Markets: ‘Yields are now as attractive as we’ve seen them in 15 years,’ strategist says

Invesco Investment Solutions Senior Portfolio Manager Alessio de Longis joins Yahoo Finance Live to discuss the current regulatory environment, bond yields, and overall state of the markets.

Video transcript

SEANA SMITH: Alessio, great to see you. I don't want you to comment specifically on Microsoft and Activision. I know you can talk about specific stocks, but more broadly, from an investor perspective, taking a look at the current regulatory picture, what that means here for future deals, what's your response to the news we got today?

ALESSIO DE LONGIS: Well, the regulatory environment remains highly uncertain. And that certainly doesn't help given the investors' concern focused already on an overall tightening by the Federal Reserve and a looming recession, right? The positive news that we find for investors-- and this is how we have positioned our portfolios-- is that over the next three months, we think we might be actually in a sweet spot where inflation decelerates.

See, the Fed may signal a pause in that tightening cycle sometime in the first quarter of the year. And this is a good environment for investors not to stand in front of that, but to actually benefit for a potential rebound in risky assets, which we have already begun to see, and we continue to see.

So, when you think about the regulation risk in the tech sector and what is happening with the crypto space, actually, this is an environment where moving towards the more traditional cyclical sectors, such as financials, industrials, materials, may actually be beneficial for investors if we do see a bit of a relief in the economic picture.

DAVE BRIGGS: Alessio, good to see you. We had some rough days after-- well, the last, really, three days, and some markets bouncing back a little bit, at least in comparison. We're all in the green right now. What do you make of today's moves?

ALESSIO DE LONGIS: Well, today's moves are sort of going in that direction that I was outlining earlier. If you look at the news flow, where are investors today? Investors have been waiting for the most well telegraphed recessions that I can remember and a recession that didn't come. Actually, growth has been surprising to the upside, both domestically and outside in the rest of the world.

So but the news flow has actually been one where the Fed may pause the tightening cycle very soon. Inflation is coming down. And the unemployment rate or that recession risk hasn't materialized yet. That is an environment where, in my opinion, the news flow today confirms that sentiment, right? No news is good news.

When you're missing that validation that the economy is in immediate risk, when you're missing that validation from the data, investors ought to take risk in their portfolios in order to get more exposure to, let's say, credit assets where yields are now as attractive as we've seen them in 15 years.

SEANA SMITH: Alessio, taking all that into consideration and where we are today, with the Dow well off the lows that we saw just a few months ago, do you think that this is the beginning of a new economic cycle? Or more so, what does this signal to you?

ALESSIO DE LONGIS: Well, that's a great question. We think that this is likely to play out like a recovery from a soft patch, but not the beginning of a new, say, 10 or seven-year cycle. The unemployment rate remains at all-time lows. We are yet to see the long and variable lines with which the tightening of the Fed will impact the economy.

So, in our mind, this is more of a recalibration of investor pricing around recession probabilities, the timing of that recession, the duration of that recession, the severity of that recession. But a recession is not a question of if, it's a question of when. So no, not the start of a new economic cycle, but rather, a confirmation of the high uncertainty and adaptive investment process that it's important to manage a portfolio in this transition period.

DAVE BRIGGS: So since it's not a question of if, when do you project a recession, and how deep?

ALESSIO DE LONGIS: We think the probabilities of a recession are likely to be concentrated in the second half of 2023. With respect to the depth of that recession, it's more likely to be a longer-- maybe a few quarters' recession. It doesn't have to be a severe one. We don't see large imbalances in the economy. The consumer has largely delivered. The corporate sector has very high cash balances. And typically, the severity of a recession is more driven by leverage in the system. So we think more of a maybe longer, but milder recession. It doesn't have to equate to a crisis.