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Stock market sentiment is at ‘really, really depressed levels’: Strategist

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Alessio de Longis, senior portfolio manager at Invesco Investment Solutions, joins Yahoo Finance Live to discuss Thursday's market rebound after yesterday's brutal stock sell-off, along with how many investors are turning to cash.

Video Transcript

- For more on the markets let's bring in Invesco Investment Solutions senior portfolio manager, Alessio de Longis. Just nice to see you, sir. So Jared's there searching for a bottom. Have we indeed found it?

ALESSIO DE LONGIS: I do hope so, and our indicators do suggest that market sentiment and positioning indicators are really, really at depressed levels that have historically been consistent with a technical rebound from here. Think about 2008, 2009, 2011, 2018. These are the kind of levels that we are seeing.

And we think the market is also ripe, from a fundamental story. Today's a very interesting dynamic where you're starting to see the dollar weakening, emerging market equities outperforming. These are signs that maybe that global growth scare narrative is really beginning to switch into market weakness that is concentrating to the derailing of valuations for US growth stocks, but not necessarily into a broader growth scare globally. I think that would be a positive narrative for the next few weeks.

- So Alessio, I know ahead of the sell-off that we just saw, you were actually pretty positive you were dismissing the recession risks that are out there. You remained in an expansionary, you think we're going to remain in this expansionary regime. It's safe to say then, that probably is still your base case?

ALESSIO DE LONGIS: That is still our base case. Now the last few weeks have seriously challenged that proposition, but again, we are still leaning in that direction. As discussed earlier in this program, it really comes down to these levels, and it comes down to these flows and technicals today. If they hold and we do get a bear market rally, I think our narrative can really be proven right.

We dismiss recession risks, at this stage. The labor market is just too strong for us to position for a recessionary trade. Also, from a portfolio standpoint, it's important to remember that being too early on a recession trade can be very, very, very expensive.

So we still believe that the resilience in the economy will prove the market right, but investors should position for the parts of the market that have more ability to stomach a correction, where valuations are really cheap. So we continue to favor value over growth, and we continue to favor markets outside of the US that load more positively on that value bias, rather than growth.

- So for investors who have been holding on to their cash, sort of trying to see where to get in on the dip or with this volatility, is now the time to start building that shopping list? Or, what should you advise them?

ALESSIO DE LONGIS: That is a great point. And I would agree with you with your suggestion. Cash being the best performing asset out there versus equities, credit, and bonds, it's a very rare occurrence historically. What we have experienced over the last two quarters is extremely unique in the ability of cash to really be the only place to hide. It doesn't last for a long time.

This is a tremendous opportunity for investors to deploy that cash always in a balanced, diversified way, consistent with one's risk tolerance levels, but credit spreads have widened. Valuations on equities have derated so rapidly that this is really a great opportunity for those investors who have been on the sidelines and that have been proven right, by the way.

- Have the last few days at all changed your expectations from the Fed?

ALESSIO DE LONGIS: It's a great question. I think the Fed does not really have a desire or ability to downplay tightening expectations as a result of market volatility, quite the opposite. We're in a new regime. What has changed, with respect to policy and the Fed, is no matter what the market does, at this point, we should begin to understand that unconventional monetary policy, quantitative easing, and extraordinary support for liquidity is just not going to be the name of the game for monetary policy going forward.

So one positive silver lining is that we're seeing that commodity prices have peaked a long time ago, over two months ago. So if we begin to see inflation roll over, those lower inflation statistics could prove to be a very good catalyst, A, for the Fed to hike less, B, for markets to rally.

- Alessio, what do you make of the retail sector? Because certainly, that has been a weak point in the markets this week, some concerning signals that we have gotten from Walmart, from Target, from a number of those individual names. And it's kind of made some people out there question how strong the consumer is, at this point. What's your current read on the strength of the consumer?

ALESSIO DE LONGIS: The consumer has been sending us clear signals through the consumer sentiment surveys for a while, even when the market was still doing well. The consumer has not liked the current pricing regime, the current inflationary environment. These higher prices, inflation is biting the consumer. And this is what the earnings releases are telling us.

Now those consumer sentiment surveys are at the recessionary levels already. They are the levels, believe it or not, that we saw back in 2008. So if we begin to see inflation roll over, and we begin to see, which we have already started, to see the Fed raise rates. If the Fed is able to engineer a tightening cycle, bringing the economy to equilibrium without crashing it, that would be a very positive environment to boost confidence in the consumer, because otherwise the unemployment situation is very, very encouraging. We think there is more resilience than currently expected.

- So then as we look at what's outside of the Fed's actions, obviously, you have lockdowns in China starting to ease somewhat, starting to see a little bit of momentum, in terms of easing of supply chains, though. How much are you focusing on the factors outside of the Fed's actions and really determining where the economy goes from here?

ALESSIO DE LONGIS: That is an important part of the equation, because no economy, no matter how large, should be judged in isolation. The primary risk factors here are the management of a Chinese exit strategy from COVID, as well as the European handling, from a growth perspective, how Europe really manages this supply shock. If we can avoid those tail risk scenarios, we expect the US recovery, the US expansion to be really well on track. The Fed will be very mindful of those major tail risks.

If a recession in Europe occurs or in China were to occur will that derail the Fed plan to hike rates? Maybe, if, and only if, inflation begins to come down. The question today is about inflation. It's not about growth.

- Indeed, well, thank you so much for your insights. Alessio de Longis there, Invesco Investment Solutions, senior portfolio manager. Thank you so much.