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Recession ‘not a foregone conclusion,’ market strategist says

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Melissa Brown, Qontigo Managing Director of Applied Research, and Ryan Payne, Payne Capital Management President & ‘Payne Points of Wealth’ Podcast Host, sit down with Yahoo Finance Live to discuss tech stock rallies after weeks of volatility, inflation, and economic pressures on the housing market.

Video Transcript

- Here's the closing bell on Tuesday.

[BELL RINGING]

- And that was the closing bell, sponsored by Tastyworks. Let's take a look at where things shake out here, with the Dow, S&P, and NASDAQ all in the green. The Dow closing well off its highs of the day, but still up 643 points, seeing some buying action here after last week's pretty steep sell off. S&P closing up about 2 and 1/2%, as well as the NASDAQ. On a sector basis, all 11 of the S&P sectors in the green. Energy by far the outperformer. Consumer discretionary, technology, health care not far behind.

For more on the markets, let's bring in Melissa Brown, Qontigo managing director of applied research, and Ryan Payne, Payne Capital Management president. Ryan, first to you. When you look at today's action, seeing some appetite from investors here to buy. Where do you see the opportunity at this point because I think a lot of people are still trying to figure out where we're headed next.

RYAN PAYNE: Yeah. And I wish my crystal ball was working. No, actually, I think, look, we've had a lot of volatility in here in all seriousness. And I think what you want to think about here is the one dynamic that's changed a lot since after the pandemic is we're in a tightening cycle with the Fed. We know we're in a higher inflationary environment. And we know, historically, cyclicals, energy, financials do a lot better than technology.

So I realize we're getting this big bounce in tech today. But if you want to win the war, not the battle, I think you want to diversify further. I think a lot of investors are happy to get a bounce back in their tech stocks. But if you look at the longer-term picture, tech's probably not going to do as well the next couple of years because we're in a much different economic environment than we were the last 10 years. And that's critical when you're looking at your portfolio.

- Melissa, a nice bounce back. But the S&P still in bear market territory. And the NASDAQ down 29% year to date. Do you agree with Ryan on the future of tech and strategy?

MELISSA BROWN: Well, I think maybe you don't want to dismiss tech as a sector completely. You may want some selectivity in certain parts of technology that may actually do well. But I think, in general, when we're looking at this high level of volatility, investors are more likely to flock-- if you're going to stay in equities, you're going to stay towards lower volatility and lower risk types of stocks that maybe are not going to be quite as volatile as the market overall.

- And, Melissa, investors are still digesting the comments that we heard from Fed Chair Jay Powell last week. Anything that you heard from the Fed that changed your outlook over the next, I don't know, 6 to 8 to 12 weeks?

MELISSA BROWN: Well, the Fed move last week was a little bigger than had been expected, at least if you go back the week before. Expectations were that the increase was not going to be that big. So maybe that-- it wasn't really a surprise on the day. But maybe that was the one surprise that the Fed is being more aggressive than I think many, many investors had been expecting going into this meeting.

- Ryan, is this the aggressive posture that the Fed is going to need moving forward?

RYAN PAYNE: I think so in the short term, yes. I mean, everything the Fed's done is working. And they're putting the brakes on the economy. It's been a red-hot economy. You're already starting to see with the housing market, mortgage applications are going down. Commodity prices have started to come down a little bit. And of course, last month, we did not see a lower print, we saw a higher print on inflation. So the Fed is doing everything in its power, which is limited, to slow this economy down and bring inflation down.

So my hope here is-- and I suspect because the Fed is being more hawkish now, and as the economy slows, because with interest rates going up or the Fed raising interest rates, there's a delay there. It's a lag of like something like 9, 18 months before it really has an effect. If the economy does slow down, they can pivot, and they can be a lot more dovish later. And I would argue that's a very, very bullish sign for the markets if the Fed can actually change course at some point this year if things do cool off. And I think they are going to cool off.

- Melissa, do you agree? Do you think things are going to cool off when it comes to inflation?

MELISSA BROWN: In terms of inflation, I think we're still in a period where if you look at the month over month numbers, they continue to be very high. So that means that the year over year numbers are also going to continue to be high for a while. So I think maybe the numbers that come out won't be higher than what we've seen over the past few months. But it doesn't look like they're going to be lower either. I think maybe they won't seem quite so eye popping. But I think they'll still be fairly high.

- Ryan, you say what the Fed is doing is working. Are you in the camp that believes we will hit a recession in the next 12 months? 30% of Goldman says now a 30% chance. That's up from 15% chance.

RYAN PAYNE: Still a 70% chance we're not. So we should focus on that.

- Thank you for that.

RYAN PAYNE: You're welcome. Hey, I study my math. I'm in finance. No, but in all seriousness, I think it's not a foregone conclusion. And the headlines will make you believe that. But I think the fact is maybe we go in recession. If we do, it's probably a very light recession. I mean, we have full employment right now. We know that for every two jobs out there, there's only one person looking. People have money in their pocket. They saved a lot of their stimulus. And I realize they're starting to reach into it now because inflation is higher.

But also, there's been a big change from buying goods to going out and buying services. People are out and about in the economy. And just go to the airport and you can just see that people are spending money. They're traveling. They're going on trips, going to restaurants. So where the money is being spent in the economy has changed drastically since we're really kind of truly out of lockdown right now. So I think the consumer is going to stay strong. I think you could see maybe a mild recession. Maybe, I don't know, is it like four or five quarters out? But the reality of it is it's not a foregone conclusion.

I think this isn't 2008-2009 when the economy was broken. We're just trying to slow down a really, really hot economy. And we're trying to reel back a lot of that free-flowing money. And that's good because we're getting out of the excess out of the system like places like Bitcoin and all these disruptive technologies. So I think it's all good. And I think when you start thinking further down the line, I think we're still going to be on really, really solid footing here in the US.

- Melissa, when we talk about the economy cooling here, just look at housing. We got the existing home numbers out this morning falling for the fourth month in a row. We still have a ways to go because prices are at a record. But how are you, from the market's perspective, how is the market looking at some of the cooling that we've seen in housing? And I guess, how do you see that impact in the market here in the short term?

MELISSA BROWN: Well, housing is such an interesting case because, on the one hand, it is an inflation hedge, and all of our research has suggested that that old saw is true. But on the other hand, it's also hurt by higher interest rates that drive mortgage rates, obviously. So I think it really kind of depends on where we come out in this whole interest rates versus inflation, and do we start to cool down inflation? If rates stay high and inflation comes down a little bit, real estate may not be a great place to be. But for right now, it certainly has held its own as a sector, even with a home buying going down.

- Melissa Brown, thank you. Ryan Payne, thank you for reminding us there is a 70% chance we avoid it. You taught us something today.

- Optimistic view.

- Is the media too pessimistic?

- I think, yeah. Thank you for that. Maybe we are today.

- Appreciate that, Ryan. All right. Thank you both.