Market sell-off: Safe haven stocks ‘are not immune’ from inflation, strategist says

Cresset Capital CIO Jack Ablin sits down with Yahoo Finance Live to discuss the market sell-offs seen today, particularly in retail stocks, inflation, recession risks, defensive investing, and the Fed's interest rate hikes.

Video transcript

SEANA SMITH: We have a lot to dig into here with our markets guest. We want to bring in Jack Ablin. He is Crescent Capital's chief investment officer. And Jack, we're looking at the worst day that we have seen for the Dow since 2020. S&P off nearly 5%. Huge losses here for the NASDAQ as well. S&P off just around 4%. What do you make of today's selling action?

JACK ABLIN: Yeah, I think what investors realized was these seemingly safe haven stocks, the staples, like Target and Walmart, are not immune, that their costs are rising. They cannot pass their higher costs onto their consumers. And as Walmart said yesterday, their customers are coming in and buying groceries, but they're not buying hard goods. They're not buying other products where they have a slightly higher margin.

So if you look at the consumer and recognize, yes, wages are up, but they're not going up at the same rate as inflation, and the highest cost increases are food and energy, that's funneling away spending that ordinarily would be spent at the more profitable side of Walmart and a Target. And I think that investors are looking at these stocks and thought that they were safe havens, and now we're seeing perhaps they weren't.

DAVE BRIGGS: We'll circle back here, Jack, but let me ask you a difficult question-- is there any good news today?

JACK ABLIN: Well, I think that if you look through the fact-- in fact, when I heard about the Target news this morning, I said, you know what? The US consumer is doing the Fed's work for it. We have high inflation, right? We have demand outstripping supply. So what we really need is lower demand to keep these prices and trend these prices lower. Sure, we have the Fed raising interest rates, but I believe that with the slowing growth that we're seeing as a result of this, combined with the slightly higher rates that we will see from the Fed, you know, inflation likely peaked in the first quarter and demand is-- will likely diminish as we move through the rest of the year.

SEANA SMITH: So, Jack, is it safe to say, then, do you think we're headed for a recession? I guess, how, when you take a look at the odds of that, compared to what the Fed could potentially do, if it's not as aggressive as maybe we initially thought it was, what does that all spell out for the possibilities of a recession?

JACK ABLIN: Sure, so the data I'm watching-- and I'm not an economist, so I'm looking at Fed data-- and I think their likelihood of recession has now moved up to about 30%. And really, to me, looking for fair value in the equity market, particularly the S&P 500, it's all about the 10-year Treasury yield. And that 10-year Treasury yield got up to slightly over 3%. 320 was the previous high in 2019. Big resistance there. But our model suggests that maybe fair value for the 10-year isn't 3%. It's actually closer to 2 and 1/2%, probably 2.6%. Well, if we use 2.6% as the discount mechanism for the S&P 500, we're pretty close to fair value.

DAVE BRIGGS: How much is energy inflation driving all of this, Jack?

JACK ABLIN: Yeah, I mean, I think energy is of the critical pieces that's driving this. People have to continue to drive, get to work, and go places. And I think that's demand that isn't going to go away. What happens is, high energy prices typically act as a tax. So if you do look at all probably four or five of our previous recessions, they were all preceded by high energy prices. So that is a concern.

SEANA SMITH: Jack, when you're taking a look at today's action and really what we've seen over the last several days, some of those historically defensive plays, especially in the consumer staples, have been taking a hit. So if investors want to be defensive in this market, what should they be favoring?

JACK ABLIN: Sure. Well, I think last time I looked, I think dividend stocks are still holding up pretty well. Our strategy for 2020 is quality dividend. So we're not just focused on the highest dividend payers, we want high quality companies, strong balance sheets that have the ability to maintain and grow dividends. I think that's going to be the play for this year. And with interest rates going up, investors have to pay a closer attention to organic, right? Earnings and dividends, that's it. We can't rely on valuation expansion anymore. In fact, we're getting a lot of compression in tech stocks.

So those kinds of companies-- and it is financials, it's energy, it's industrials. It's just the down and dirty stocks that grow their earnings and pay a decent dividend. That's probably where we should be for the next couple of years.

DAVE BRIGGS: Jerome Powell talked to the Wall Street Journal a lot yesterday about a soft ish landing, about saying the economy is strong. Did any of his comments carry over into this broad-based sell-off?

JACK ABLIN: No, it sure didn't. I mean, it sounds like that investors pretty much shrugged whatever he said off. I mean, I think it's sort of pan gloss thinking to suggest that you can ratchet up interest rates to 6% in the front-end and expect that the curve won't invert and investors won't anticipate a recession. But if you think about the combined impact of wages among lower income households getting diverted to food and energy, plus now, the wealth effect of higher earning households who are watching their stock portfolios shrink, that, I think, will ultimately weigh on demand and growth.

Whether it's enough to throw us into recession, it's hard to know because we've got a very strong labor market. Aside from Q1 growth, we did run into 2022 with a running headstart. So I think that if it's either flat growth or slight recession, we'll probably be OK. And companies are still very profitable and growing earnings reasonably well. I think the last time I looked, I think analysts are expecting 9% earnings growth for 2022.

DAVE BRIGGS: All right, Crescent Capital chief investment officer, Jack Ablin, always good to see you, sir. Thanks.