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The consumer has ‘really been that stronghold for the economy’: Strategist

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Victoria Fernandez, Crossmark Global Investments Chief Market Strategist, and Aaron Dessen, Payne Capital Management Financial Advisor, sit down with Yahoo Finance Live to discuss market growth outlooks, China's supply chain, inflation, the labor market, and the Fed.

Video transcript

[BELL RINGING]

[CLAPPING]

- Investors are finding reason to buy today, with all three of the major averages closing to the upside. You can see the Dow rallying 430 points. S&P up just about 2%. The NASDAQ was the leader today, although closing off the highs of the day, still up nearly at 3%.

Let's break down what this all means for the market. For that we want to bring in Victoria Fernandez, Crossmark Global Investments Chief Market Strategist. We also have Aaron Dessen, Payne Capital Management's Financial Advisor.

Victoria, let me start with you. When we contrast the buying that we're seeing today to some of the selling that we've seen more recently, what do you make of the recent market action and where we're likely headed from here?

VICTORIA FERNANDEZ: Yeah, so I think you had the fear of liquidity really coming out of the market, and that's what drove the market lower on the previous sessions that we had. And you saw people selling out, you saw a lot of scarcity in the market, and people were concerned. They're concerned with the growth prospects that were coming out. And so really and truly with that liquidity coming out, you saw those risk assets really get hit, those tech sectors probably the hardest hit up to this point.

Now, today you see a little bit of a turnaround. We had retail sales that were pretty strong, the revisions for retail sales were strong. We had positive news coming out of China in regards to COVID outbreaks. So lockdowns could be coming off in Shanghai. So this is all positive for supply chain efforts, which obviously we know has flown through to the inflation numbers. So there's this positivity today.

I think the consumer has really been that strong hold for the economy for such a long period of time. This is going to be an important week, and we could see more volatility depending on how these retail earnings shake out the rest of the week. But I think you use some opportunities on names that have come down to buy. And on up days like this, if there's some names you want to trim a little bit, you can do that as well.

- And, Aaron, do you see this as the beginning of a turning point? And how are you positioning your portfolio and telling your clients to react in this sort of environment?

AARON DESSEN: I think it's very possible that it's a turning point. When we've seen corrections in the past, they're always followed by this big relief rally. And really we think that a lot of the action so far this year has been based on just negative sentiment and emotion and fear, rather than fundamentals.

As far as how we're advising clients, really just looking to stay the course, continuing to add in cash that becomes available from dividends and interest, and really stay invested through this volatility.

- Victoria, is that similar advice that you're giving clients at this juncture?

VICTORIA FERNANDEZ: Yes. So we really want to be opportunistic in this market. Typically we're long term investors, but with the volatility that we've seen in the markets, I think you have to be quite tactical. So we're looking not just at sectors broadly that you can go into, which over the last year, that's worked well, just to kind of pick a sector and go for it.

You have to be very specific in your name, so we like financials. We've been buying some Mastercard, we've been buying Discover Financial. But we've also been in some of the tech names like Apple, it's down tremendously. So if you want to nibble a little bit at some of those names, I think you can go ahead and do that.

- Aaron, the big question mark here is inflation, whether or not it's peaked. From your view, do you think we've seen peak inflation at this point?

AARON DESSEN: You know, that's impossible to answer right now. I think it's likely that there's a good chance that we have seen it peak, we've started to see those numbers come down a little bit. And if you talk about what the Federal Reserve uses as the measure with the core PCE, that's actually come down more so than other measures.

So I think certainly, in the latter half of the year, as we see headwinds from the pandemic continue to ease and has shift from consumer spending on goods to services, that's really going to allow a lot of these supply chain pressures to ease, thereby bringing down pressures on inflation.

- And, Victoria, obviously when we saw the yield curve invert, a lot of people were screaming recession. Fed Chair Jerome Powell saying, look, the economic fundamentals of the US economy say that we can support this with this fiscal tightening.

