Russia-Ukraine war: Market is ‘underestimating some of the risks,’ strategist says

Advisors Capital Management Partner and Portfolio Manager JoAnne Feeney joins Yahoo Finance Live to discuss market risks and geopolitical uncertainty as well as defense and homebuilder stock picks.

Video Transcript

BRIAN SOZZI: The markets continue to shake off a host of concerns ranging from the crisis between Russia and Ukraine to sky high inflation in the US. Now add another concern to the mix, one that may be signaling a recession is on the horizon. A key part of the yield curve inverted on Tuesday as the two-year US Treasury note yield rose above the benchmark 10-year US Treasury note yield for the first time since September 2019. For more on this, we're joined by Advisors Capital Management portfolio manager, Joanne Feeney. Joanne, always good to see you here. Perhaps you could settle this debate for us. Do you view the market right now as calm? JOANNE FEENEY: [CHUCKLES] I think the market is perhaps underestimating some of the risks that are out there. We saw this increase yesterday on the possible peace talks, which I think people really are misreading that situation. So I think we have a lot of geopolitical uncertainty. We have a lot of macroeconomic uncertainty, with inflation as high as it is, rates rising, people worried about recession, which, by the way, I think is probably premature. And so investors really need to think about what their time horizon is for investing and how to be best positioned for the next couple three years in this kind of a volatile environment. JULIE HYMAN: And so if we're looking at that period of time, some of your picks are interesting here, especially when you're looking at the geopolitical situation. If you're looking at it for the next several years, you're looking at some defense companies, for example. Does that imply that you think that we are sort of in a new geopolitical regime where there will be a sustained-- excuse me-- period of higher defense spending? JOANNE FEENEY: Yeah, Julie, that's exactly what we're expecting. So there's two things going on with our defense picks. First of all, we've always had them in portfolios as a way of ensuring against geopolitical risk. And now they're actually serving that function, plus also a real chance for appreciation longer term. And the reason that you suggested is absolutely correct. We're seeing defense budgets go up around the world. We saw Germany, for example, signal for the first time that they're going to increase their defense spending budget. And moreover, the selections we have, we think, are well exposed to the particular areas of defense that are going to see some of the most increase in spending, like, for example, in drones, where we own Kratos for our growth investors-- smaller company, but a leader in drone technology. And we think that's going to be a good longer term play as they become bigger, maybe become an acquisition target for some of the larger defense companies. BRIAN SOZZI: At the same time, Joanne, you also like a lot of reopening plays, but doesn't that thesis get hurt when we're still dealing with oil prices over $100 a barrel, and of course, all these geopolitical risks? JOANNE FEENEY: Yeah, so, Brian, right. We want to do here is make sure we don't get too focused on the yield curve issues, where some folks are thinking that's signaling recession. We think it's very dangerous at this point to use historical episodes of yield curve inversion to try to predict what's going to happen now. Because if you look at the broader economic data, what we're seeing is the JOLTS report came out yesterday. Job openings, 11 million, 5 million or so above the number of people looking for jobs. So firms are really trying to expand. And so when we think about reopening, we are still coming out of COVID and COVID-type behavior. So, for example, one of the positions we recently added was Match because they did pretty well during the pandemic, but they're going to do even better as people start socializing in person. Other plays in that area are brick and mortar. But you're right. You do have to watch out for how much inflation is going to crimp consumer spending. Most of that impact is going to be on the lower end of the income distribution. The middle group may be going down to a TJ Maxx to shop, instead of shopping at a Nordstrom or a Macy's. So you want to be cognizant about how consumer spending is going to be affected by inflation, and still find the opportunities for the reopening, which is still in process, judging by the job numbers, judging by the production numbers we're seeing, semiconductor increases in supply. So there's still a lot of recovery yet to happen. JULIE HYMAN: And you also have a housing pick, Joanne. So I wanted to dig into that with you a little bit. It's Lennar, which is on the higher end of the homebuilding spectrum, if you will. We've been seeing some choppier housing numbers as of late, although pricing seems to be remaining elevated. So why housing broadly, and then why Lennar specifically? JOANNE FEENEY: Yeah, so obviously, some folks have gotten discouraged about housing because of the rise in mortgage rates. And so people have turned away from this trade. Lennar has come down a lot, along with the others. But the thing to remember about housing is the fundamental demand story and the lack of supply. And so when we see existing home sales be weaker than expected, that's because there just isn't much inventory. And so that really does push demand to the home builders. Lennar is a high quality company. They tend to build homes for entry level and one step up buyers. And so the millennials, which are really driving that demand, are exactly in that market. And they've had to wait longer to go out and get houses. They've saved up their money, and they now have down payments. So even though we're seeing those mortgage applications come down, we think that's really about the supply problem. You try to buy a house now, very difficult to find. And that's really been complicated by the supply chain issues-- builders not having enough stuff, not having enough employment-- sorry, not having enough workers. And so we think the housing expansion is a multi-year secular growth story at this point. And so Lennar, we think is one of the best positioned house builders out there, given the market they are focused on. BRIAN SOZZI: Lastly, Joanne, in your view, what would be a bullish read on Friday when we get that jobs report? JOANNE FEENEY: Given how tight the labor market is, I think the report that came out this morning was surprisingly strong, actually. I think tomorrow, people are expecting 490 and/or Friday, sorry. And, you know, anything in that range will be viewed as a positive, as reassuring that the economic recovery is continuing. On the other hand, there are not a lot of people out there looking for jobs. And so if it comes up short, I think it'll be attributed to that. The real thing we're focused on is labor force participation. Do we get more workers coming back? That is the biggest constraint right now on the economy continuing to grow, is there's just not enough people out there to take these jobs. So getting them to come back to the workforce I think is going to be the better signal about how much growth is ahead of us. BRIAN SOZZI: Joanne Feeney, partner and portfolio manager at Advisors Capital Management, always good to see you. We'll talk to you soon.