Global recession ‘crosscurrents’ lead 2023 expectations to be deeper rather than shallow: Strategist

Federated Hermes Head of International Equity Group Martin Schulz and Sound Planning Group CEO David Stryzewski join Yahoo Finance Live to discuss global economic growth, expectations for the Fed in 2023, wage growth and the labor market, and how to adjust investment strategies to the current economic climate.

Video Transcript

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JARED BLIKRE: Here’s your closing bell, the first of four in this holiday-shortened week.

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PRAS SUBRAMANIAN: That’s the closing bell today on Tuesday, the 27th. Take a look at the markets here. The Dow eking out some green here, up 37 points, barely a tenth of a percent higher. The S&P down 4/10 of a percent. And the NASDAQ down 1.4%, around there, Jared noting those mega caps taking a big hit there along with Tesla weighing down heavily on the NASDAQ.

So let’s get more on this market, on the broader markets, and also the Fed, bringing in Federated Hermes Head of International Equity Group Martin Schulz and Sound Planning Group CEO David Stryzewski. Guys, thanks for joining us. Martin, I’ll start with you. What’s your take on today’s market action? We’re in a period of low volatility– or sorry– low volume here as the year comes to an end.

MARTIN SCHULZ: Yeah, I think 2022 was a tough and interesting year. I think the fact that we don’t have the Santa Claus rally, as was just mentioned, is an indication that– and if you think about everything that’s happened in the last year, crypto situation. You’ve got first land war in Europe in over 75 years, and everything else post-pandemic. So I think growth was in favor for the last several years.

And I think with the global economy slowing, we’re going to continue to see the markets digest the economic scenario as it revolves around central bank tightening. And I think central bank tightening will continue to upend the markets to a degree that is unexpected. And so near-term, we think that the weakness may continue. But possibly later, second half 2023, we’re going to see better market conditions.

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SEANA SMITH: David, what do you think? Do you agree just in terms of how we’ll likely start the year and what we will likely see from the Fed in terms of policy over the next several months?

DAVID STRYZEWSKI: I do. As far as the market goes and the Santa Claus rally, we’re below the 200-day moving average, not very bullish. Additionally, we’re about to be facing earnings season coming up here in the next few weeks and ultimately find out how analysts’ expectations actually rounded out. And so I don’t feel very positive as we’re heading into 2023.

I agree with Federal Reserve Chairman Powell that we’re going to be higher for longer, as it seems that inflation is a little bit sticky as we’re reshoring different parts of our economy, as there’s supply chain challenges still kind of being spotty out there, and ultimately, borrowing costs have doubled over this year.

So that really affects consumers. That really affects corporate earnings, and especially junk bonds. So, you know, I’m very concerned right now. But I have an optimistic personality. But here’s reality– what goes up ultimately comes down, and we’re seeing cycles change today.

PRAS SUBRAMANIAN: Hey, Martin, what do you think about that inflation? Is it still as– is it as sticky as you think? People are saying is it going to affect sort of housing markets, like we’re seeing today with markets coming out a bit there in housing prices?

MARTIN SCHULZ: Yeah, you know, inflation will probably stay higher for longer than people expect. We’ve just finally, this last six months at our team, really scoped the world and finally getting on the ground. The one place we haven’t gotten to is China, obviously, which just is now finally opening up. But inflation is something of a global phenomenon.

And on top of that, I think central banks, not all of them, but many of them are in a situation where they will continue to hike into this higher inflationary situation. Again, we have a situation, for example, in Japan, where wages, we will potentially see wage increases for the first time in over 30 years to the degree that they’re expected to spring. And that’s really– it’s really the labor market that’s the tight scenario that will potentially keep central banks on edge and continue, if you will, this push towards decreasing the inflationary situation.

SEANA SMITH: David, in terms of what has already been priced into the market when it comes to an aggressive Fed and what we could expect to see in 2023– we’re looking at the S&P off just over 19% so far this year, the NASDAQ off over 33% since January 1– has an aggressive Fed, has that already fully been priced into the market?

