first one comes, I would anticipate multi year slow, gradual interest rate reduction pattern.

OK, so what does all this mean for stocks?

I mean, we have had bear after bear on Wall Street saying I was wrong.

Mike Wilson and Morgan Stanley was the latest JP.

Morgan's Kano is the last one who remains somewhat bearish, so but it seems like no matter what these people's outlooks are, stocks are going to go up.

Yeah, but I do think the market has got a little bit ahead of itself thus far this year, pricing in the perfect execution of a soft landing by the Federal Reserve, and we're clearly not there yet.

So each time a successive FO MC meeting goes where they don't cut interest rates, you could see some more short term bouts of volatility.

But once that first interest rate cut does occur, then I think you'll see a tailwind for both stocks and bonds.

Beyond just NVIDIA.

All the talk this week is about NVIDIA, and I do believe the stock market has been riding in the wave of NVIDIA for the better part of the last year, and that wave is about to get bigger tomorrow.