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If we look back at the last four recessions the yield curve steepened every time: Citi U.S. Wealth Mngt.

Shawn Snyder, Citi U.S. Wealth Management Head of Investment Strategy joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: The yield on the 10-year, those jitters sprinkling through here on the market front, as investors continue kind of this rotation that we've been talking about for awhile away from tech into cyclicals. For more on that, I want to bring on our next guest here, Shawn Snyder, Citi US Wealth Management head of investment strategy.

Shawn, good to be chatting with you again here today. I mean, you're kind of pointing out something that we've heard from a few that have been through this before. When we talk about a steepening yield curve coming out of a recession, what do you maybe look at in putting this back into historical context for where we're at right now?

SHAWN SNYDER: Sure. First off, thank you for having me. I appreciate being on the show. Yeah, it's really interesting. I think, you know, people seem to be almost surprised by rising bond yields. But if we look back at the last four recessions, when we exited those recessions, the yield curve steepened every single time. And if you look back, and you take the difference between the 10-year yield and the two-year yield, which is what we define as the yield curve, the spread eventually peaked at about 2.4% during those past four recessions.

Right now, the spread between the 10-year and the two-year is about 1 and a-- a little over 1 and 1/2 percent. So I think that implies that we still have a ways to go here and that the 10-year yield could eventually climb higher to maybe 2 and 1/2 percent, you know, over the next year or two.

So I think the sheer velocity of how quickly bond yields kind of caught up to where the market was caught everybody off guard. And we have richly priced technology stocks, so it's causing them to reassess. But this is not a new phenomenon.

- 2 and 1/2 percent on the 10-year yield over the next year, I mean, that-- that seems to-- that points to significant upside. What does that mean from an investment standpoint?

SHAWN SNYDER: Well, if you actually look at the same four recessions, and you go back and see what happened to the stock market during that time when the yield curve was steepening between the exit of the recession or the end of the recession and then the eventual peak of the yield curve, stock check continued to climb. They took about-- about 18% gains in the S&P 500, about 20% gains in the NASDAQ over that period of time, while the yield curve was steepening.

Now, it took about 22 months on average from when you exited the recession to when the yield curve actually peaked, but you know,-- so it's not 22 months from here, because we probably exited the recession maybe in the third quarter of 2020. So we've already seen the yield curve steepen pretty markedly. So some of it's already probably done. But I think maybe you get another 8% to 10% gains in stocks from here, even though the yield curve will continue to steepen.

But I think the main message here is that the pace of gains are likely to slow. We've already marked the one-year anniversary of this bull market. I think the second year will probably be positive, but probably not as positive as the first year.

ZACK GUZMAN: Yeah, which means people are going to have to get smarter in chasing those returns. And through Q1, I mean, we've seen financials and energy stand out, much more of the cyclical trade here, as we were talking about. I mean, do you expect that to continue? What's your advice to clients if it's going to be a little bit of a less exciting, maybe expectation out there for the market writ large? How are you kind of framing the way clients should be looking to invest now?

SHAWN SNYDER: Sure. I think you make a couple of good points there. Energy and financials are two sectors that are positively correlated with rising yields. So we've seen a sharp run up in both. So maybe-- investors maybe missed a little bit of that. But I think if you consider the yield curve continuing to steepen, then that's going to benefit financials. And I think energy prices have taken a hit over the last week or two. But I think there's still opportunities there. Maybe you see crude oil in the range of 70. So I think those are both viable options, things that will probably continue to do well if rates continue to rise again.

The pace of the rate rise may slow from here. It may start to stabilize. But over time, as the economy recovers, we expect it to continue. So I think both those sectors make sense.

The other thing is I would also look outside of the US. I know we tend to be home-biased, and we only focus on the stocks we know. But if you think of like UK equities, they're a prime example of a value play, because they trade at about 14 times earnings. They're about a 40% discount to US shares. And the indices, particularly the FTSE 100, is chock full of energy and financial companies and does not have a lot of exposure to technology. So if you think that this rotation into value has some room to run, which we do,-- you know, maybe not. We've caught up a lot, but we still think it has some room to run-- then that makes sense to maybe look elsewhere.

ZACK GUZMAN: Yeah, tough to not be homebodies after we were trained for so long in this pandemic just to love our own homes. But Shawn Snyder, I appreciate you coming on here to chat with us-- Citi US Wealth Management head of investment strategy. Thanks again.

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