Oil prices: ‘You can’t have this rise at the fuel pumps’ not hit the pockets of Americans, strategist says

G Squared Private Wealth Founding Partner Victoria Greene and Morningstar Investment Management of the Americas CIO Marta Norton join Yahoo Finance Live to discuss the Russia-Ukraine pressures on U.S. economic outlooks, the energy market, supply chains, the impact of Fed interest rate hikes on growth stocks, and domestic oil production.

Video Transcript

[CLOSING BELL RINGING]

BRAD SMITH: And there you were taking a live look at today's closing bell. Citi is ringing closing bell with the New York Stock Exchange in celebration of International Women's Day. And as we take a look at the major averages, well, we were positive at one point but we ended up with the downside across the board.

Dow Jones Industrial average, that ended lower by about half a percent, a little more than that, actually 185 points to the downside there. The S&P 500, that, too, ended the day down by 7/10 of a percent, 30 points in the red there. And the NASDAQ composite, the tech heavy average, that closed the day lower by about 35 points.

I want to bring you into the discussion Victoria Greene, who is the founding partner and portfolio manager over at G Squared Private Wealth, as well as Marta Norton, who is the America's Chief Investment Officer over at Morningstar Investment Management. Of course, the sentiment going into the close, at least among this group, was just make it close already with regard to the Russian war in Ukraine and Russian war with Ukraine that has put the rest of the world on alert and sent oil prices rocketing.

You've both actually offered the same acknowledgment that there are a multitude of outcomes with regard to the conflict. And Victoria, you actually believe that it should not affect US economic growth greatly. And we received remarks from President Biden saying Putin's war is already hurting American families at the gas pump. So what is the level of impact that you foresee to the US economy? And where would you expect it to show up within the data?

VICTORIA GREENE: We have kind of revised that a little bit lower. It will show up in the data. You can't have this rise at the fuel pumps not hit the economic pockets of everyday Americans because it's going to make everything go up in cost. Anything that rides on four wheels or six wheels to get anywhere, including all your shipping, it's going to make all your costs rise. We're already in an inflationary environment. And right now, this is just putting a little more gasoline on the fire, for a horrible pun there. But it really is going to be something that we have to watch, what the drag is on this, and how this all resolves.

I don't think, honestly, that sanctions are going to go away. This isn't Crimea. This isn't Georgia. The world is severely annoyed and angry-- and annoyed is not even strong enough-- angry at this situation. So let's say, miraculously, we get a cease fire tomorrow, I think these sanctions and the general shrinkage and the issues of supply chains is going to be a sticky situation for the rest of the year.

EMILY MCCORMICK: Marta, I'm wondering, do you think these geopolitical concerns, these rising energy prices, weigh on consumer spending, consumer sentiment, and the labor market eventually to the point that we do get a recession in the near term?

MARTA NORTON: Yeah. I have to resonate with Victoria's comments. I don't know how we can't see a move like this in oil prices and the impact it'll have on consumers, especially when inflation is already high. Now, whether that tips the economy into a recession, I think that's a lot to be seen. I don't know if that's a guarantee.

In large part, because the US economy is reasonably healthy, there are some concerns. If you look back through history, rising oil prices have a mixed record in terms of whether they precede a recession. And it can come down to the health of the economy, how the Fed reacts. And so I think there's room for there to be a range of different outcomes that could occur. But I think there's a lot of folks who think we're in reasonably good shape to endure some pain at the pump.

RACHELLE AKUFFO: And Victoria, you said, obviously, with a lot of pressures coming from a lot of different directions here on markets, you've said what you own matters this year. Value over growth, quality and cash flows are key. What signals will determine whether or not you rotate out of value into growth stocks?

VICTORIA GREENE: We're looking at, number one, the trajectory of the Fed. Obviously, what happens with interest rate does still matters. Geopolitics has weighed on this market a lot, but we can't forget the Fed next week should be 25 basis points. Are we still getting six hikes?

I think, one, I want companies that aren't trading at a valuation and have a little bit of wiggle room. Some of those growth stocks are what we call price to perfection. Any miss in EPS, any slowdown, and they're going to get punished horribly. Two, value tend to have cyclicals. Typically, they do well during rising inflationary periods. We want the commodity stocks. We want the energy stocks.

And three, I think, quality is going to be very important. Can these stocks withstand a slowdown? Do they have room on their balance sheet? Can they withstand a little bit of cash flow interruption? Are they big enough in order to rejigger their supplies and still make ends meet? And I think sometimes the smaller companies and the more leveraged companies don't have as much flexibility as the large companies.

