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Russia: Past geopolitical conflicts had ‘much bigger shocks’ to the market, strategist says

In this article:
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Geetu Sharma, AlphasFuture LLC Founder and Investment Manager, and James Bruderman, 1879 Advisors Vice Chairman, join Yahoo Finance Live to discuss how the market closed on Friday, the February jobs report, geopolitical risk, and the market outlook.

Video Transcript

- Well, for more on today and this week's trading action, let's head back over to our market panel. And Geetu, I'll start with you. We got a much better than expected jobs report out this morning. Payroll's up by 678,000 for February. Do you think this changes anything for the federal reserve?

GEETU SHARMA: I think the market is-- the strong jobs report shows that the us economy is continuing to lift up from reopening, the consumer spending is good, the hiring is good, and the market wants to believe that the us economy can sustain this crisis that is emerging in eastern Europe.

- And James, we're moving into the lull before the next quarter's earnings season picks up at this point. Does this leave markets even more vulnerable, in your opinion, to headline risks from Russia-Ukraine in the near term, or are there other positive catalysts that might be able to outweigh this?

JAMES BRUDERMAN: Well, I think the jobs report today is certainly a positive catalyst. Look, underpinning the economy right now-- or underpinning the markets right now, we've got a very strong economy. Forward earnings are higher than they've ever been, certainly still in record territory.

So I think there's a lot of underlying strength in the economy that provides a nice, you know, that provides a nice bit of downside protection to the geopolitical challenges that we're seeing right now. So quite honestly, we feel that the markets are priced reasonably well. We've seen a compression in multiples a little bit underlying the markets. We're in pretty good shape overall.

- And a lot of investors wondering how to invest at this point. Now, Geetu, in your notes, you say that investors should focus on stocks that tend to do well at this time of the economic cycle. That includes companies with high pricing power, strong brands, strong current cash flows, and safe balance sheets. Using that criteria, what are your top picks at the moment?

GEETU SHARMA: So we are focused on-- as I said, we are focused on companies that have strong balance sheets, strong cash flows, and tend to behave defensively in a volatile environment. To us, that's in the consumer staples space, health care, and also quality industrials and quality tech as these companies will be more resilient if we continue in this volatile environment.

- And James, you've said that the probability of a soft landing accompanied by more sustainable growth is more likely than a recession over the next 12 months. At a time when retail investors might be panicking looking at all these wild swings, how are you advising them to take advantage of the opportunities now with that eye on that soft landing a year from now?

JAMES BRUDERMAN: Well, look, at the end of the day, you know, we're facing a little bit of geopolitical turmoil right now, but we've been here before. You know, in the corner of my desk I've got the slide rule that my dad used to do his daily valuations when Kennedy was shot. And my grandfather was in fact the family's managing money since before the Berlin wall came down and before it went up and during World War II. Those were much bigger shocks. The Cuban missile crisis, much bigger shocks than we're experiencing today.

So I think the market is maybe-- certainly when you have geopolitical problems like this, the natural tendency is to err on the side of what don't we know? How much worse can it get? But when I think investors need to focus on is, is it likely to really get a lot worse? I mean, until the first bullets are fired by NATO soldiers, I don't think we've got a lot to worry about escalation. And people should be looking at the underlying value that's inherent in equities right now, especially given the underlying strength of the economy.

- So James, what are investors to make of companies that are already saying that their supply chains are going to be facing headwinds, or they are already facing some sort of headwinds on the material front because of the international conflict right now?

JAMES BRUDERMAN: Yeah. And not just the material front, but also you know the risk of cyber war heating up as well is certainly having a short term and may have a longer term impact on supply chains. You know, I think the assumption that we've have to go forward with is that from a secular basis, we are back in the Cold War. And we need to think about what our Cold War footing is, and how that does impact supply chains.

Simply put though, we do think, you know, there's still a lot of strength in the consumer, today's jobs report. And low unemployment suggest that earnings or suggest that a significant portion of the of employees are continuing to earn money. They should continue to spend money. We probably will see more bottlenecks for a little bit longer than we would have anticipated even a month ago.

But from the supply side and from a good side, we do expect those to kind of work themselves out. And we think as we get into the second quarter and into the third quarter, we'll probably see a lot more spending on the services side. And we do think that the pent up demand for services will be a nice boon especially over the summer months.

- And so Geetu, I want to swing that question your way, Geetu, because if we think about where the first amount of spending is to get cut on a household basis, what are the sectors that would be most readily or most reactively impacted?

GEETU SHARMA: I think as of now, the view is that the US consumer is inclined to spend because of the reopening. There has been a lot of pent up demand that has been, travel you know has, been locked in. And the consumer is doing well given again, the jobs report. So there is good hiring, there is there is wage growth.

And so at this moment, we think that the US economy will continue to do well, and will continue to take inflation in its stride, enabling the fed to start with the rate hike process even if it wants to stay cautious and not speed up the rate hikes. Because we know that inflation is much higher than Fed's 2% target, and the current monetary stance is not in line with those inflation numbers.

So I think that we don't see the consumer constraining spending right now. But of course, if the inflation stays high for a very long time given this Russian crisis and a spike in commodity prices, we will have to see how that plays out whether that will affect growth, whether we will continue to stay in this high growth, high inflation heating up environment or whether we will move towards a more stagflationary environment, which is high inflation but low growth.

- James, how are you thinking about the energy sector? Crude is over $100 a barrel. The energy sector has outperformed again, today after outperforming for the year to date. Do energy commodities and stocks continue to outperform and continue to have some room to run from here?

JAMES BRUDERMAN: That's a really good question. And I think the answer is candidly no. I mean, we can't predict exactly how supply and demand shake out. But we're certainly seeing a little bit of speculative froth. And in terms of the recent run up of interest rates-- not interest rates-- but in terms of the recent run-up in energy rates.

I don't know that that's really sustainable at $120 plus a barrel. And you know, we'll have to see what the OPEC countries do on the supply side. We'll have to see if Europe and US start, you know, thinking about maybe energy independence again. And certainly, I think that you know in this Cold War environment, energy independence probably takes a front seat to clean energy or to, you know, well, really to clean energy.

So you know, I think on the supply side at these prices especially, it's certainly logical that we'll see more supply. Certainly at these prices, demand is also going to come down. So I don't see it sustainable at this level.

- And Geetu, I'm wondering for US economic activity, where are you seeing the biggest soft patch at this point aside of course, from inflation that you think may be underappreciated at this point by investors, thinking about where they should be investing, and where potential pitfalls could be?

GEETU SHARMA: Yeah. I agree with the other guest that energy is, you know, people may believe that energy is the place to invest. But there could be pitfalls there because if suddenly we have a resolution to this crisis, both oil and energy stocks can pull back quite a bit.

I also think that investing in the-- right now we should be investing in companies that have current cash flows rather than investing in those that have high growth and high cash flows into the future with high valuations. Because if we do see a rate rise, then long duration stocks with high valuations can suffer.

If you're in an environment of rising rates and tighter financial conditions, than valuations will begin to matter. And in that regard, focusing on companies with high cash flows today and sustainable and stable will do well.

- Geetu Sharma, Alpha's Future LLC founder and investment manager. And James Ruderman, 1879 Advisors vice chairman. Thank you both so much. Have great weekends.