Why a recession is 'not the situation we have today,' according to a strategist
BNP Paribas Asset Management Chief Market Strategist Daniel Morris joins Yahoo Finance Live to discuss the state of the U.S. economy, the probability of a recession, and the resignation of UK Prime Minister Boris Johnson.
Video Transcript
- Welcome back to Yahoo Finance Live, everyone. Continuing our recession watch as market volatility remains a constant, and our first guest today says even if a recession is coming, it's too early for investors to begin positioning portfolios. Let's welcome in Daniel Morris, BNP Paribas Asset Management's chief market strategist and co-head of the Investment Insight Center as well. Great to have you here with us. First and foremost, you know, how and why is it too early, Daniel, to kind of position your portfolio for kind of a preemptive or possible recession?
DANIEL MORRIS: Well, first off, we don't think there's a risk of recession in the near term. Now technically, we actually may already have had one. We all know, of course, that first quarter GDP was negative, driven primarily by decline in net exports.
The GDP now forecast for the second quarter also point to a negative print. However, when we think of a recession, it's really a collapse in demand, and that's absolutely not the situation we have today. Consumer demand is still strong and business investment is still pretty good and unemployment very low.
So it's really more how the labor market is reacting if you're seeing a big increase in unemployment, and certainly, that's not where we are now. Now we may be there by the end of next year. If we look at the path that the Fed has laid out for policy rate hikes, what that is supposed to do is to slow growth. That's how they're going to get inflation down. Will it be too much and actually tip the economy into a recession? Maybe, but we don't really see that happening until next year. And that means the markets aren't going to be pricing in that potential outcome for a while yet.
- I want to put the US to the side for just a second because BNP very much has a world view, and Boris Johnson resigning today. Does that make you any more excited about investing in the eurozone?
DANIEL MORRIS: It's not really a key consideration. We're actually currently underweight European ex-UK equities. And that's driven much more by concerns about the geopolitical outlook, risk to European earnings, if there's an energy cut off in the winter, and really has very little to do with politics.
- Internationally here, I mean, when we look at all of the economies that could be staring down a recession, what's the possibility that you believe that the globalization right now of and reliance of the US on other countries that US-based companies are selling into and relying on those consumers as well, and the same can be said for some countries that are-- for some companies that are in other countries as well. With that globalization, what is the extent that you might see a global recession triggered because of that?
DANIEL MORRIS: We think that's actually a fairly low probability. Clearly, the risk is the highest in the US simply because you have one of the highest core inflation rates in the US. It's about twice as high, actually, as it is in the eurozone.
Now there is a risk of recession in the EU and Europe, again, if you have a cut off for gas in the winter. Again, that's going to be an unpredictable political event. But economically, growth in the eurozone is actually still pretty good. So the bigger risk is in the US. It's unlikely to trigger a global recession in and of itself in which case you probably want to be looking at other markets with a bit more resilience and also more supportive monetary policy, which is why we have our overweights in China and in Japan for the equity market.
- Do you think, Daniel, we have exited a recession?
DANIEL MORRIS: Well, we won't know for about six weeks yet whether it technically occurred. But again, it's not something we really would consider a recession. And we kind of do lynch on this definition of two consecutive quarters of negative GDP growth.
But in fact, that's not the definition that the NBER uses. And just to take an example, if you look at the recession that occurred after the dotcom bust in 2000, you did not have two quarters of negative GDP growth, but it was still classified as a recession. So again, it's really looking, one, more what happens in the labor market, and then two, whether or not the Fed responds to the slowdown. It's kind of really that combination that signals, yep, this was a recession.
