Inflation ‘very easily could get back to 2-3%’ over the next two years: Strategist

Lisa Erickson, U.S. Bank SVP & Public Markets Group Co-Head, and Sizemore Capital Management CIO Charles Sizemore join Yahoo Finance Live to discuss the stock market rising to end a 7-week losing streak, inflation, GDP, the Fed's interest rate hikes, recession concerns, and the outlook on tech.

Video transcript

- Here's the closing bell for today, Friday, May 27 at the New York Stock Exchange.

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[BELL RINGS]

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SEANA SMITH: For more on the markets, let's bring in--

RACHELLE AKUFFO: As you can see, all three major indices there ending in positive territory. The Dow up about 1.77% there, the S&P 500 up almost 2 and 1/2 percent there, and the NASDAQ up 3 and 1/3 of a percent there, gaining 390 points, as we see, as we head into this final holiday weekend.

So I want to bring in our markets guests to digest this market action. We have Lisa Erickson, US Bank's Senior Vice President of public Markets Group Head, and Charles Sizemore, Sizemore Capital's Management Chief Investment Officer.

So Lisa, I'll start with you. How much of this is a relief rally that will last versus, say, a turning point? Or is it just a little too soon to celebrate?

LISA ERICKSON: To your point, Rachelle, we do see this as a little bit of a relief rally. But overall, we still have a balanced outlook on the US stock market. And the reason, really, why is if you look at the underlying fundamentals, while we have some slowing in different macroeconomic indicators, the overall trend is still solid, with most of our sector work really showing above-average historical trends across different groups in the economy.

So really, while again, we see some of that bounce-back from, again, the very difficult past eight or nine weeks in the different indices, we do see some solid report in terms of the fundamentals behind some of that action.

SEANA SMITH: Charles, what do you think? We're looking at a market that's very, very different than what we've been talking about over the last six or seven weeks? Do we still have room to run to the upside?

CHARLES SIZEMORE: Well, I think we do at least in the short term. And it's nice to finally see some green. It's been a brutal two months. But I think the next two to four weeks, I think the likelihood is we are going to see a really strong bounce. Beyond that, I think it is a bit more murky.

We're still fighting the Fed. And stocks are still expensive. And we still have a lot of inflation and economic data yet to come. So jury is still out longer-term.

DAVE BRIGGS: And Lisa, have we seen the peak of inflation?

LISA ERICKSON: So our base case is really that inflation will continue to come down through the year. And we really got a very nice print in terms of the personal consumption expenditure this morning. That did show, again, relative to year-ago levels, we're seeing some moderation.

The key question, really, going forward is, at what pace that comes down? So again, while, to Chris's point, that was some encouraging data, we really believe we need to continue to monitor the standpoint. We continue to have a more difficult environment with the Fed. And so really, that's the counterbalance, again, to some of the above average growth we're seeing overall in the indicators.

RACHELLE AKUFFO: And Charles, are you as optimistic as the Congressional Budget Office in terms of their projections for both GDP and then also seeing inflation go down to that 2% mark over the next two years?

CHARLES SIZEMORE: So over the next two years, I think inflation very easily could get back to 2% to 3%. Whether it's peaking right now, I think it's in the process of peaking. So I think over the course of this year, we will see inflation start to moderate.

And I do think the Congressional Budget Office is-- I'll say this. Their estimate is not completely out of left field. I think it is certainly possible we could get there. And I do think we're probably at least reaching some sort of peak here in inflation.

Now, with respect to GDP, they're a little bit more optimistic than I am. I think it's still likely we have a very mild recession, nothing nasty, but some at least a mild pause. We're really kind of fighting some hard comps right now. So if we were to have-- if GDP comes in this quarter at even just flattish and slightly negative, it's down 10 basis points, that's a technical recession. So I think it's very likely that could happen.

SEANA SMITH: So Charles, you said we could see a recession here, nothing nasty. I guess just explain to us exactly how you see this potentially playing out.

