Inflation: ‘The Fed has got one clear goal,’ strategist says

Hennion & Walsh CIO Kevin Mahn and Ryan Belanger, Claro Advisors Managing Principal and Founder, sit down with Yahoo Finance Live to examine the Fed's interest rate tactics to lower inflation and Snap's earnings report.

Video transcript

BRIAN CHEUNG: To the closing bell on this Thursday, July 21. And we are getting that closing bell right now. You can see on the New York Stock Exchange, I believe it's Core & Maine, a company that distributes water, sewer, storm drain, and fire protection down in Wall Street, guys.

[BELL]

SEANA SMITH: And that was the closing bell on Wall Street. Stocks-- it looks like we're holding onto gains. The Dow closing up 162 points. The S&P up just about 1%, just shy of that 4,000 mark. The NASDAQ the leader once again today. That's been the story all week, with the NASDAQ closing up just about 1.3%. Taking a look at the sector action today, consumer discretionary, healthcare, materials, technology among the leaders. Communication services, energy to the downside, with energy off just about 2%.

Well, for more on this, we want to bring in Kevin Mahn, Hennioon & Walsh chief investment officer. And joining us from Boston, we have Ryan Belanger. He's Claro Advisors founder and managing principal. Kevin, first to you, because it's about the third or fourth day in a row where we've seen technology lead, the NASDAQ outperforming. What do you make of the buying action that we're seeing and the leadership from some of those large cap names that have been beaten down so far here?

KEVIN MAHN: If you think about it, the names that have been hurt the most during this pullback in 2022 have been technology, consumer discretionary, notably, e-commerce. Boy, did we get an announcement from a big e-commerce name this morning with Amazon's acquisition, spending $3.9 billion now to get into the healthcare space. I'm not going to call the bottom here.

But what I will suggest is that if, in fact, we've met the technical definition of recession-- and I believe that we have. And recessions last, on average, 12 months. Well, guess what? Typically, the stock market bottoms about four to six months prior to the end of a recession, which puts us right into that August, September time frame, which is when I think the Fed will turn less aggressive. And that should provide upside potential for stocks as well, including technology stocks.

RACHELLE AKUFFO: And Ryan, do you also believe that we're in a recession? And if so, how are you positioning your portfolio? What are you rotating in or out of?

RYAN BELANGER: Yeah, certainly possible that we're in a recession. It's just hard to know. Oftentimes, you look back and have those answers. But yeah, from the leading indicators that we look at, certainly, a few of those are turning negative with manufacturing and new orders. Consumer sentiment is a big one for us. I mean, it kind of is self perpetuating. Once people start to think we're in a recession, you kind of start to be in one.

And so just to be defensive in portfolios, we're liking the dividend paying stocks, companies that are providing a tremendous amount of free cash flow. But we are also are not abandoning the large cap technology space. I totally agree. I feel like there's some really good opportunities for investors with a longer term time frame to pick up some companies at great prices, companies that people liked in the last couple of years. And they're still making good products and have great technology. So just because the share price is down, that's actually the reason to buy. And so that's what we're telling our clients.

DAVE BRIGGS: Kevin, what are you seeing from the consumer as-- I mean, we've talked about this self-fulfilling prophecy, so much talk about being in a recession or whether one's lying down the road. Are we talking ourselves into a recession?

KEVIN MAHN: Well, there's a couple of traditional indicators that are flashing red, right? We have the yield curve is inverted right now. The yield curve has inverted before every recession in our country going back to 1955. And we also know that in all likelihood, we've now had two consecutive negative quarters of real GDP. But to your point, we also see the consumer still spending. We have an unemployment rate at 3.6% and retail sales still relatively strong.

But there are dents in those armor as well. We saw initial jobless claims today, the fourth consecutive weekly uptick over 251,000. Our personal savings rate has now dipped to 4.4%. And Americans are putting more on their credit cards than they ever have before. They're still spending, but they have to borrow from their savings, put it on credit cards to keep up with these inflated prices. How much longer can that last? And if they pull back on spending, well, 70% of our economic growth comes from consumers.

DAVE BRIGGS: Yeah, John Stankey this morning, he said that he's seeing people pay a little bit later their bills each and every month. And that's why he expects a little bit of a waning economy down the road, just seeing little slippage here and there.

