Stock market slump leaves ‘no place to hide,’ strategist says

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Hennion & Walsh CIO Kevin Mahn and Threadneedle Ventures Founder Ann Berry join Yahoo Finance Live to talk about this week’s volatile market losses, which sectors investors should look into to ford recession concerns, blockchain technology across industries, and recession risks amid rising inflation and the Fed’s interest rate hikes.

Video Transcript

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That was the closing bell sponsored by Tastyworks. And taking a look at where we ended today, you can certainly see we lost some steam in the final couple of minutes of trading, the Dow closing off just around 42 points. The biggest laggards in the Dow today– Chevron, off just around 5%, and Walmart and Goldman, both of those stocks up nearly 2%.

You look at the losses in Chevron. You can see that reflected in the broader energy sector– the XLE, like Ines was just telling us, off just around 5% today, off 17% for the week. NASDAQ, off 4 and 1/2% for the week, S&P having its worst week that we have seen since at least January 2021.

Well, let’s talk about the moves that we’ve seen over the past five days and what we could expect going forward. We have Ann Berry, Thread and Needle Ventures founder. And we also have Kevin Mahn, Hennion & Walsh chief investment officer.

Ann, first to you because we’re trying to make sense of the volatility that we saw, that intense selling. We did see some buying action earlier today. What’s your big takeaway from the massive losses that we saw this week?

ANN BERRY: Yeah, there’s just no place to hide at this point. And that’s actually really unusual. Normally, you’d expect to see certain sectors performing better than others, depending on what kind of down cycle you think you’re in. And you’re just not seeing it. Everything is down, and I think it’s gonna be that way for a while.

And, Kevin, the same to you– big picture, last 48 hours or so, your takeaway. You know it’s bad when energy is down 5% plus for the week.

KEVIN MAHN: I think investors are still trying to understand and grasp exactly how aggressive the Fed turned earlier this week. Not only did they raise by 75 basis points after telling you just five weeks earlier that raises above 50 basis points aren’t even in consideration, but they also raised the consensus for their year-end Fed funds target rate from 1.9% to 3.4%. They’re gonna be raising rates aggressively into a slowing economy that, in all likelihood, will be in a recession soon.

Well, given that we’re in this period right now– And, Ann, you said there really aren’t any places to hide– how should people be positioning their portfolios right now? Is it better to hold onto cash? Or is there something to start making your shopping list with?

ANN BERRY: Credit is something I’m starting to look at very aggressively. There are ETFs out there. There are publicly traded funds that help you find ways to try and find yield in very liquid instruments. Things like Triple-A, that’s an example of an ETF. There are others out there. So rather than just holding cash and having it in the bank account, that’s the kind of place I’m looking to try and wait this out right now.

Kevin, what do you think? Where are you seeing opportunity?

KEVIN MAHN: Well, investors can’t reinvest for what’s already happened in 2022. But what they can do is invest for the balance of next year and into next year as well. We did a couple of research studies here at SmartTrust. And what we found is that during periods of rising rates, certain sectors tend to outperform.

We then mixed in slowing economic environments that lead into recessions. Two sectors jumped off the screens that came across in both of those studies, those sectors being industrials and, believe it or not, information technology. If you factor in an ultimate recession, then you add utilities.

So investors who are looking to position themselves for the next one, two to three years, you may want to look at quality companies that pay dividends and are associated with those sectors.

Ann, what do you think of that? Information technology and industrials– are those built to sustain the next 12 to 18 months?

ANN BERRY: Well, I think industrials is one, and I think it really depends on how capital-intensive those businesses are. So if you look at the industrial companies, who need to spend a lot on machinery and equipment and real estate, rising rates are pretty tough for those businesses. So it depends on the capital intensity.

Information technology– not all of these businesses are created equal. And I think one of the things Kevin said that was key, it’s cash. Which of those businesses are generating cash? That’s what I’m looking out for.

