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Recession risk: Consumer has ‘deteriorated faster than we’ve ever seen,’ strategist says

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Calit Advisors Partner Lenore Elle Hawkins joins Yahoo Finance Live to discuss the state of the economy, stock futures, consumer sentiment report data, May retail sales, retail inventories, inflation, and the outlook for a recession.

Video Transcript

BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. Coming off one of the worst consumer sentiment reports in recent history, our first guest this morning says that a report shows a recession may have already arrived. Let's welcome in Lenore Elle Hawkins, Calit Advisors partner. Lenore, great to speak with you, as always, and get some of your insights here. First and foremost, what are you reading through in the data to see that the consumer is, right now, navigating mentally in their own wallets and pocketbooks through a recession?

LENORE ELLE HAWKINS: Well, let's first point out that we saw in the first quarter, the economy contracted. So it's not like a contracting economy was a brand new thing. That already happened. And normally, what we see in a healthy economy is, if you have one quarter of contraction, that doesn't mean a recession. But if you have one quarter of contraction, usually in the next quarter, the economy bounces right back up. So far, we're really not seeing that. And there's really good reason for that.

The state of the consumer has really deteriorated faster than we have ever seen in decades. And both consumers and small businesses are basically telling us that the recession is already here. And they have good reason to feel that way. We've seen the largest nominal drawdown. And for the combined bond and stock market on record, there's been nowhere to hide. Mortgage rates have increased at the fastest pace in history.

And then last week's Michigan's Consumer Sentiment Report actually blew away the lows that we have seen over the past 11 recessions. Consumers are hurting that much. It's worse than we saw in the '70s, in the real estate crashes in the '80s, even 9/11 terrorist attack, and the financial crisis in 2008. Even those were not as tough on the consumers as what we're seeing today. Not even the pandemic lockdowns.

And we're also seeing that sentiment is really widespread across generations. It doesn't matter how old you are. It doesn't matter what your income level is. It doesn't matter where you're living. That really tells us something.

JULIE HYMAN: So Lenore, you know, consumers may be telling us there's a recession. But is there actually a recession already happening? In other words, you tend to see a disconnect or you sometimes see a disconnect between sentiment and what's actually happening with the economy.

LENORE ELLE HAWKINS: Right, well, what's really happening, the May retail sales report. That really supported what the consumers are saying they feel. May consumer-- or sorry, May retail sales came in weaker than expected. And April was revised down. That's what you tend to see when the economy is really changing direction. You have to do backward, downward revisions.

And the key thing here was that the core [INAUDIBLE], and that's what feeds directly into the consumer part of GDP, it was flat, compared to what was expected to be a 0.3% increase. And real retail sales-- that's when we take inflation into account-- was the weakest year to date in May, with actually a 1.2% decline and down in two of the past three months. And if we look at kind of an annualized pace year to date through May, it's down negative 0.6%.

JULIE HYMAN: So Lenore--

LENORE ELLE HAWKINS: What that means is--

JULIE HYMAN: Sorry, just to bring it down, so are we already in a recession?

LENORE ELLE HAWKINS: The data is telling us that there is a very good probability of that, when you've got consumer spending that low. And then on top of it, we have sky high inventory levels. Now here's why inventory levels matter. When, let's just say, if across the board, general merchandise inventory levels are, say, zero, and during the quarter, they go from zero level to, like, three, that's going to be positive for GDP because those stores are buying things in anticipation of selling them.

As their inventory level goes up, that is a positive for GDP. If, in the following quarter, their level goes from, like, a three to a one, that is negative for GDP. Right now, we have sky high inventory levels that are at a point that we last saw right before the Great Financial Crisis in 2008. So that's also a deflationary thing, right? Because if you think about all this inventory sitting there, how are they going to get rid of it? They need that cash flow. They're going to be discounting prices.

BRAD SMITH: So what would you expect to become the next reality, if you will, of the employment situation, given that there's a high probability that we are already in a recession?

LENORE ELLE HAWKINS: Yes, so one of the things that we've been hearing is, we have this low unemployment number, except the employment level-- so the number of people actually in the labor pool, people working-- has not recovered from the pandemic. So people are just sitting on the sidelines. And now we see the consumer saying, oh, my God. This is awful, right? Prices are skyrocketing. My savings is getting destroyed. No one can afford a house. What do we do?

That means people are going to be coming in from the sidelines, joining the labor pool, because we also saw in that Michigan Consumer Sentiment report that comfort in retirement is at, like, a nine-year low. So that means more people are going to come into the labor pool. As more people come into the labor pool, they need to find jobs. That's going to be the unemployment rate will be pushing up. And that's something that the Fed will also be watching.

JULIE HYMAN: Wow, this is a bummer, Lenore. I mean, we got lots out there to choose from, obviously. OK, so you mentioned earlier that there have been precious few places to hide in the markets here, because we've seen pretty much everything go down in tandem. Where, going forward, is going to be a good investment?

LENORE ELLE HAWKINS: Well, there's a couple of places to look. So first off, the one thing that everybody really agrees on, if you look across the board, is that bonds are just the worst thing ever. And when we're looking forward to a recession, you tend to have inflation peak before that really hits. So those bonds that everybody hates and that nobody wants to be near, those are actually going to become something pretty interesting going forward.

Well, the other thing we can look at is, it's not everybody who's really been struggling. If you look at, like, the consumer defenses, because that's where we go, right, when things get ugly, Dollar Tree's actually at-- actually up year to date almost 7%. That's ticker DLTR. Hershey, another consumer defensive, it's up nearly-- about 6.5%. Constellation Brands is up almost 6%. Archer Daniels is up over 14%. And those are just those consumer defenses.

You can also look at what's going on in the world. Aerospace and defense is a pretty good place to be. The world is not less scary these days. Lockheed Martin is another one that's doing well. It's up almost 14%. Northrop Grumman Oh up over 14%. So there are places to go, even though things right now are a little bit dicey. And the best thing, though, what's great about the markets right now is that they always precede a recession. So the markets will bottom out before we get into the bad part of the recession. And that's a really great buying time for investors.