SEANA SMITH: Yeah, Ryan, we heard Kevin saying that he expects maybe the Fed won't be as aggressive as some on the Street are anticipating that we'll see, at least into the fall. Do you agree with that?

KEVIN MAHN: I think it's going to have to depend on the CPI prints. I mean, if these things keep coming in really hot, they don't really have a choice. I mean, this is their principal mandate at this point. They've got to get the inflation under control. And statistically, they have to get the Fed funds rate at a level above future consensus inflation rates.

So if we're going to settle in at 4% or so, I really feel like we've got to get there on the federal funds rate. It's a little higher than the forecast is now. Certainly, the data could change, but it feels to me like the Fed has got one clear goal. That's to stamp out inflation by raising interest rates. And so that's what we're thinking is probably going to happen.

RACHELLE AKUFFO: And Kevin, obviously, with every data point that we get in, we see the markets sort of fluctuate. But they do seem to be pricing in that 75 basis point hike. What are you doing-- what are you concentrating on to really not focus on the noise, but really focus on what's going to give you a clear indication of where the markets could be headed in the next few months?

KEVIN MAHN: Sure, and I do believe that the Fed will raise rates by 75 basis points next week. They don't meet in August. They come back in September. And at that point in time, they're going to see us that we're in a technical definition of recession. They see continued earnings deterioration. And I believe they turn less aggressive and perhaps only raise up to 3% by the end of this year. The economy can't withstand any more than that.

And if, in fact, we are in a slowing economy, which I think we all agree that we are, one sector that we really like is healthcare. Two ways to access the healthcare sector, one through traditional large cap pharmaceutical companies, like a Merck or a Bristol-Myers Squibb.

Another way is through the smaller cap biotech companies who are likely to be acquired by those large cap pharmaceutical companies with excess cash on their balance sheets, names like Karuna Therapeutics or even AXIM Therapeutics. We think the healthcare sector is certainly worthy of consideration in this environment.

DAVE BRIGGS: Ryan, I want to quickly get your take on the housing sector. We've seen a lot of down data this week, existing home sales fall 5.4%. Homebuyer sentiment plunged 12%. But yet, we're stuck with this number, a median record price of north of $407,000 per home, telling you what?

RYAN BELANGER: Well, I think it's just old news, to be honest. I think that number is coming down. It's probably going to come down quite quickly. Rates are up significantly. That's slowing some of the home buying. So we would expect home prices to come down. One interesting thing to watch, I mean, housing is about 33% of the CPI number. And within the housing, home prices are about 80%, and rents are about 20%. So it might be interesting to watch.

You could have a scenario where home prices are coming down. That's actually going to pull down the CPI number. But a lot of people rent, and rents are only going up. And so you could have a situation where things are actually tougher out there than what the CPI is forecasting, just due to that imbalance in how the housing is broken down in the CPI number.

SEANA SMITH: And guys, right now, we're waiting for Snap earnings. They're expected to be out any minute. It was a decent day for Snap, but Kevin, year to date, the stock's off just about 65%.

KEVIN MAHN: Ouch.

SEANA SMITH: A lot of the focus is going to be--

KEVIN MAHN: Snap.

SEANA SMITH: --on advertising spend. What are you looking for, not so much in these specific results, but what we're seeing, more broadly speaking, in the social media space?

KEVIN MAHN: Yeah, I think the theme for Snap is still growing, but yet slowing. We're anticipating, I believe, earnings per share of around $0.04. We believe daily active users have gone up, but still at the slowest growth rate in over two years. Revenue should have increased, but at the slowest growth rate in over three years.

And I think that's indicative right now of the social media space and ad sales in this environment. So it's one area that we're not particularly optimistic about. Snap doesn't meet our selection criteria within our portfolios. But beyond social media, we really like the e-commerce space. And we think that has a lot of upside potential in the months and years ahead.

DAVE BRIGGS: Still growth, but slowing growth. Great to have you in studio, Kevin Mahn. Appreciate it.

KEVIN MAHN: Thank you.

DAVE BRIGGS: Also Ryan Belanger with us today. Thank you both.