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

Martin Schulz, Federated Hermes’ Head of International Equity Group, and David Stryzewski, CEO Sound Planning Group, join Yahoo Finance Live for a discussion about global economic growth, Fed expectations in 2023, wage and labor market growth, and how to adapt investment strategies to current economic conditions.

Video Transcript

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JARED BLIKRE Here’s your closing call, the first of four during this holiday-shortened work week.

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PRAS SUBRAMANIAN This is the closing bell for Tuesday, February 27th. You can see the markets here. The Dow managed to make some gains here with a 37 point increase, just a tenth higher than the previous year. The S&P down 4/10 of a percent. Jared notes that the NASDAQ is down 1.4%. This could be due to mega caps taking a significant hit and Tesla heavily weighing down on the NASDAQ.

Let’s talk more about this market and the Fed. Federated Hermes’ Head of International Equity Group Martin Schulz, and Sound Planning Group CEO David Stryzewski are joining us. Guys, we appreciate your presence. Martin, let me start with you. What are your thoughts on today’s market activity? As the year ends, we are in a time of low volatility or sorry, low volume.

MARTINSCHULZ Yes, 2022 was an interesting and difficult year. I believe that the absence of the Santa Claus rally is a sign that something has changed. There has been a first land war in Europe in more than 75 years and all the rest post-pandemic. I think that growth was favorable over the past several years.

I think that the slowdown in the global economy will cause the markets to continue to process the economic picture, which revolves around tightening central bank rates. I believe central bank tightening is going to continue to disrupt the markets in an unexpected way. We think the weakness will continue in the near-term. However, the market may improve later in 2023 (second half of 2023).

SEANA SMITH David, what are your thoughts? Are you in agreement about how the year will likely begin and what the Fed’s policy will be over the next few months?

DAVID STRYZEWSKI I do. We are below the 200-day moving mean, which is not very bullish, as far as the Santa Claus rally and the market. We’ll also be dealing with earnings season in the coming weeks. This will allow us to find out what analysts’ expectations were. As we head into 2023, I feel less optimistic.

Federal Reserve Chairman Powell is right that inflation will continue to rise for a longer time. It seems that inflation is sticky as we reshoring various parts of our economy. There are also supply chain challenges that remain. And, ultimately, borrowing costs increased by two-thirds this year.

That really has an impact on consumers. This has a significant impact on corporate earnings, particularly for junk bonds. You know what? I am very worried right now. But, I have a positive personality. However, the truth is that what goes up eventually falls down. Today we are seeing cycles change.

PRAS SUBRAMANIAN Martin, how do you feel about this inflation? Are you still seeing it? Many people are asking if it will affect housing markets. We’re already seeing a slight upward trend in housing prices.

MARTINSCHULZ You know that inflation is likely to stay higher longer than people anticipate. The last six months have been a great time for our team. We have finally surveyed the globe and are finally on the ground. China, however, is the one place that we haven’t been to. But, it is opening up. However, inflation is a global phenomenon.

And, of course, central banks are likely to continue increasing inflation. We have an example in Japan where wage increases are likely to occur. This is the first time that wages have increased in 30 years. This is because it’s the labor market, not the economy, that’s the tight situation that will likely keep central banks on edge. You can continue this push to decrease inflation.

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 Because we are still debating whether there will be recession, I don’t think it’s fully priced into market. Bloomberg stated that there is a 65% chance of a recession based on all the people they surveyed saying that it will happen in 2023. Fannie Mae had a chance of 85%, while Visa stated 83%. If you can get the consumer right (Visa, Fannie Mae have good data on this– I think you understand where we are going in the future.

When we look at stock prices, PE ratios are what we see. Prices were affected by inflation and the difficulties we face right now, supply/demand. In the next year, I expect an earnings recession. This is very likely, given how we are moving forward. This is not something I believe has been priced in.

I don’t believe that the average consumer has been prepared enough to budget. They aren’t talking about what they can do right now to protect themselves, given the Federal Reserve’s declaration that 2 million more jobless people must be rehired. They will continue to raise rates until inflation starts to fall. This sounds fantastic. It sounds great.

However, I believe things will get more complicated as they get rid of the 4% inflation rate. Their goal is to drop to 2%. People need to be aware of what they are allocating their money today. It is important to be more secure. However, strategies and investment methods must adapt to the new normal we are recognizing.

The economy is not growing, but the focus has shifted to fundamentals. My encouragement is to encourage people to review their strategies and portfolios, because there has never been a better moment to get things right. It is crucial that we focus on the end of each year, as we move into 2023, I believe, for our success.

SEANA SMITH Yeah. David, there are a lot of analysts who predict that we will see an earnings slump in 2023. It begs the question, “How deep could it possibly get?” Your opinion?

DAVID STRYZEWSKI It’s difficult because there are so many crosswinds in today’s world. I can sort of see a worst-case scenario as well as a best case scenario. If the Fed can make a splashy landing, it doesn’t necessarily have to be a deep depression. It could be very shallow. It could be fixed. Perhaps they are able to accommodate and lower rates in a significant manner. Perhaps they can give us a 40-year mortgage. I don’t know what the end result will be.

However, it seems that there are many things. To use Jamie Dimon’s example of a hurricane approaching, I think the point is that we can prepare for the unexpected because we recognize changes in the atmosphere when things spin and go insane. There are many crosscurrents in the world right now. A global recession is likely to occur, so it appears that this will be more on the deeper or longer side of things than the shallower and shorter.

JARED BLIKRE Martin, this is my last question. If you are looking for growth around the world, and not just in the US. Which sectors are you looking at that will be attractive to investors?

MARTINSCHULZ First, geographically we are looking at Asia. Then, we will be looking at South Africa and Brazil and some of the commodity-oriented markets there. If you take a look at the actual sectors, David points out that we are seeing an increase in earnings and a decrease in margins around the globe as companies try longer to retain labor, particularly here, the US.

We like health care from a sector perspective. We like energy. It’s about good growth, defensive companies that can manage this possible recessionary cycle. The dollar was parabolic this year in 2022, according to my calculations. It is down more than 10% and more than 12% against the yen for example.

At the end of it all, I believe the dollar provides some better liquidity – the lower dollar provides better liquidity for the rest of global economy. So as the US slows we’ll finally see China come back. Talking about the FAANGS of the US, Teslas, Apples, etc. getting hit. This has already happened in China over the past year and a quarter. So we are likely to see some big-tech Chinese companies perform at least slightly better than their counterparts in the US and Europe.

SEANA SMITH All right. Investors are sure to face a difficult year. Martin Schultz, David Stryzewski – thank you for joining us this afternoon.