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Recession fears ‘are way overblown’: Market strategist

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Heritage Capital President Paul Schatz and Simplify ETF CEO Paul Kim join Yahoo Finance Live to examine market volatility ahead of economic data, inflation, recession concerns, the Fed's interest rate hike cycle, and the effect of rising oil prices.

Video Transcript

RACHELLE AKUFFO: Paul, what do you think the markets were reacting to the most today?

PAUL SCHATZ: Good afternoon. It's good to be with you again. Look, I think today was more of a sigh of relief more than anything else. Friday didn't end so great. Markets have been volatile. The negativity looks like and feels like and acts like you've been through a 30% decline with a moderate recession.

So I think each and every day, the markets are trying to wring out the volatility, calm things down. And frankly, that's the only way you repair from a 20% decline in the S&P and a 30% decline in the NASDAQ. You slowly but surely, volatility goes from the alligator's mouth being wide open, and slowly, it closes, and you get back to just kind of normal trading patterns. And that's what we're seeing right now.

SEANA SMITH: Paul Kim, lots of focus is going to be on the end of the week when we get that latest CPI print. Questions about what's been priced into the market in terms of inflation. How do you see that?

PAUL KIM: I think the pendulum's swung back a little bit in the past couple of weeks, right? May ended up essentially flat. And so if anything's priced in, I think a much more moderate Fed is currently priced in. And not so much dependent on the single CPI print on Friday, but I think there's going to be a continuous sort of realization that inflation is not transitory. It's here to stay.

There's a lot of pressures, both from a tight job market, a continuous high and elevated housing market, as well as all the supply chain and commodity related issues that we faced all year. And I think, really, the culmination is going to be next week, where we expect to see some more market volatility. We're kind of trading sideways until the continuation of that narrative begins again.

DAVE BRIGGS: Paul Schatz, there's a first time for everything and likely the last time I ever ask about Cardi B talking about the economy. But here it is, and here's your opportunity to speak to her. She tweeted this. When y'all think they going to announce that we going into a recession? And Paul Schatz, what's your answer? Are we headed toward a recession?

PAUL SCHATZ: My kids would love this because they would bet I wouldn't even know who Cardi B was. Here's what's so fascinating and so eye-opening about this. When someone in pop culture starts tweeting, commenting about markets, about the economy, it's like having it on the cover of Time or Newsweek or US News and World Report. It's so beyond what we're, in the industry, focused on. When that happens, the negativity needle is about as pressed as it can get. I would never expect Cardi B or anybody else like that to focus on the economy.

I think recession fears are way overblown. I said this coming in with you guys January 1. No recession in 2022. It's not going to happen. Could we have one in 2023 if the Fed makes policy mistakes? Yes. However, with all the data that's available and looking forward, I'm still going to be in the camp that if it comes in 2023, it's mild.

And the stock market has largely discounted a mild recession, going down 20%. Mild recession, stocks go down 20 to 25. Unless you get a moderate recession, not mild, moderate, and oil goes to $175 or $200, we've largely survived what could be coming next year. But I don't think recession's coming this year, nope.

RACHELLE AKUFFO: And we've seen a lot of people on Twitter saying, look, a lot of you are going to end up just sort of speaking a recession into existence because it keeps becoming this narrative, even though a lot of analysts are saying, if we do get one, perhaps next year, or perhaps not at all. Paul Kim, I want to ask you about some of the narratives that we're seeing in terms of what the Fed can really do to break some of this inflation inertia. What are you keeping an eye on?

PAUL KIM: Really looking at, obviously, interest rates. The bond market relatively smart compared to many markets and has been fluctuating, right, back and forth. But really, I think the single most important metric is oil. I think oil is going to tell you a lot about which side is winning because traditionally, oil has created recessionary impulses when it's roughly doubled in a year. And we're pretty close to that.

And if oil continues to rip, it's going to, by itself, create a lot of the energy-- no pun intended-- to create a recession. But also, if you see it really start to sell off, that's a classic pattern of a recession in progress. So either way, a very sharp selloff in oil or continuous ramp-up in oil. I think either of those are pretty bad for our future outlook.

SEANA SMITH: Paul Schatz, what do you like in this environment right now, when there's uncertainty, we have record high gas prices? Inflation isn't too far from the 40-year high. What are you buying?

PAUL SCHATZ: Hey, look, Seana, you go down 20% in the S&P, you go down 30% in the NASDAQ, and you got a whole bunch of stocks down 60%, 70%, 80%, 90%. There's a whole lot I love. You just got to give me the time frame. So short-term, I think I love the semis. If you want to get granular, you can look at AMD and Broadcom. I did like Tesla. It's just so hard with this constant circus of a game with Twitter. So I'm not going to add my small position in Tesla, but certainly, semis.

I love utilities if you want to get some income. We've been paring back our energy exposure as crude's gone higher. I don't think that-- right now, I don't think that trend is sustainable. Even if I'm wrong and crude does spiral to 175, there should be a pullback first. If you want to add, you can. But up here, it's too difficult, for, at least, for me, to buy crude.

Listen, if you're aggressive, so many of these stay-at-home stocks or new age tech stocks or Ark stocks have been so hit over the head. I do think stock market rallies, in the process of rallying 7% to 15%, those stocks should go 15% to 30% in the short, intermediate term. There's plenty to love here.

I just-- if I were in-- and I love bonds to the end of the year. I think bonds offer phenomenal risk-reward. I think the worst case is, bonds go sideways. Best case, you get back half of what people lost early in the year. We get into the middle of summer, I may want to be a seller. But right now, I think the path of least resistance is higher. And I don't see a moderate recession, which would make me wrong.