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U.S. economy has an 'enormous cushion' in the labor market, strategist says

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J.P. Morgan Asset Management Global Market Strategist Meera Pandit joins Yahoo Finance Live to discuss the state of the U.S. economy, the labor market, recessionary risks, and the outlook for Fed policy.

Video Transcript

BRIAN CHEUNG: Well, let's get a little bit more on the markets with JP Morgan Asset Management global market strategist, Meera Pandit. Meera, it's great to have you, first of all, in studio. Great to see you in person.

MEERA PANDIT: Thanks for having me.

BRIAN CHEUNG: And we just had Myles on set. We were talking about the whole recession thing. Just curious to get your take on it. I mean, it seems like there's this view around Wall Street that this is probably going to happen. Is that something that's also going to happen, in your view? And what might the severity be of it, in your opinion?

MEERA PANDIT: Certainly, we're seeing, hearing more about recession risks. And to your point earlier, we've been hearing about them since the beginning of the year. That's something that people have been talking about. But I think that now, we have a little bit more firm of a catalyst when we see the Fed moving even more aggressively than we anticipated, even just two weeks ago.

So if they continue on this path, the upshot is hopefully we do start to control inflation more. But there's certainly that downside risk that you do face a downturn. But I do think it is important to consider the risks around how severe this recession could potentially be. I know that Myles might not like to have that conversation necessarily.

But when we think about the severity of 2008, the severity of the COVID recession, we have to consider the fact that right now, we're not seeing that same level of excess in the economy, whether we look at residential spending as a share of GDP or CapEx, whether we think about inventories, autos, things that really amplify recessions in the past. Because some of those areas are more contained than they have been in the past and because we have this enormous cushion when it comes to unemployment, that should help us weather.

BRIAN CHEUNG: I guess, is the story different, though, for a Fed induced recession? Because the view, at least from the more aggressive Fed that we got last week, is that this may not be an inflation induced recession because the Fed is going to get ahead of it, but it's going to be an interest rate hike cycle induced one. So does that make, let's say, for example, the story on spending, more or less, relevant from that framework?

MEERA PANDIT: Look, it's still relevant because ultimately, with the Fed induced recession, what they're doing to induce a recession is raising interest rates high enough that it takes out some of that consumer demand. So certainly, we still want to make sure that we're monitoring what the health and the progress of consumer spending is.

But at the same time, look, we have also seen many recessions in the past induced by the Fed and somewhat more boilerplate than some of the more extreme ones we've seen in the last 15, 20 years. So I do think that distinction is still important there.

BRIAN CHEUNG: Were you surprised to see the Fed make that pivot? We got that "Wall Street Journal" report last Monday. And then all of a sudden, all right, 75 basis points it's going to be. Do you think that's the right move? And also what does that mean for Fed credibility going forward? Because they gave us guidance and said it's going to be 50 or 75 in July, but some people going, well, why should I trust you after what happened last week?

MEERA PANDIT: Well, I think it's a pivot in terms of Fed credibility. Do we want to be credible in terms of sticking to guidance that maybe isn't going to work for the economy? Or do we want to be credible in trying to actually abide by those dual mandates that we do have and bringing that price stability into the fore? I mean, as you know, every time we have a Fed meeting, there is this central question.

And what's interesting to me is that central question, actually, back in May, was, could this be a 75 basis point meeting? Even back in April, you saw a decent probability of a 75 basis point rate hike for the May meeting. So I think that the fact that that ended up being the central question yet again for the June meeting really points to the fact that the market was expecting, anticipating, and totally willing to take on that 75 basis points, if that's what it takes to bring down inflation.

BRIAN CHEUNG: We've seen the market reaction so far, very green after the press conference and then very red throughout the rest of the week. When you take a look at positioning, your note said no obvious place to hide. It's a pretty scary way to describe things. Where do you go right now?

MEERA PANDIT: I think when markets are really interesting, you have to be a little bit boring. Being diversified, not necessarily putting all your eggs in one basket. We're certainly preparing portfolios by moving up in quality, whether that's equity or fixed income. On the equity side, again, not necessarily favoring any one area or sector, and really gearing towards that balance. From a geographic perspective, we are a little bit more geared towards the US, given some of the uncertainty around Europe and China. And in particular, the US tends to be a pretty high quality market.

And then on the fixed income side, look, while investors have experienced a really hard selloff in the bond market, the harshest that probably most people have ever experienced in their portfolios, at the same time, we've had that similar rerating in the stock and bond market, where, actually, many parts of the fixed income market are attractive. And if we think about recession risks, how to protect portfolios in terms of having core bonds, it does make sense to add some of that core exposure back to portfolios, move up a little bit in duration.

BRIAN CHEUNG: Does that suggest a little bit more stability in the volatility we've seen specifically in the bond market? Because this is-- I feel like this is important because people don't normally talk about the bond market. But it has been ugly, ugly in 2022. But that's arguably because bond markets were trying to figure out what the heck the Fed is going to do. But I would argue that forward guidance hasn't gotten that much clearer, at least for right now. But are you suggesting that, well, maybe you will start to see that normal allocation of when equities spill, people go into fixed income? Because that's not really happening right now.

MEERA PANDIT: Yeah, essentially, when you have this rate shock, that's going to push stocks and bonds both down. But when you start to actually have more concerns about growth, that creates a different environment in which, while it can still weigh on the equity side and on earnings, it starts to support from a bond side when investors are looking, again, for a little bit more of a safe haven.

So I think you start to see a little bit of that. You saw a little bit of that in May. I think you're going to see a little bit of that going forward. So that growth scare actually, look, we have to see a little bit of bad news to see good news on the inflation front. That means a little bit of slower growth. And that potentially could also entail an environment in which stocks and bonds are not moving in the same direction necessarily.

BRIAN CHEUNG: Yeah, the story still remaining about inflation. Meera Pandit, JP Morgan Asset Management global market strategist, thanks so much for stopping by in person. I hope to have you back in studio again sometime soon.

MEERA PANDIT: Yeah, thank you so much. Take care.

BRIAN CHEUNG: Appreciate it.