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The odds of a recession in the next six months ‘are quite low,’ strategist says

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Zach Hill, Horizon Investments Head of Portfolio Management, and ERShares COO Eva Ados sit down with Yahoo Finance Live to examine the possibilities of a recession amid market volatility, inflation, and the Fed's interest rate hikes.

Video transcript

JARED BLIKRE: And here's your closing bell on Wall Street.

[MUSIC PLAYING]

RACHELLE AKUFFO: And there you have it, your closing bell for June 22 on a volatile choppy day as Jared was just mentioning there. Let's see how the market settled. This market check sponsored by Tastyworks. All three ended in negative territory. They were hyper oscillating right into the close. The Dow, they're settling down almost flat, about 0.16% there, about 48 points. The S&P 500 there, down about 5 points more or less. And the NASDAQ down about 16 points there, 0.15%.

So relatively flat for the day but ending in the negative right there. Well, let's get a deeper dive into what happened with the market action with our market panel. Let's welcome in Zach Hill, Horizon Investment's head of portfolio management. And Eva Ados, ERS Shares COO. So thank you both for joining us. So Zach, I'll start with you. We've been talking about recession all day, some not seeing it until 2023. But the fact that Jay Powell mentioned it as a possibility, market is not too happy with that. What is your take on if and when we'll enter a recession?

ZACH HILL: Yeah, look. The calls about recession coming down the pipe are just really nonstop. And the way that we look at it, there's so much momentum in the economy. Consumers have a really, really healthy balance sheet from all the fiscal stimulus we've done and curtailment of consumption we've done in the last 2 and 1/2 years. And so we think the odds of recession in the next six months are quite low.

You get beyond that, 12 months, 18 months, and they do tick higher. But really, that's going to depend on what happens with inflation. And that's anybody's guess right now. So forecasting out that far in this really uncertain economic environment is not something that we're really undertaking right now.

SEANA SMITH: Eva, how about you? The possibility of a recession, how are you factoring that in? I guess, how likely do you see it?

EVA ADOS: We see 60-40 that we're not going to have a recession in 2022 and early 2023. Of course, setters variables, we don't know if we'll have any unforeseen events and if the war is going to escalate, or of course, those conditions in place. But other than that, all eyes are on inflation. We think that the next reading mid-July will be key to watch. And if that is-- if then it's announced that inflation is peaking, we think we're at a very good spot and the markets will soar.

DAVE BRIGGS: And Zach, if talk of a recession is overblown in the next six months, wherein lies the opportunity in the markets right now?

EVA ADOS: So--

ZACH HILL: I think--

DAVE BRIGGS: Zach, go ahead.

ZACH HILL: So I think you still need to be defensive. Look, we've done a lot of work in terms of adjusting valuations lower, especially in some of the COVID winners and the mega-cap tech space that have been really the darlings of the market for the last few years. But if you take a look at the earnings picture, that's a place where there's no recession priced in at all. In fact, earnings expectations for the S&P are they continue to go higher. So we're still cautious on the overall market even though our broad outlook in terms of the economy is looking pretty good for the next six months.

RACHELLE AKUFFO: And Eva, same to you. In terms of opportunities that you see and how people should be positioning themselves right now.

EVA ADOS: I think there's a dichotomy in the market. We have some companies that are struggling with their costs the majority of them are out of the 56,000 companies that we're tracking globally. Under 250 companies based in the US are profitable and they are seeing their SGNA costs fall. And so these are the good places to be. And of course, they are only a handful of companies.

But that being said, even if you look at the private market, not only the public market, you see more and more VCs announcing again and again to their clients that you cannot be spending money like you used to before. So it's really a company by company analysis. And the mega caps are always the safest place to be. But that being said, when money goes off the markets, they're the first to get hit too.

SEANA SMITH: Zach, going back to what you were saying before, the odds of a recession, or maybe the talk of recession, is overblown, we had a Philadelphia fed president Patrick Harker on Yahoo Finance earlier today. And he was talking about fed policy going forward saying maybe at the next meeting, a 50 to 75 basis point hike would make sense based on the data that we're going to get over the next couple weeks. What do you make of the fed's policy so far? And I guess, what do you anticipate we'll see at the next couple of meetings?

