U.S. consumers are facing ‘double-header of headwinds,’ strategist says

Advisors Capital Management Partner and Portfolio Manager JoAnne Feeney joins Yahoo Finance Live to discuss slowing economic growth, inflation, the Fed, and cybersecurity stock picks.

Video transcript

- A theme is starting to emerge in the markets. Hence, heightened market volatility. That theme you ask? It's that surging energy prices sanctions and disrupted supply chains will unite in driving a major economic slowdown this year. Let's explore this more with Advisors Capital Management Partner and Portfolio Manager Joanne Feeney. Joanne, always great to get some time with you here. How sharp could this economic slowdown be and when do you think we might start seeing it?

JOANNE FEENEY: Yeah, good morning, Brian. You know that's the question of the day. Now clearly there's a lot of things changing. One is we're moving into a year which is further in time from the worst of the pandemic. So we know for sure growth is going to slow down just because of that. On the other hand, we have high inflation.

We have the fiscal stimulus coming off, so consumers are facing a bit of a double header of headwinds, less stimulus and higher prices obviously particularly at the pump, but also in food and used cars and new cars and other things. So that's going to tamp down consumer demand into this year. And then we have the Fed raising interest rates.

So we have three things conspiring to reduce production this year and weaken economic growth. That's largely been anticipated. But now investors are really worried that that's going to be exacerbated by the extra jump up in oil prices and gas prices at the pump. So as an economist, I can tell you, we are seeing certainly slower growth this year.

We don't see a recession, however, where growth actually turns negative. And the reason for that is because on the supply side, we have a lot still coming back online after the pandemic and we have a boatload of new semiconductor chips coming out of new factories just turning on their lines, ready to pump out more chips that go into those cars and everything else in the second half of the year.

- But Joanne, let me push back on that because you do bring up some great points here. The consumer has underpinned this economic recovery from the pandemic. I mean, they're getting walloped over the head with $5 plus a gallon gasoline. Those semiconductors could be in short supply because what we're seeing out of Russia and Ukraine. Do you do see any chance of a recession this year? Is 10% is it 20%? What's your probability?

JOANNE FEENEY: Yeah, you know, there's always a chance. In the past we've seen spiking oil prices lead to a recession. In fact, most of the recessions since World War two have been either preceded or coincident with an oil price spike. This time though that's less likely. Number one reason being that the US is not a net importer of oil. So it doesn't affect the aggregate economy as it would have say in the 1970s.

But on the other hand, the consumer, as you pointed out Brian, is really the vulnerable one here. And the consumer and their strong balance sheets have been driving part of that recovery. So we don't see a move into recession. But we do see more growth slowdown than perhaps people were expecting.

But by the way that does help to solve the inflation problem. Because inflation has been born of consumer demand running ahead of that constrained supply. And so with slowing down growth, the higher prices at the pump helping to tamp down consumer demand, that could make the Fed's job a little bit easier, which is why some market forecasters are suggesting that the Fed may not have to raise rates as aggressively as thought even a month ago.

So you know that looks like us to be slowing growth rather than recession. So I don't know what the probability is of recession because other shocks can happen. We don't know how long this war is going to go on. We don't know how the spillover effects might amplify from where we are now.

But I think for the investing public right the thing to remember is that wars, pandemics, recessions always cause stock markets to go down. But if you look at the history, the recovery period required to get back to where you were has been pretty fast. You can measure it in days, weeks and months with a couple of exceptions.

And so for the investor, it's really important to remember right now that we're looking at still supply recovering, even with the rush of shortages even in the semiconductor industry because of the stockpiles they have and inventory of a lot of these materials, we do still see that supply coming back and helping increase the production of autos for example.

- I always like getting your stock picks, Joanne. Hit me with three of your best picks that could outperform an environment where we're about to see slowing growth.

JOANNE FEENEY: Yeah one of the things that happens when aggregate growth slows down, Brian, is that investors recognize that if they want appreciation in their portfolios, they're going to have to go buy companies with secular growth, not just cyclical. So we're going to see, we believe, investors move away from the cyclical plays that they started last fall and back into secular growth storis.

So you know it's a good opportunity to go bargain hunting, given how much for example the tech stocks have pulled back since early November when the rate hike cycle began to be realized. So a company like PayPal, for example, really got crushed after it revealed the nature of the headwinds it was still feeling from eBay. Their underlying numbers though were very strong.

Or a company like you know a Broadcom, maybe not the best you know appreciation potential but they also offer a nice dividend. So if an investor is looking to build some dividends into their portfolio, you own that kind of a stock both for the income it provides and for the appreciation, it's well-diversified and so it has some more stability than some of the others.

And then in this environment, with these heightened geopolitical risks, we really like small defense company Kratos, which makes drones, target drones, as well as surveillance drones, swarming drones. And we understand that defense spending on drones is going to be one of the biggest increases over the next several years. Good way to put some protection into the portfolio plus a fair bit of appreciation potential we think.

- Definitely appreciate those picks in this really crazy environment. Advisors Capital Management Partner and Portfolio Manager, Joanne Feeney. Always good to see you.