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Fed likely to set off 'mild, short-lived' recession: Strategist

Wells Fargo Investment Institute Investment Strategy Analyst Veronica Willis joins Yahoo Finance Live to discuss economic growth, market concerns, recessionary risks, and the outlook for the Fed’s 75 basis point rate hike.

Video Transcript

BRIAN SOZZI: All right, let's continue our conversation around the Fed's latest decision with Wells Fargo Investment Institute Strategy Analyst Veronica Willis. Veronica, good to see you here this morning. Look, you were just hearing our discussion here on what the Fed did yesterday and what perhaps they didn't do. What's your take?

VERONICA WILLIS: I think, you know, the markets took it as a positive that the Fed is willing to be aggressive to combat inflation. And then today, we're seeing the markets are concerned about, you know, what are these rate hikes going to do to the economy. And that's kind of the overarching theme that we're seeing in the markets.

With this bear market, a lot of concerns around economic growth. And during bear markets, you tend to see these rallies or days where the market is up because of what might be happening on that particular day. But it always goes back to the theme that the market is concerned about.

BRAD SMITH: Veronica, the word recession came up eight times yesterday during the press conference, particularly as they were asked about-- and Fed Chair Jerome Powell-- was asked about whether or not these moves would tip the economy into a recession. He said, right now we're sitting at 1.6%. It's hard to see how that's too high of a rate.

And even if they did more by the end of the summer, they'd be somewhere in the twos. And that's not calculated to bring a recession on. Is that what the analysts out there, the strategies-- the strategists such as yourself believe at this point in time, that we are going to avoid a recession?

VERONICA WILLIS: I think, at least at Wells Fargo Investment Institute, we are expecting a recession, albeit a mild and short-lived one, just because the moves higher and rates that the Fed will have to do to combat this higher inflation that we're seeing. But again, I just do want to reiterate, we're not expecting a deep recession like the last one that we've experienced. It's very tricky for the Fed to navigate this soft landing. And we're not completely convinced that we won't slip into a recession.

JULIE HYMAN: And so then, how do you make decisions based upon that outlook, I guess, is the next question. What we've seen this year thus far is that nothing's behaving great, right, except maybe energy, right? If you had put money into energy at the beginning of the year, you'd be sitting pretty.

Elsewhere, it's been tough. And so if there is-- even if it's 60-40 and not 50-50, I mean, still that's-- that's really tough to make investment decisions based on something that where on the one hand, on the other hand. So how are you thinking about it, Veronica?

That's right. You know, the portfolio diversification topic is definitely one that's top of mind for investors. And, you know, what we've been stressing is to think a little bit outside of just the traditional equities and bonds box and think about using commodities as a diversifier for qualified investors. Think about using hedge funds as a diversifier because those areas have held up a lot better while stocks and bonds are both down.

And as we continue through late cycle within that equities and bonds allocations, we're wanting our investors to start to move a little bit more defensively to areas where you can mitigate risks even during a down market. So higher quality large caps, higher quality mid caps instead of small cap equities, US equities over international equities. Because we think that they'll hold up better during late cycle. Within fixed income, we are liking short and intermediate term bonds over longer durations because of that duration risk in those long bonds.

BRIAN SOZZI: Veronica, what's the ultimate data signal-- data or buy signal for stocks in your view? Is there a data point you're watching? Is it something you want to hear from a company when they start to report earnings in a few weeks?

VERONICA WILLIS: We're not looking for one particular thing. I think what-- what's tricky here, in the last bear market, we experienced a very short but deep decline and then a very quick recovery, and that's not what we're expecting. Bear markets take time to find the bottom and time to recover.

And so there's, you know, a lot of patience that you have to-- a lot of patients do have to focus on, especially if you're a longer-term investor to just ride out the volatility and look for signs that the economy is starting to pick up again, earnings are starting to pick up. And that's kind of the signal that things are on the upswing.

BRAD SMITH: Wells Fargo Investment Institute's Strategy Analyst Veronica Willis. Veronica, thanks for taking the time with us this morning.