ZACH HILL: Yeah, look. The fed has-- they've had a tough time in this. They spent too long last year saying inflation was transitory. And so they're definitely a little bit behind the eight ball here. And that's why we got that 75 basis point hike just last week, although it seems like it's months ago. What we're doing when we think about the fed is right now actually watching the data much more intently than we're listening to what they're saying. There are a few members-- Governor Waller for example, has been kind of leading in terms of policy most recently.

And so we're paying attention to what he says as well as Jim Bullard. But broadly speaking, it's going to be the data. A guest on prior was talking about the CPI print and that's certainly something that's really important as well as labor market data, what's going on with wages specifically, and then just other measures of inflation expectations, which obviously have spooked the fed pretty substantially. And so I think baseline is 50 basis points coming up in a month. And the risk is skewed higher, not lower.

DAVE BRIGGS: Eva, Jerome Powell said earlier today they have both the tools and the resolve to get inflation back down to their target of 2%. And Jim Paulsen was with us earlier in the show and said he thinks the fed is succeeding in its goal and thinks that we're looking had a 50 point hike and a potential pause after that. What's your reaction to that?

EVA ADOS: Yes, we agree with that statement. Because the fed, and many people don't put a lot of attention in that. They have a great wiggle room because on the one hand, the 30 year bond is at half of its historical average. And then if you look at unemployment, is at historical lows. It's at 3.6 compared to 5.75, which is the historical average.

So the economy is really at a good position. And that shows how-- what power the fed has to do what they're doing. And I agree with their statement because we're already seeing signs, and many indicators pointing to a soft landing. We see housing starts falling, we see housing demand falling, we see materials and commodities dropping, even oil. And so there-- and of course, more and more companies now are laying off people unfortunately. But also, that will have an upward affect on unemployment.

RACHELLE AKUFFO: And Zach, I want to ask you, because in your notes, you talked about obviously the mantra of, don't fight the fed, which then spawned the buying the dip mentality. But how should people be viewing it now in light of this current environment?

ZACH HILL: Sure. So I think this is a major change. And something that we've been trying to talk about for the last couple of months is that don't fight the fed has meant they can pretty much ignore the inflation side of their mandate and they focus exclusively on growth. We've been in that mantra for the last 10 plus years since the global financial crisis.

And so that's led to persistent dip buying in both the institutional, professional, and in the retail community. And I think the situation now where they have to worry about inflation as public enemy number one is completely different. They don't want financial conditions to loosen because that's just going to-- Sort of to juice up the housing market and make more credit available for auto purchases and things like that.

It's exactly in those types of more durable goods and more interest rates than sensitive sectors where we have the biggest demand supply imbalances in the economy right now. And so as we think about it, it's much more of a sell rallies type of market as opposed to dip buying. That's the 2022 version of not fighting the fed.

DAVE BRIGGS: And Eva, before we go, a lot of talk today about global markets, and in particular, Europe. Are you seeing softening there? Do you predict a recession there in the next six months? And what's the trickle down to our economy?

EVA ADOS: So we think that, of course, there's a much better chance for Europe to have a recession than us. That being said, we're seeing a slowdown especially in Europe, but also globally, including the US. So there's no doubt that the economy globally is slowing down. And if you are an international investor and you're trying to decide whether to invest in China, or Europe, or the US, by far the safest haven is the US.

And we think that in the next announcement regarding inflation, if our prediction is correct and we see inflation peaking, a lot of money will flow back into US equities, and especially tech. So we might see 5% to 10% days in tech or even 10% to 20% weeks in tech. So I think investors that are in this camp that believe that inflation is peaking are-- it's good for them to start allocating money back into the markets.

DAVE BRIGGS: OK Eva Ados and Zach Hill. Thanks so much. I appreciate you both being here.

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