Strategist on choppy stock market: ‘Don’t try to be a hero’

Truist Chief Market Strategist Keith Lerner joins Yahoo Finance Live to discuss looming global recession concerns, economic uncertainty, market swings, and the outlook for investors.

Video Transcript

- Well, we're talking about rising interest rates, rising seas for that matter. As Jen was just alluding to a looming global recession, all of these macroeconomic factors don't seem to be going away anytime soon. So how should investors be thinking about positioning themselves? Joining us now to discuss, Truist chief market strategist Keith Lerner.

Keith, it's great to see you. Amidst these troubling times, if you're a bull in these markets, as we see losses accelerate in today's session, how are you thinking about this? Is what we're watching unfold the market's pricing in a recession? Or is there something else going on here?

KEITH LERNER: Yeah. First, great to be with you, Julie. It is a very complex and challenging market. You know, after being big bulls for several years, we started to become more cautious in February. And we still think this is not the time to be on offense. It's still more the time to be on defense because these global complexities are set to continue.

Look what just happened this week, right? You know, with the UK, normally, when they have this big fiscal stimulus, that would be a positive for the market. Instead, the market took that as a negative because of inflation concerns, and interest rates had moved up.

So, listen, and with these supersized rate hikes, not only in the US but globally, that's gonna continue to weigh on global growth and earnings as we look into next year. The only thing I will say, though, I mean, it is a challenging backdrop. We still think it makes sense to be more defensive.

I will say, on a short-term basis, we just published a note saying it's not time to press an increasingly negative view after we've just gone down, you know, 15% in, like, four or five weeks. So the market is moving towards an extreme as far as being oversold a bit. So in a day when it's all gloom, I least want to bring that up as maybe a short-term, you know, silver lining.

- Sure, a rose in a bit of a storm here. So, I mean, even as we move forward, there's still gonna be so much of the viewpoint that a lot of trading desks have to think through in how far out the markets are attempting to look, even as we've gotten economists that have been discussing a possible recession that would be felt sometime in 2023. What is your viewpoint around that and how far out the markets are looking, and where we might actually start to see some of those very trading desks and institutional investors kind of position portfolios just a little bit differently? Where would the first sectors be that they start to look at?

KEITH LERNER: Sure. Well, at this point, our view is that we haven't been in recession. Most of the indicators we look at suggest sometime in early to mid-2023. But let's also be, you know, honest. It's very difficult to time any of this stuff precisely.

I think the more important point is that the economy is going to slow down from where it is today. At least our work suggests a high probability. And, you know, normally, markets bottom when you are in a recession. So we don't even think we're in a recession yet, even though the market's down, you know, quite a bit.

So until we're a bit further along, we would stay still stay more somewhat defensively oriented as far as which sectors as far as staples, utilities, health care. We still like energy as well. But the market is kind of-- you know, it's interesting because things happen so much quicker today.

We are down about 24%, 25%. That is the median decline around the recession. But the average is about 29%. But we just think we're gonna be in choppy waters for, you know, at least several more months into early next year.

- Keith, what would be your ultimate buy signal for stocks?

KEITH LERNER: You know, there's nothing that rings a bell at the bottom, Brian. I think it's always kind of the weight of the evidence. And instead of trying to call just the bottoms and tops, our work focuses a lot more on risk-reward, saying-- and that's what happened in March of 2020. We came out, actually, on the day of the market low, not knowing it was the low but just saying, hey, the risk-reward was really positive because we thought the upside was much better than the downside.

Here it's hard to make that case, right? Because the upside on the S&P is probably around 4,000. And on the low side, I mean, if you go through an average recession, it's about 3,400. You can obviously overshoot that.

So we just don't think it's compelling yet. You look at the S&P PE right now, it's about 15 and 1/2-- huge reset for the market from where we were. But if you look at 2018 or even during the pandemic, we bottomed around 13 to 13 and 1/2. So it's just not a, you know, compelling-- even though we do think we'll have some sharp, intimate rallies, we just don't think we're there yet.

So as far as signals, lower prices would be good, more extremes in even the sentiment metrics we're seeing today. And also, on the technical side, we'd like to see some rotation more towards these cyclical areas of the market. And finally, I think we'd have to have a better sense that the economy is actually bottoming.

We're getting close to that, right? Markets will bottom before the economy but closer to where the economy bottoms. We don't think we're there yet.

- Yeah, none of that stuff is happening quite yet, Keith, to be sure. Something that I'm asking guests today, as we get to the end of the third quarter, if there's anything in particular, as you look back over the third quarter, lessons learned that you can now apply through the end of the year. We had some of those, like-- or one notable sort of brief reprieve in the market and rally in the market that now proved to be wiped out.

KEITH LERNER: Yeah. Well, I think one of the things with this market is, you know, the moves have been violent. And what we're trying to-- what we actually discussed in June and also in August is to be a bit more tactical in this market. And you're not gonna get every call right, and it's not always gonna work out that way.

But in June, you know, we were looking at our indicators and saying things were extremely oversold. So we're saying, you know, don't-- this isn't a market to necessarily, you know, sell breakdowns or buy breakouts. We're in a broader, choppier market range, in our view.

And, you know, you can use that to your advantage in some ways. And even right now, I say, on a short-term basis, we wouldn't be pricing in the downsides since we are so oversold on a short-term basis but, again, I think, being somewhat more patient. And we also have to realize when we're in a bear market, the rallies tend to be sharp.

So just kind of keep on an even keel, and, you know, don't try to be a hero at this point. I think this is gonna take time to work through. Maybe, Julie, if I can, just because I'm guessing a lot of the viewers are not just investing for the next few months, when we did the studies about after you were down over 20%, on a three-year lookout period, you know, markets actually tend to rebound pretty strongly. We just think it's gonna be a challenge and rocky road to get there.

- Right. And you laid out the next several months, saying that would be kind of that rocky road. And so, you know, even if you do have the historical average of a decline in the markets by about 29% over the course of a recession, or kind of predating one into the depths of the recession, what would that next several months look like from your perspective? How deep could the declines continue to persist?

KEITH LERNER: Yeah, well, I mean, I think the first thing on a very short-term basis-- like, this week, you mentioned right before I got on the low is-- the intraday lows for the S&P was around 3,623. So that's gonna be something that's looked at.

If we break that convincingly, you know, the next kind of real strong level on our view is around 3,400 for the S&P. That would be that 29% average. And that also coincides with the prepandemic peak. And I think there things start getting more interested. Going back to Brian's question, the risk-reward starts becoming a lot more attractive, especially if that's someone that has a multiyear horizon.

So that's kind of what would be looking at. Again, on rallies, I think, on the other side, for folks that have been more offense during this decline, I would say if you get up to 4,000, 4,100, that's a good place in our view to start taking more risk if you're overweight risk today down.

And then the other thing is, I think, what's a positive, for the first time in 10, 15 years, we're actually seeing really much more attractive yields in high-quality fixed income with the two-year above 4%. So I think the fixed income side is actually becoming more interesting, which hasn't been the case for a long time.

- One last positive, Keith-- the market is closed on Saturday. And at this point, that's a very good thing.

- And Sunday, too.

- And Sunday, too. And that's a good thing. All right, we'll leave it there.

KEITH LERNER: Come on, guys.

- Truist chief market strategist Keith Lerner, always good to see you. We'll talk to you soon, bud.