Recession risks ‘are fully elevated,’ market strategist says

Thomas Kennedy, J.P. Morgan Global Wealth Management Chief Investment Strategist, joins Yahoo Finance Live to discuss U.S. inflation, rising rates, market trends, a recession probability, and the outlook for the global economy.

Video Transcript

- All right. Let's take another look at the markets here. Because as I mentioned, we are seeing a big surge in futures, in particular, coming and getting a further leg up after this morning's PPI print, and coming after last week's CPI print that was reassuring to many investors, and led to the belief that maybe it'll give the Fed more breathing room.

Let's bring in JP Morgan Global Wealth Management Chief Investment Strategist, Thomas Kennedy, to talk more about this right now. Thomas, as I mentioned, we got PPI this morning. We got CPI last week.

Inflation is not a problem anymore. Right? No, I kid. But where are we as we look at those inflation expectations given these two data points, which does not tell the whole story?

THOMAS KENNEDY: Yeah. Beautiful. Good morning, team. The inflation conversation is being adaptive to the soft landing narrative so far.

But to your point, inflation is only sequentially trending lower than expected. And the real question will become what is the level of inflation that the Fed is really fighting.

But in the meantime, this is a trend that most on Wall Street had been expecting. Candidly, it happened later than just about everyone expected.

But supply chains have normalized. And inventory is building across The Street. And now that's going to have an impact on prices.

- Thomas, I'm looking at a team note out this morning from the JP Morgan macro team. They're saying recession risks remain high. They're still like stocks. But they're reducing some of the exposures.

Where are you pulling back on some stocks here, and in what sectors?

THOMAS KENNEDY: Yeah, I think the overall cyclical side of the economy is most at risk. The recession probably, soft landing, hard landing conversation will be the debate until it actually happens, one way or another.

But recession risks are fully elevated here. You have interest rates that are exceptionally high to combat high inflation. And historically, the Fed doesn't have a great track record of getting interest rates just high enough to avoid that recession.

Cyclical economy stocks are most at risk. And building off of some of your conversation you were having about Walmart, you're starting to see the natural progression of tight financial conditions or high interest rates through the economy.

Housing sector is already in a recession. The next step, traditionally, is that the manufacturing cycle then becomes challenged.

And Walmart's earnings were better than feared. But they are starting to defend their margin now. Right? Inventories are building and expectations for revenues are coming down. So they're going to have to defend that margin.

- For some of the most global companies, have you already started to see signs of recession in other countries start to show up in US financials?

THOMAS KENNEDY: To some degree, you're seeing a global cohesion in recession risks. But the drivers of recession, in our opinion, are quite different.

China, for the most part, has already experienced their recession. In Europe, you have energy embargo risks. And in America, you have a central bank that's fighting demand-led inflation.

Why say it that way? The US is largely the most insulated economy there. Outside the US, you can see recession. And it need not have a recession in America. So you're seeing some global cohesion on that recession conversation. But I think there are different drivers.

- Thomas, given all of this, and given we talk a lot about the vibe, the feeling of seeing all these job cuts, the feeling of hearing all these recession signals. That said, I believe that the global view at the bank is still overweight US stocks, if I'm not mistaken.

So how do you sort of hold your breath, if you will, and have that position, given all of that noise?

THOMAS KENNEDY: Yeah. JP Morgan will have all different views from different sectors of the bank. But when you start to think about, how can I be overweight, the US versus the rest of the world, well, European stocks are about 35% cheap to US stocks. However, embargo risks create even more downside than what's in the price.

And you can start to have that conversation. So the overweight to the US is a reflection of defense and even in our risk on bucket. So trying to be very calculated, that we're defensive in the global risk bucket allocation.

My preferred way to be implementing for a long-term strategic investor is trying to find the value in fixed income again. It's been about 12, 13 years since we've seen yield and defensive characteristics in fixed income.

Now, that's not to take away the fact that it has been a painful year to be a fixed income investor. But an investment grade index that trades at 6.25%, since the year 2000, the S&P 500 is annualized to about that much.

But of course fixed income has less risk, less volatility, near zero default rate. So this is a rotation back to basics in fixed income that I think offers the most value for long-term strategic investors.

- Really solid context. JP Morgan Global Wealth Management Chief Investment Strategist, Thomas Kennedy. Thanks so much for joining us this morning, Tom. Appreciate it.