The unemployment rate is 'fantastic' despite recession indicators: Strategist

Fiduciary Trust International EVP and Head of Regional Markets Gene Todd joins Yahoo Finance Live to discuss the current state of the U.S. economy and labor market, and the odds of a recession.

Video Transcript

- Joining us now Gene Todd, Fiduciary Trust International EVP and head of regional markets. Good to see you, sir. So what's the green, the green screen there all about? What are driving the markets today?

GENE TODD: Dave, good to see you. Good to be with you guys. So it's a classic bear market rally. Happy to see it. It's a risk-on day. We need it. I think this is day five of the market going up.

And remember, it's off of a just horrible first half of the year, one of the first-- one of the worst first halfs of the year that we've seen in decades, I think since 19-- the early 1970s. And, Dave, you weren't around then, but let me tell you, recession, we had a recession. We had very high interest rates. Mortgage rates were 18%.

The markets were a mess. Commodity prices were rising. We had serious inflation. And so I don't think we're going to go back to there.

But no, I think the market is just, it's just a classic bear market recovery rally. And it's good to see. We will take it.

- And Gene, in your notes, you said that the recession narrative has now replaced the inflation narrative. How does that change what clients are putting into their portfolios and what they're rotating out of?

GENE TODD: So is it the next shoe to drop, a recession? And the GDP now, Atlanta Fed number for Q2 is -1.9%. And we had a negative GDP number in Q1. It was one -1.6%.

Now, that's a little r. I mean, there is no doubt, Rochelle, that you're seeing the economy slow down. But I'm not so sure yet that we are going to go into a recession. We're going to see a slowdown. It'll have to get proven out over the weeks and months ahead. The National Bureau of Economic Research will be the one to officially declare whether or not we're in a recession.

But what's different this time is jobs. The unemployment rate is fantastic. It's still 3.6%. We're going to get a payroll number tomorrow. We had the JOLTS number yesterday. And it wasn't that bad. We lost 427,000 more job openings. So we've got now 11.3 million.

It's still a hot labor market. And so as long as labor holds in there-- and I don't think the payroll number tomorrow is going to be all that bad. It might be a little soft. But I still think the unemployment rate is going to hang in there for a little bit. And it's going to take some time before we see if we're truly into a recession.

But that is the talk of the town. Everybody's talking about R, the big R, a true recession. We may be in a little r right now. Time will tell whether or not we go into a full-fledged recession in the months to come.

- Yeah, Gene, you mentioned that labor market. And the number that stands out there, 1.9 jobs per available worker. Hard to imagine a recession with anything close to that. You talk about the jobs number tomorrow, on which Jared said, all eyes on wage growth. Are you watching that or is there a number after that, perhaps next week that will tell you the direction in which we're headed?

GENE TODD: Yeah, we're watching that. But we're also going to look at the CPI print that comes out next week. We think inflation has peaked. I think the market feels like it's peaked. But it's still out there. So I wouldn't expect to see a CPI number that's in the mid eights. Hopefully it's coming down.

But if you look at the M2 money supply out there, there's still a lot of money growth out there. It's up 6.6% from the last 12 months. That's going to take some time to calm down. And so I think inflation is still out there. We're going to watch that very closely.

- And, obviously, with things still very volatile at the moment in terms of waiting for each data point and seeing the markets react to each one, how should people be positioning themselves? You said focus on companies with strong balance sheets. Which ones are your favorites right now?

GENE TODD: Well, we like quality. We like large cap over small cap. We like companies that have pricing pressure, the ability to pass on price increases to customers, and strong market shares and strong balance sheets.

So but we're still going to be defensive, Rochelle. So we like the consumer staples. They're defensive. They're the must-have sorts of goods that consumers want. So we think those are going to continue to outperform during the second half.

And we like health care. Health care, first of all, it's performed better than the market by a long shot during the first half. And there's so many positive long-term dynamics with this aging population that we think these companies will continue to be able to take advantage of, some of the advances around oncology and Alzheimer's and diabetes what they've been doing with the genome.

And so I know there's some merger activity that's taking place in this sector. That would be good for this industry. And we think health care will do well in the back half of this year.

- And quickly, we won't see a till then, as we get towards earnings season, what's your expectations? Have companies already baked in and begun to prepare for some type of recession?

GENE TODD: Yeah, the Street is still high for 2022. I mean, it's close to 10%. I think it's like 9.7%. And believe it or not, those numbers have come up over the last 30 days. And so I think the earnings numbers that we're going to see for Q2 are going to be OK.

But what I'm a little nervous about is the back half of 2022. I think the Street is still pretty high, way too high. And so that's something that I would ask people to look at. Watch earnings numbers. Watch the guidance that a lot of these companies provide start to come down in Q3 and Q4.

- The guidance definitely will be key. A big thank you to Gene Todd there, Fiduciary Trust International EVP and head of regional markets. Thank you so much.