So we think US large value, there's a good place to be bunkering. We're not overly defensive. Utilities and reach tend to not do well during rising rates. But we do think you want to be in the right stocks. And after 2020, it felt like you could throw a dart or the dart board and make money. And we think this year, as you've seen, what you own really matters. Russell 1000 values off, what, 4% or 5% versus NASDAQ off about 16% or 17%.

BRAD SMITH: Victoria, something you mentioned, which is the sanctions and not believing they will be lifted anytime soon, and I actually want to shift the question to Marta. And Marta, do you believe that this changes the valuation calculus for some of the most globalized companies that are now having to navigate where they either alter supply chains, where they halt operations in Russia or in regions where there is conflict?

MARTA NORTON: Yeah. I'll tell you about Morningstar Investment Management, one thing that we've acknowledged as this conflict has unfolded is that not only our prices in flux, but fair values are in flux, too. I think there is a certain amount of fundamental analysis that has to be done to understand what the forward-looking picture is, particularly in Europe and in emerging markets and some of these other more interconnected areas.

So when we look at something like European financials or Germany, we want to take a look at the calculus and make sure we have a good sense of where things are headed because there is an element of potential structural change that we want to take into account. Now, the non-US markets versus US markets, I think it's safe to say from anyone's estimation that there may be US companies are potentially a little bit more immune to some of these structural changes but not completely. So I will say that we're taking a closer look at our fundamentals around the world.

EMILY MCCORMICK: Victoria, you mentioned that cyclical and specifically, energy is your current tactical overweight. How much longer do you think this outperformance in energy can last given how far and how fast it's already run up?

VICTORIA GREENE: Yeah, sure. It feels a little bit like the price is right mountain game right now. I'm aware of that. And we don't want to fall off the edge. Typically, energy stocks do bubble, like let's look at '91, I'm sorry, with Kuwait and Iraq. It took like 77 days to peak and then only about 98 days to come back. It was literally trough peak trough and 177 days.

However, I do think this one's a little bit different. We think it may be persist that we see oil prices over 100, which is very good for a lot of our domestic producers, you local EMPs, your Devin's, your Diamondbacks, your EOGs, your Pioneers, they're in great acreage with breakevens in the Permian area of the 30 to 40. So we see that as a great place to be. We want to make sure we understand where our products getting out of the ground, what our breakevens are.

And we're aware, there are a lot of macro factors we don't control. Saudi Arabia and OPEC could definitely turn on the pumps. They have it. They see this as a very short period. They've come out saying we're not going to increase more than 400,000 a day. Iran does seem stalled out, but Iran does have a lot of production if they come online. And the one that surprised me is that we sent representatives to talk to Venezuela over the weekend. And I think we're looking to maybe ease up on Venezuelan sanctions, which also would then ease this supply crunch that we were seeing and potentially replace Russia.

so generally speaking, though, I think energy is still a good place to be looking at what you get on cash flows.

RACHELLE AKUFFO: And as you mentioned there, Victoria, a lot of unknowns there. Who would have thought a year ago, the US would be sort of opening these talks to Venezuela regarding oil. Marta, I want to bring you in here because you said that as multi-asset investors, we should try to avoid predicting some of these pathways and instead look at the potential implications across assets. What does that look like from a retail investor's perspective?

MARTA NORTON: Yeah. So I have to acknowledge that we resonate with the emphasis on value. That's a place that we've been for a while. And we acknowledge that valuations and in growth areas have been really strong. And so we've been underweight that particular area. But what I will say is when we do see movements and prices, and we see growth stocks, technology areas, start to sell off and sell off more meaningfully and to the tune of 15%, 20%, that's when we start to invest into those markets, incrementally and not in some sort of wholesale move.

But I think it's important to take advantage of price movements and adjust your positioning. And so we look at opportunities, even though they're not the focal point anymore, like they have been in the past, to start taking advantage of those opportunities. And then also think broadly across fixed income markets. I think it's important to have a multi-asset portfolio and to think about how asset classes outside of equities can offset the risk within equities. And so that's where something like treasuries can play a role and can be a nice offset to the volatility that we're seeing elsewhere.

BRAD SMITH: Victoria Greene, founding partner and portfolio manager at G Squared Private Wealth, as well as Marta Norton, who is the America's chief investment officer over at Morningstar Investment Management, thank you both for joining us here today.