DAVID STRYZEWSKI: I don’t believe it’s been fully priced into the market because we’re still debating whether there’s going to be a recession or not. Bloomberg came out and said 65% chance based on everyone that they’ve surveyed to say that there’s going to be a recession in 2023. Interesting, though, Visa said 83% chance, Fannie Mae 85% chance. So I think if you get the consumer right– Visa, Fannie Mae have pretty good data on that– I think that you understand where we’re going here as it relates to the future.

So I think that when we look at stock prices, we look at PE ratios, price got affected by inflation and the challenges that we’re facing right now, supply and demand. This next year, I think that there’s going to be an earnings recession, very likely anyhow, as we’re going forward here. So I don’t think this has been priced in.

I don’t think the average consumer has actually even been really prepared because we’re not talking about budgeting. We’re not talking about the things that they can be doing to protect themselves right now given what the Federal Reserve has declared that they have to do, which is 2 million more unemployed need to happen. They’re going to be raising rates until they start seeing inflation come down. That sounds great. I think we’re seeing it right now.

But I think that things are going to get a little bit sticky here as we get around that 4% inflation rate as their goal is to get down to 2%. And so, again, people need to be very aware of how they’re allocating today. And so being more protected, very important. But also, our strategies and how we invest need to be adjusting to this new normal that we’re recognizing today.

So we’re no longer in a growth economy, but it’s turned to more fundamentals. And my encouragement is that people evaluate their strategies and portfolios because there’s never been a better time to get things right. And so focusing on things at the end of the year as we go into 2023, critically important, I think, to our success.

SEANA SMITH: Yeah. And, David, talking about that earnings recession, a number of analysts out there predicting that we could see an earnings recession in 2023. I guess the question is, how deep of a recession, how bad could it potentially get? What’s your view?

DAVID STRYZEWSKI: I think that there’s a lot of crosswinds today, and so it’s challenging. I mean, I’ve kind of got a best-case scenario and a worst-case scenario. So if the Fed can do the splashless landing, then it doesn’t have to be a deep recession. It could be shallow. We could turn things around. Maybe they can accommodate and drop rates in a significant way. Maybe we get a 40-year mortgage. I don’t know what they’re ultimately going to do.

But it seems like there’s so many different things– if I can use the analogy of Jamie Dimon saying that there’s a hurricane coming, here’s the point– we can prepare because we recognize the changes in our atmosphere as things begin to spin and go crazy. There’s just so many different crosscurrents right now. With a global recession occurring, it seems like this is probably going to be on the deeper side or the longer side than on the shallow and short.

JARED BLIKRE: Hey, Martin, last question to you, my man. So if you’re looking at growth across the globe, not just in the US, where are some of these sectors you’re looking at that are going to be pretty attractive for investors right now?

MARTIN SCHULZ: Well, I think first, geographically, we’re looking at Asia, and then a lot of the commodity-oriented markets in the Middle East potentially, South Africa, Brazil, and that sort of thing. And then when you look at actual sectors, I think, to David’s point, we are seeing an earnings hit to– and basically margin hit across the world as companies try to hold on to labor longer than would ordinarily be the case, and particularly here in the US.

But from a sector perspective, we do like health care. We like energy. And really, it’s all about really defensive, good growth companies that have the ability to kind of manage through this potential recessionary cycle. And so at the end of the day– the dollar, I think we saw it go parabolic earlier this year, 2022. It’s down more than 10%, more than 12% versus the yen, for example, more than 10% in a weighted– trade-adjusted perspective.

But at the end of the day, the dollar, I think, is providing some better liquidity– the lower dollar is providing better liquidity situation for the rest of the global economy. And so as the US slows, we’re finally going to see China come back. And you were talking about some of the FAANGS in the US, the Teslas, the Apples, and the like getting hit. Well, that already happened in China within the last year and a half. And so we’re probably actually going to see some of these big-tech Chinese companies at least outperform relative to their US and European counterparts.

SEANA SMITH: All right. Certainly setting up to be a challenging year here for investors. Martin Schultz, David Stryzewski, thanks so much for joining us here this afternoon.