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Fed bringing U.S. economy ‘right to the brink,’ strategist says

John Hancock Investment Management Co-Chief Investment Strategist Matt Miskin joins Yahoo Finance Live to discuss third-quarter market performance, Fed rate hikes, the U.S. inflation rate, the probability of a recession, and the outlook for the economy.

Video Transcript

- We're tracking stock futures this morning. Higher for the Dow, the S&P 500, and the NASDAQ. And this after the market routes deepened on Friday to end a dismal third quarter. So here to discuss what to expect in Q4, the fourth quarter, we've got Matt Miskin, who is the John Hancock co-chief investment strategist. Just great to have you here with us this morning, Matt. First and foremost, when we think back to what the third quarter was and what could possibly protrude into the fourth quarter here, what would you be keeping your eyes on?

MATT MISKIN: Yeah. The third quarter was one of the trickiest one investors have faced. And one of the things we look at when we go underneath the hood of the overall market is risk on parts of the market did better than risk off. And what I mean by that is things like US small caps outperformed. Consumer discretionary did well, which is a very cyclical sector. And high yield bonds and bank loans did well. So those are all high beta, higher risk parts of the market. And yet, overall, markets were down 5% to 10% depending on where you went.

So it was very tricky to manage risk in a down market when risk on parts of the market did better. Our view is that part of the market, the risk on parts of the market start to turn and lag the overall markets into the fourth quarter and defense will start showing up, whether it's in the bond market, whether it's in higher quality stocks, as the year goes on.

- Matt, can you make any short-term bull case for stocks?

MATT MISKIN: Oversold is one that, I mean, basically, we're at these levels where it's been seeing selling pressure. Sentiment is washed out, meaning that everyone is pretty bearish. Even the strategists out there that have been more bullish have kind of turned and become more bearish. So in our work, one of the things we do is we tap all these resources of broker-dealers, research firms. And it's amazing how many are bearish right now. So if we get any good news like the Fed pivots a little bit, if Treasury yields just stop going up, if oil prices came down, although we're not seeing that today, those would all be things that could make a short-term bounce in global equities.

- Matt, you say in your note to us that the Fed is taking down the housing market, the financial markets, eventually the labor markets because they are so focused on inflation. And you, like many folks, are saying this stuff operates with a lag. The Fed might benefit from slowing down. The Fed does not seem like it's listening, right. Is the Fed at risk of making a big policy mistake here?

MATT MISKIN: Absolutely, Julie. They are. And they're bringing it right to the brink. It's almost like they're playing a game of chicken with the labor market. And, unfortunately, that's just not a great way to run monetary policy. It's almost like they want things done immediately. I almost think of like the Amazon effect, where you press a button and you want something delivered at your door the next day. The Fed wants that with inflation. They want to basically say inflation is coming down this month.

And it just doesn't work like that. What they're doing today is actually going to show up in terms of tightening in the economy next year. And so you can't just stop inflation in its tracks. If you do want to, which that's what they want to do, the best way to do it is cause a global recession.

But the thing is you're bringing in all these other risks into the picture. And by the time the data shows up, it's actually too late. And then they're going to be pivoting on to another problem that they've created, which is in this example a weakening labor market. But we think that's going to happen next year. And we think eventually bonds rally as a result of that. And there's attractive income there because they're overshooting to the upside.

- Matt, when you say global recession, what type of global recession on the markets pricing in right now?

MATT MISKIN: So it's mixed. It's not as bad as you might think. So overall stocks are down. So that would suggest some pricing in of a recession. But high-yield bond spreads are still pretty tight, around 500 basis points. Historically, that's a 20-year average. Again, you're seeing even cyclical parts of the market do decent. Oil prices are still very high. Earnings estimates, for example, haven't come down that much. So there are parts of the market that aren't really pricing in recession in our view. Treasury yields, again, going up all the time. That's not pricing in a recession.

So you can lean into certain parts of the market, get income right now, in our view position for a recession that hasn't been priced in. And in portfolios, that's what we're looking for as best ideas to actually see positive income streams, decent risk-adjusted returns in what can continue to be a choppy backdrop.

- John Hancock Co-Chief Investment Strategist Matt Miskin, always good to see you. We'll talk to you soon.

MATT MISKIN: Good to see you, Brian.