30% market losses would effectively price in a recession: Strategist

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So let’s take a look at that market reaction and we turn to liz young so far his head of investment strategy so liz as obviously the markets have a lot of information to digest and they’re wondering how the fed is going to react to these different data points as well what is this doing for investor sentiment right now investor cinnamon is pretty extended on the

Bearish side and it seems difficult to find really a lot of positivity in that and you can look at that a couple different ways you can look at it as there isn’t much to grasp on to as far as looking forward and and getting positive about a soft landing or you can say that when things get this extreme on the bearish side we’re getting closer and closer to that

Being over now what we’re still dealing with though as you’ve clearly pointed out is that there are a ton of data points rolling in many of which are telling us that the economy is softening things are slowing but it still hasn’t been enough to fight that big enemy which is inflation so it keeps the fed on this path the jobs numbers from last week keep the fed on

This path and that’s what the market is really grappling with liz what do you think has been priced in not priced into the market at this point when it comes to fed policy the likelihood of a recession what has been accounted for so if you look at just the movement in what the market expects the terminal rate to be so the rate at which the fed will stop hiking

And either pause or have to eventually cut that rate has actually moved up or that expectation has moved up just even in the last week we’re looking at about 4.7 percent terminal rate as expected by the market by march of next year so you could assume that that’s sort of what’s priced in but you’re still looking at the expectation of a recession still only about

50 50. and with a market that’s been down at most 25 percent peak to trough this year it would tell me that we still have further to go on the downside to really price in a recession and that could be what we see through october as we start to get earnings information if companies start to revise down and as economic data continues to soften we could get closer

And closer to that 30 35 percent down which would effectively price in a recession in my opinion speaking of rochelle mentioned off the top the prediction from jamie diamond six to nine months before we’re tipped into a recession that europe is already there and that our markets could have another 20 percent to follow your thoughts on the latest comments from

Jamie so look this it’s not necessarily new that he’s said that he’s worried about economic growth so it’s not the first time that he’s mentioned this but it’s definitely possible and you know even six to nine months seems a little far out to me i think that if we do see a recession or the beginning of one that it’ll happen in the first half of 2023 as far as

Another 20 down in the market that feels like a lot to me and look nobody really knows how much further it could go and where the stopping point is but 20 more percent does feel like a lot to me and if you just think about on average to price in a recession or a drawdown during a recession you do have to get beyond 30 and we haven’t quite gotten there yet so at

This point the market is still sort of hoping that we can avert one i don’t know that we need to go down another 20 percent i feel like 3 300 on the s p is a pretty good stopping point if not beyond where we might stop but again who knows what the future holds there’s a lot of different things that could happen and one of the things that i think investors should

Really be watching is credit spreads there hasn’t been a huge blowout in spreads they’ve widened but in a really orderly fashion so far if credit spreads start to become more troublesome and get to a level where we’re worried about defaults particularly in the corporate market or in consumer lending that’s when you have to start assuming that the stock market

Will go down much further so then liz give given those factors then a lot of investors especially retail investors wondering should i hold on to my cash is that the safer bet versus say other opportunities what are you seeing in terms of opportunities say what’s the play here short term versus longer term so in the short term look it’s not a bad idea to hold on

To your cash if you’re nervous but here’s what i would say we’ve already done a lot of work on the valuation side so we’ve done a lot of re-rating in stocks like i said before we’ve gone down at one point from peak to trough 25 in the s p so if things continue to fall it’s okay to start thinking about buying that incrementally on the way down and you can look at

Many people are talking about a barbell approach i do think that that’s a good approach so on one end of the barbell you’ve got safety stocks which are pretty expensive right now and i would keep that in mind but you can also think about putting things in there like gold you can think about using treasuries at this level and then on the other end of the barbell

Look at some of those growthier names or some of those cyclical sectors that are probably trading at pretty attractive valuations compared to where they were a year and a half two years ago so thinking about just entering into those names systematically don’t spend it all at one once but systematically as we go down and always remember the market bottoms before

The economy bottoms so by the time the market is done with its downdraft the economy still has to follow and by the time the economy bottoms the market usually has started to recover well liz what you’re saying right now about those growthier more cyclical names brings me to tech and the selling that we’re seeing today and really what we’ve seen since the start

Of the year clearly we have seen a large drop in valuations the selling that we’re seeing today they’ll bring the nasdaq to its lowest level that we’ve seen in more than two years i guess what do you think it’s going to take to get investors back on board or if they are picking some of those growthier names those cyclical plays what should what more specifically

Should they be looking for so one of the things that you covered earlier in the show was semiconductors and what i would say to people about that it’s important to think about this the way that the economy has changed and the things that the u.s economy is now dependent on are much more technology focused so semiconductors have really taken over as one of those

Cyclical indicators in the tech space so on a day where we’re having increased recession fear and we’re still worried about the fed raising rates too far and putting us into a recession it is probably not any surprise that semiconductors are under a lot of pressure because they are that cyclical indicator for tech now as they continue to get hurt and as we see

Recession fears heat up as the market prices that in that’s when those names start to become attractive so i would still be waiting a little bit and maybe even beyond when the s p gets lower than 3 500 if that’s the case but that’s when you start to nibble on some of those names and but you want to be choosy about it and make sure that you’ve diversified your

Portfolio still outside of heck because rates are going to stay high for quite a period of time here until inflation is under control which means that technology communications and even some consumer discretionary names could have a lid on their upside because of that rate hike but you can start to enter back into what i would call the sort of cream of the crop

In each of those groups all right we’re certainly some great options there big thank you to liz young from sofi thank you for joining us this afternoon

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30% market losses would 'effectively price in a recession': Strategist By Yahoo Finance