And, Kevin, I want to ask you about, obviously, the crypto selloff we saw, a lot of large institutional investors in this space. What’s your take on whether it’s worth having crypto in your portfolio right now?

KEVIN MAHN: I’m not a large or a small crypto investor. In fact, I can’t put my arms around valuation. I couldn’t tell you why it rose as much as it did, nor can I tell you now why it’s fallen as much as it has.

What I can tell you, though, in terms of one area of information technology which I do think is transformative and which has sold off significantly, is blockchain. That underlying technology that cryptocurrency is based upon can also be found in other industries, such as health care and financial services. So that’s one area to potentially consider.

And despite this significant selloff we’ve seen thus far in 2022, there are many attractive valuations for different companies across many sectors. And here’s one statistic that I’m gonna give all of your watchers today. And that’s the Altman Z statistic. That was developed back in 1968 by an NYU professor to help predict the probability of a company declaring bankruptcy over the next two years.

Wow, isn’t that appropriate for right now? So if you can find those companies that have good, strong balance sheets, cash on their balance sheets, pay a dividend, and their Altman Z sticks below 3, that should help you navigate through what’s likely to be some difficult economic times in the months ahead.

Speaking of the difficult times here, even over the next couple of weeks, because, Ann, there’s been lots of talk about PCE. There’s been lots of talk about earnings. But we have a few weeks until we start getting– until we get PCE, and then, of course–

ANN BERRY: Yeah.

–until earnings season gets underway. What should investors be watching or focusing on until then?

ANN BERRY: Well, the frustration is right now, we feel like we’re flying blind to exactly– we’re in the sort of information black hole period. I think it’s looking internationally, actually. I don’t think we talk enough about looking overseas. The UK right now, I think, is in technical recession. It’s had two straight quarters of decline.

Looking at the Chinese situation with continued lockdowns and seeing what Europe has to say about the impact of the Ukraine on their GDP growth, until we have domestic data ready here, looking overseas to see what’s going on, I think, is important.

Yeah, Kevin, what about that? You got the news from the ECB and the Swiss Bank. And it looks like situations are quickly worsening across Europe. Are they headed towards a recession, and what’s the implication on our economy?

KEVIN MAHN: It’s an excellent question. And inflation isn’t just a US problem. It’s a global problem right now.

And other central banks are trying to thread their own needles with respect to trying to dampen inflation without killing economic growth entirely. We saw just the other day the Swiss National Bank raised interest rates by 50 basis points and also indicate that they may look to start selling US equities off their balance sheet. That happened around 4 o’clock in the morning the other day. And that’s when we saw the futures markets turn quite considerably.

So I do think this is a problem that’s shared across the entire globe. But, again, that has created opportunities for investors to consider. And I agree with Ann. Having some degree of international equities in a globally diversified portfolio should position investors very well coming out of what’s likely to be a global recession over the course of the next year.

And speaking of that, Ann, obviously, we saw the Conference Board come out with their data showing that 60% of CEOs expect a recession. 15% believe we’re already in a recession. How do you think that is going to shape things like earnings going forward?

ANN BERRY: One of the issues with expectations is they can become self-fulfilling. And, actually, if you look at the Fed, they were concerned about the issue that inflation expectations were becoming self-fulfilling. I think we’re going to see that, too.

If CEOs are not confident, they’re gonna cut back on hiring. They’re gonna cut back on capital investment. They’re gonna cut back on marketing spend and other areas that typically get cut during recessionary periods.

So I think the issue here is needing to see from the business community that there is a belief that there is a light at the end of the tunnel relatively quickly.

OK. Ann Berry, great to have you in studio. Kevin, when are you gonna come hang out?

KEVIN MAHN: Invite me, and I’ll be there.

OK, buddy. We’ll see you soon. Enjoy the weekend, meanwhile.

KEVIN MAHN: Have a great weekend, everybody.

OK, you too.