Now, you also are saying that you don't predict a recession, not at least this year. How should people be positioning themselves to sort of rotate when it comes to value, to growth stocks in this sort of environment?

VICTORIA FERNANDEZ: Yeah, so I would say six, nine months ago, we really had a larger overweight to value stocks at that point in time. But we've seen the benefit of value versus growth really start to diminish a little bit this year. And so we've actually started looking a little bit more towards some of the cyclical or growth names.

I mentioned Apple a moment ago that we have in there, we nibbled a little bit on Microsoft as well, adding some more tech names. And even some of the old school tech that a lot of times people don't think about, the Texas Instruments, the Intel. I think you can add some of those to your portfolio.

And, look, we think recession is probably going to be second half of next year, so you have plenty of time to do some of the more tactical moves now and wait a little bit before you make changes in your portfolio. But be more broad based, and I think you'll do well when and if a recession hits next year.

- When and if. Aaron, Jerome Powell earlier today also said to the "Journal" that there have been 11 tightening cycles, none have ever been like this one. There has never been seen a single tightening cycle like the one we're in now. That's based on geopolitical events, as well as the tight labor market as well. But he said that we still believe we'll hit a softest landing. Do you?

AARON DESSEN: Yeah, I think there's a really good chance of that. I mean, excuse me, if we think about inflation starting to come down, we have a very tight labor market, historically low unemployment, rising wages. We're able to add about 500,000 jobs a month. And the housing market is very hot.

So, you know, I think it only takes a little bit of inflation coming down for the Fed to really revise their stance and maybe become a little bit more dovish and less hawkish moving into the rest of the year. And we don't really forecast recession moving forward, which I think really just gives, I guess, gives back up to the idea of a soft landing with what the Fed is doing.

- Victoria, we'll get another reading on the jobs market here in just a couple of weeks. When we take a look at the numbers that we have seen, we have seen the labor market be rather resilient, at least at this point, up to this point in the recovery. Do you think that's going to continue to be the case? Or anything, I guess, on the horizon that you see that could be a little bit worrisome.

VICTORIA FERNANDEZ: So, Shona, you know that Jolts number is so important, right. And we see up to 2 times as many job openings as we have people out there looking for jobs. So that tells us that the labor market is going to continue to be strong. I think an important point here is that Powell and other Fed speakers have said they're willing to let that labor market weaken a little bit, if they need to, in order to fight inflation.

So I think the underlying trend will be strong, but yet are we going to see some moments of weakness? Is the Fed going to allow the labor market to weaken a little bit to reach their primary goal? They could, and some of that's going to depend on wage pressure.

Are we going to continue to see wage pressure if the participation rate doesn't go higher? Maybe not, maybe that comes down a little bit, which helps inflation, maybe we see more people go in to the job market. I'm not sure if we can say exactly how it's going to go, but we do know that the Fed is willing to let it weaken. And I think we have to anticipate that happening.

- Now, outside of Fed action, obviously a lot of other factors can also bring down inflation as well. And, Aaron, you noted that capitalism will solve inflation. Break that down for us.

AARON DESSEN: Well, I mean, I think if you look at capitalism, it's really filling a need that's there. Rising soybean prices was a great example from last year. You saw soybean prices really start to rise. What did farmers do? I mean, that's really incentivizing them to add that as a heavier part of their crop, grow more soybean, and now the increase in supply is going to bring down that demand and bring down those-- I'm sorry, bring down those prices.

So I think with capitalism and ingenuity, the human response, really, we're going to see that continue to solve some of these problems and these fears that we're having. And really just continue the path of markets and the economy as they've been historically. And over time continually starting to go upward.

- Well, a big thank you to our panel. Victoria Fernandez there, Crossmark Global Investments Chief Market Strategist, and Aaron Dessen, Payne Capital Management financial advisor. Thank you both.

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