Aggressive Fed tightening could push economy ‘deeper into more protracted recession’: Strategist

Hennion & Walsh CIO Kevin Mahn joins Yahoo Finance Live to discuss the Federal Reserve's interest rate hikes, what a recession could look like, and the state of the U.S. economy.

Video Transcript

SEANA SMITH: Well, again, stocks are mixed as we enter the final 15 minutes of the trading day. Investors are starting to weigh what seems to be maybe a cooling jobs market. The latest ad out from ADP showing that that report for private payrolls came in just around 145,000, well below the Street's estimates.

We want to bring in Kevin Mahn, of Hennion and Walsh Chief Investment Officer. Kevin, it's great to see you here. So taking a look at today's action, some of the technology names, chip stocks among the underperformers because, of course, that fear of recession may be creeping in as we start to see, potentially, the job market slowing. How are you looking at today's action and the data that we got out this morning?

KEVIN MAHN: Yeah, taking a step back, Seana, and putting in a bigger perspective-- as you know, my outlook for this year was better days ahead for the markets, but not necessarily the economy. I think that's holding true and coming to fruition. And this is all because the Federal Reserve, since March of last year, essentially told the markets that they were going to continue to raise rates and shrink the size of their balance sheet until something broke.

Well, guess what? Something has now broken, as we've seen in the banking system. We saw the impact that those rising rates had on housing. We've now seen the impact that it's had on regional banks. And we're going to soon see the impact that that's had on earnings and the economy.

For the first quarter of 2023, as it stands now, according to FactSets, the earnings of the S&P 500 are expected to contract, go down by 6.6% on a year over year basis. We know that the economic growth forecasts are positive for the first quarter, but we also got an update from the Federal Reserve last week, which suggested that GDP growth for the entire year of 2023, according to the Fed, is only going to be a measly 0.4%.

So yes, the economy is slowing. And if there is a silver lining to all this, it's going to prevent the Fed, in my opinion, from being as aggressive as they wanted to be to help combat inflation.

SEANA SMITH: Well, Kevin, what happens, though, if the Fed does stay aggressive and we get another 25 basis point hike? How worrisome could that potentially be for you?

KEVIN MAHN: As it stands right now, I think there is still a likelihood of another 25 basis point hike in May. But that will be it, because they can't go any further. What did concern me, to your point, Seana, is the most recent dotplot chart that was released after the March meeting, which showed that 10 of the members believe that one more 25 basis point hike is in the cards this year.

However, the other eight members actually believe that there could be more rate hikes this year. And none of them are forecasting any rate cuts this year. If the Fed stays too aggressive, I believe they're going to push the economy into a deeper and more protracted recession than would have otherwise occurred on its own.

SEANA SMITH: So, Kevin, I think a lot of investors out there are wondering what they should be doing with their money right now. Let's first take the opportunities that you are seeing in equities. Where are they?

KEVIN MAHN: Sure. And I think if we just expand our horizon out and go on a journey with me, Seana, for the next two years-- over the next two years, rates should be lower, yield should be lower, inflation should be lower, and market should be higher. So how do you position your portfolios to take advantage of the end of this rate hike cycle when inflation should continue to moderate as well?

Well, I suggest on the equities front that you consider those sectors that were the most beaten up in 2022 and thus stand the greatest likelihood of a significant rebound towards the second half of 2023 into 2024. Those are areas such as information technology, consumer discretionary, notably e-commerce, and even health care.

Health care is often looked to as more of a defensive area. But if you consider the biotech industry, that's where the real growth can occur based upon M&A activity. So I believe if you invest in those three sectors, that should lead the US economy out of this recessionary period and have also helped lead the economy out of COVID-19, that should be some real good opportunities for growth in the years ahead.

SEANA SMITH: And, Kevin, some of the companies that you guys do hold right now-- I understand Broadcom, Dick's, and Regeneron. Let's just talk about Dick's because you mentioned that consumer discretionary part of it right now-- what sets them apart maybe from some of the other players within that sector? Why do you see some upside opportunity there?

KEVIN MAHN: Sure. And as you know, Seana, our country is obsessed with sports. Look no further than the recent March Madness--

SEANA SMITH: I see the UConn sweatshirt behind your-- behind your shoulder there.

KEVIN MAHN: Yes. My younger daughter Brianna is a senior at UConn.

SEANA SMITH: Oh, fun.

KEVIN MAHN: Very happy that they won the national championship on Monday night. But going back to Dick's-- Dick's should certainly be a benefactor of that obsession with sports and the need across the country to buy sports apparel, sports equipment, and also spend money on health and wellness. Dick's has done an excellent job expanding their online footprint to complement the large number of stores that they have-- brick and mortar stores across the country.

Dick's pays a dividend of nearly 2%. They have positive free cash flow on their balance sheet. Their forward PE is below 11. And they have less than 50% of the debt to asset ratio. So I think they're well positioned, they're well run, and they also tap into our country's obsession with sports and health and wellness.

SEANA SMITH: Certainly does. That is a strong case there for Dick's and some of the other players within that space. Kevin Mahn, always great to speak with you. Thanks so much.