Main Street has been ‘in a recession for 6 months,’ analyst says
International Assets Advisory CEO Ed Cofrancesco examines the Fed's interest rate hike outlook after publishing its latest meeting's minutes, the reality of a recession on Americans, energy markets, and investing in quality stocks.
AKIKO FUJITA: Well, debate over the direction of Fed policy is getting noisier after FOMC minutes showed a substantial majority of policymakers agreeing it will soon likely be appropriate to slow the pace of hikes. The minutes also seemingly upgrading the possibility of a recession in 2023 is now, quote, "likely." Jay Powell speaks next Wednesday ahead of the central bank's blackout. His colleagues have been vocal over policy in recent days, with the likes of Loretta Mester signaling a downshift in-- is a possibility.
Joining us to break it down is Ed Cofrancesco, International Assets Advisory CEO. Good to talk to you today. So given what we saw in those minutes earlier this week, has this changed your base case at all?
ED COFRANCESCO: No, not at all. I think we've all been expecting the Fed to slow down these rate increases. And what we're hearing is that that seems to be the commonality in the thread on the Fed members that there's still going to be increases, but they're going to be smaller.
And it seems like all the pundits, while they have called for this, were also expecting the terminal rate to be higher. So we're going to have smaller increases, but we're now calling for a higher terminal Fed funds rate. This is still going to be a drag on the economy. It's going to be an anchor. That and energy are going to be the big anchors on this economy.
RACHELLE AKUFFO: And, Ed, we did see from Mary Daly there, she's saying that a 75 basis point hike not off the table at this point. It would be hard to measure that given some of the data points that we've seen coming out. But do you think, is there going to be a certain point where the Fed does more harm to the economy than good when it comes to bringing down inflation?
ED COFRANCESCO: That's a great question, Rachelle. I wish I had a definitive answer for you on that. But if I did, I guess I'd be retired, living on an Island somewhere because I'd be right with every prediction I've ever made. So I think there's a real risk in that, and the Fed needs to be cautious.
We are clearly in a recession. And I love when the Fed said, well, it looks more likely that we're going to be in a recession. I don't live in New York. I don't live in Los Angeles. I live in Main Street. And I can tell you that here in Main Street America, we've been in a recession for nearly six months, and it looks like it's getting worse.
AKIKO FUJITA: And how much worse are we talking about? I mean, when you say that we've been in a recession, what have-- what have you been seeing? What have you been hearing? And what's the concern you have going into next year?
ED COFRANCESCO: So our concerns are severalfold. First of all, we've seen an uptake in unemployment. And international assets-- we hate to say this, but we started discussing this six months ago, saying that come the summer of '23, come the fall of '23, we won't be talking about inflation as much as we'll be talking about unemployment. We won't be talking about a shortage of labor like we have been for the last year, year and a half, two years since we first began the COVID recovery. Instead, we're going to be talking about how unemployment is back.
Secondly, we think that energy is going to remain high. At the end of the day, we're going to have gridlock in DC. And the Biden administration is looking at this last election two weeks ago as a victory, so they see no reason to change their economic and energy policies.
As a result, we think fossil fuels are going to continue to rise in price here in the United States and globally and that this is going to be-- though energy is not calculated in the inflation numbers. We all know that energy plays a great role in real inflation. So this is, again, going to be a huge anchor on the economy.
RACHELLE AKUFFO: So, Ed, how are you advising clients in this sort of-- when people are sort of looking for direction, including the markets? And what sort of opportunities do you see right now?
ED COFRANCESCO: Well, Rachelle, first of all, in rising interest rate environment, financials are always a fantastic play. They benefit from the increase in spread between debits and credits. So we expect that financials will continue to do well. We think that this is a time to really look for high-quality stocks. We think the market is due for a sell-off sometime in the second quarter of next year but that when that happens, high quality will be at a bargain, and then you can go shopping.
In the interim, even though we're talking about the Fed still raising rates, we're talking about the Fed slowing down the increase of rate raise, we're clearly closer to the end of the cycle of the rate raises than we are to the beginning. So now for the first time in 15, 20 years, fixed income is starting to look really attractive. So we think there's some good fixed income opportunities that need to be explored.
RACHELLE AKUFFO: All right. Well, thank you for joining us today. Ed Cofrancesco, International Assets Advisory CEO. Have a good weekend.