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Recession risks: Investors 'have to be aware' of decelerating global growth, strategist says

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Laffer Tengler Investments CEO and CIO Nancy Tengler sits down with Yahoo Finance Live to discuss how markets are reacting to the latest CPI data, the pace of the Fed's interest rate hikes, recession concerns, labor force trends in the tech sector, and defensive sectors amid surging inflation.

Video Transcript

DAVE BRIGGS: Let's talk more about the CPI number and the impact on the markets with Nancy Tengler, Laffer Tengler Investment CEO and chief investment officer. Nancy, nice to see you on this difficult day. I'd love to ask for some good news in this data, but that may not be possible. What's your big picture? If you're writing the story of today, what's your headline?

NANCY TENGLER: That the inflation numbers, Dave, were catastrophic. I think this was a month when some folks thought we would see a decline because we dropped off a very big month in April of last year, a high inflationary month. But we didn't. And if you look closely at the sticky-- the Atlanta Fed sticky CPI, it's now at 7 and 1/2% month over month and 5.2% year over year.

That's the stuff that people have to pay. They can't not pay rent. They can't not pay for health care services and things that have a long lead time. And so I think this shows us that the Fed has to become more aggressive. And it's just unfortunate that Fed Chairman Powell took 75 basis points off the table because that's exactly what they should be doing next week.

RACHELLE AKUFFO: I mean, and speaking of what people should be doing, a lot of people scratching their heads. We had some analysts saying, look, inflation has peaked. Now we have this new data coming out. What should people make of this investing environment? And what are the defensive plays here?

NANCY TENGLER: That's a great question. And I think what I would say to you is that you don't want to take risk entirely off the table. So we've been adding-- we added risk back into our portfolios, or added to it in May. And I think three to five years from now, which should be anyone's investing time horizon, we'll be very happy we did. But we also went defensive last year.

When we expected growth to slow and we thought that the Fed had gotten behind the curve in inflation-- and we've written a lot about this-- we added names in the portfolio that took on more defensive characteristics, reliable growers, so things like Public Storage, Chubb Insurance, Philip Morris, names that will kind of turn in earnings regularly. They're important parts of people's budgets. And they're not going to change very much.

And so we're always on the lookout for those. On the riskier end of that reliable growers environment, we added Spotify to our portfolios yesterday. And we think that that will be a place that we'll be happy we're in, a stock we'll be happy we're in a couple of years from now.

SEANA SMITH: Nancy, I want to go back to what you said about the Fed, the fact that the Fed should be hiking rates by 75 basis points next week. We likely won't see that since Fed Chair Jay Powell said that it was off the table. But turning that focus then to the fall, does that mean that 50 basis point hike in September, is that almost a sure thing at this point? And then looking out to the rest of the fall, what do you think the Fed policy will potentially look like?

NANCY TENGLER: Well, I think-- so, Seana, I think that what we're seeing is, behind the scenes, the Fed is tightening up the balance sheet. We saw a precipitous drop-- and I mean that in a good way-- in M2 because we really need the liquidity to come out of the market to kind of get ahead of inflation. Jeremy Siegel had said almost a year ago that he thought we'd see about 20% inflation at some point because M2 had expanded so dramatically. And when I repeated that, people laughed. But I think he's going to end up being right.

So the decline in liquidity will do part of the work. The futures market clearly thinks that we're going to see 50 basis points in September. Just a week ago, we had Fed governors coming out and saying, well, we might pause in September. So I just caution people not to put too much on this. It is a midterm election year. I imagine we're going to get a rally in the fourth quarter and that the Fed may be sort of pushed to the sidelines as we get into September. We'll see.

I mean, they're in a very precarious position, having to hike rates in a slowing growth environment. I'm not in the recession camp this year. If we get one, I think it'll be next year. And I don't think it's going to be-- I think it'll be shallow and short. But we are experiencing decelerating growth, sorry, globally. So we have to be aware of that.

DAVE BRIGGS: And there were a few signs, Nancy, of a strong consumer. Then comes the University of Michigan's Consumer Sentiment Index at an all-time low. How does that change your perception of the consumer at this moment?

NANCY TENGLER: Yeah, and that's a really great point, Dave, because that was the historic low since the survey started, 50.2. And their inflation expectations also edged up. So a couple of things, you'll hear people say, well, there's a lot of excess savings. And there still are. And I think that's important to note. In the first quarter GDP number, we saw that consumers saved about a trillion dollars. So, yes, it's slowing down, but they still had a pretty decent cushion.

But now we're starting to see credit going up. And revolving credit went up 19.6% in April, total credit up 10.1. At some point, that can't continue into infinity. So I think you'll see consumers willing to still spend. And they kind of have to because prices are going up, so they're going to be spending more than they expected to.

But I don't think-- I grew up in the '70s. I managed money in the early '80s. This is not that. And so I think we have to keep that in mind. Corporations have tons of cash on the balance sheet. I think that we're in an environment that's uncomfortable and unprecedented, in many ways. But it definitely is not the 1970s.

RACHELLE AKUFFO: And speaking of discomfort, we're obviously still seeing some layoffs, especially in the tech sector. And you're saying that that's actually going to offset some of the labor market tightness. Why is that so important, especially in this environment?

NANCY TENGLER: Well, I think one of the really important things that investors need to pay attention to is that corporations are utilizing technology to improve productivity. Now we haven't seen it in the last two monthly numbers. But I believe we will as we move forward. And CapEx budgets for tech are now-- well, the total CapEx spend is now greater for technology than old economy CapEx spend. So I think that's going to provide some cushion in margins, as I think these companies are going to be very determined to protect their margins as best they can.

So we are seeing some layoffs, but it's in the thousands and maybe even, let's call it, hundreds of thousands. But we still have 11 and 1/2 million open jobs. And I think, really, that's what the Fed is going to try to target, is reduce the number of open jobs, while preserving the number of people working because that is the important factor. Yes, your disposable income may decline. But if you're working, it's a whole different picture in a high inflationary environment than if you're not.

SEANA SMITH: Nancy, how are you looking at the travel sector? Because even ahead of this inflation report, we certainly have seen many of these travel names under pressure today. Taking a look at names like Delta, American Air, some of the cruise lines all moving to the downside yet again. Are you seeing an opportunity to enter this space? Or is there still too much uncertainty, and investors should stay on the sideline?

NANCY TENGLER: Yeah, they've been so volatile. And there's no fundamental reason for the short-term moves. I think you've got a lot of the algos in there, a lot of the hedge fund traders. And in the short-term, that creates just a lot of white noise. We don't usually buy those names because they are not committed to their dividends. And so we're interested in dividend growers and growth at a reasonable price names that ideally also pay a dividend.

So we've been long energy, and we continue to be. We've been long the commodities that drive planetary decarbonization. And we've been long technology and health care. And I think those are areas that kind of balance each other out in a portfolio when you have this much uncertainty. At some point, we will be through this, and people will return to normal again, we hope. And you'll start to see stocks trade on fundamentals. And those are the spaces we want to be exposed to in that period.

So, materials. We do have an overweight to industrials, but also technology-- selectively. Not the high flyers, not the stay at home tech names, but the ones that have real balance sheets and real earnings and are growing earnings. You look at the cloud names and the cybersecurity names this last quarter, not only did they beat, beat and raise, but their guidance was really optimistic. And I think when this all settles down, those are going to be places where you hope you should have or might have increased your exposure. And you'll be quite pleased.

RACHELLE AKUFFO: There you have it, a heads up there from Nancy Tengler there, Laffler Tengler Investment CEO and chief investment officer, thank you so much.