CHARLES SIZEMORE: Oh, it's really the same story we've seen all year. We're coming up on really hard comps from last year. Everything was depressed two years ago. Everything came just raging back really quickly last year. And then now we're up against those difficult comps at a time when the Fed is the most aggressive we've seen in 40 years.

So that, to me, is, if nothing else, a recipe for slower growth if we do see a little bit of shrinkage. The difference between economic shrinkage and really slow growth is really splitting hairs. So whether or not we see a recession this year, I do think we are looking at least slow growth, which is fine. We can deal with that.

DAVE BRIGGS: And Lisa, do you see signs of a recession in the next year? And given that we finally broke that losing streak, seven weeks for the NASDAQ and S&P, eight weeks for the Dow, what's your level of optimism for the markets the next couple of weeks?

LISA ERICKSON: So we're on the more positive side of the economic trajectory. And for 2022, our belief is that we're going to be able to stay out of recessionary territory. And then again, it starts with really, we're at pretty solid levels in terms of just the absolute level of economic growth as well as corporations have shown themselves to be very resilient. And while margins have come down a little bit, they're mainly holding their own.

So with that, with the healthy consumer, with healthy corporate balance sheets, we continue to believe that, through this year, we'll manage to say in positive territory on GDP. I think we'll want to continue to monitor for 2023.

And I think what that means, really, for the stock market is, as they continue to monitor how this data continues to come in, knowing that we're starting at decent levels, but there's some slowing, is we're going to see some volatility. Again, with the big selloffs we've had over the last few weeks, there is a good chance of continued relief rally. But we'll have to continue to see how that plays out through the year.

RACHELLE AKUFFO: And speaking of that selloff, Charles, I want to talk about, obviously, the tech-heavy NASDAQ and what we've seen there. And you talked about some of the differences we're seeing in terms of trends from how retail investors are impacting this tech selloff versus the moves that we see from institutional investors. What are you keeping your eye on there?

CHARLES SIZEMORE: Yeah, so the story throughout this year has been, as the NASDAQ fell, you did see retail investors trying to buy that dip. And it didn't go well for them. The NASDAQ continued to really suffer until very recently here. But we have seen institutional investors starting to step up now. It does seem that, after a brutal several months, stocks finally got cheap enough in that sector for the institutional money to start stepping back up.

DAVE BRIGGS: Lisa, sectors you'd recommend to investors that are, admittedly, taking the holiday weekend off?

LISA ERICKSON: So in the nearer term, really, we're advising clients, all other things being equal, to look at more profitable, higher-quality, larger-cap types of names that will have the defensive characteristics and be able to hold up generally better in an environment where we're seeing a little slowing of that growth trajectory.

Over the long term though, for the clients with those kinds of horizons, we do think tech may be an interesting place. Again, it may go through some nearer-term volatility as people watch where interest rates may head. But again, the long-term trends of continued move to different uses of technology to facilitate both work and home should continue.

SEANA SMITH: So Lisa, you see opportunity in technology, a sector that's been beaten down, obviously, most recently. Consumer discretionary, another one, although leading the way today. Some of those retailers that have been struggling, a name like Target, Walmart, Home Depot, what does that tell you just about the strength of the consumer right now? And are you seeing any investment opportunity within some of these consumer discretionary names?

LISA ERICKSON: Well, again, from a longer-term perspective, we do have some secular trends that really should benefit select industries and companies within the consumer discretionary areas. People really pivot to the combination of formats where you can have both online choice as well as in-store shopping. But in the near term, to your point, really, the key question is going to be on consumer spending.

And what we're seeing overall is those retail sales levels are holding up. Again, even in the PCE number today, we saw some nice increase in terms of personal expenditures. But again, to your point, there has been, really, some mixed results in how that's impacting the underlying companies. So that is a key trend we'll want to continue to monitor.

DAVE BRIGGS: All right, Lisa Erickson, US Bank's Senior Vice President Public Markets Group Head, and Charles Sizemore, Sizemore Capital Management Chief Investment Officer, enjoy the three-day weekend. Thank you.