Market strategist on recession risk: ‘There is time to correct this’

Citi U.S. Wealth Management Head of Investment Strategy Shawn Snyder joins Yahoo Finance Live to discuss the U.S. economy, inflation, volatility, Fed policy, and the outlook for a recession.

Video Transcript

BRAD SMITH: Well, everyone, the market extending its losses this morning. Currently, the Dow is sitting right now lower by about 395 points in the futures, with the broader markets also lower as well in the futures. The S&P 500 and the NASDAQ, you're taking a look at the past five days' decline, five days S&P 500 down 2/10 of a percent, NASDAQ down over that time by about 1 and 1/2% over the past five days. So joining us now to dive more into the markets, we've got Citi US Wealth Management head of investments, Shawn Snyder.

And Shawn, particularly here, you write in your note that the financial markets appear to be caught in a traditional growth scare. I mean, if there is anything that is scaring the markets right now, it's not just happening in the US. It's happening broadly as well. And so what would you kind of extrapolate towards the move that we're seeing this morning internationally? And what does that set up for today's trading session?

SHAWN SNYDER: Well, the roller coaster continues, right? So we're seeing yields higher and stocks lower, but why is that happening? And why that is happening is we're actually going through a period of transition where the stimulus-- the sugar rush from stimulus is wearing off. So the US economy is potentially slowing from a rate of growth at 5 and 1/2% in 2021 to something that's maybe closer to 2% in 2022. So stock market is adjusting to lower growth.

And at the same time, you have the Federal Reserve tightening monetary policy into a downturn. And you're seeing bond yields rise. So it's making for a very difficult environment for investors right now, but the key question is whether the Fed can break this cycle of rising prices without breaking the economy. And that's something that we need clarity on, but we're probably not going to get clarity for a while. We at least need to see inflation fall or bond yields stabilize or growth stabilize as well.

BRIAN SOZZI: Shawn, none of that stuff sounds like it's going to happen in the near term, which raises this question-- do you think we're headed for a bear market?

SHAWN SNYDER: I think there's certainly the potential for that. I mean, at the end of the day, this either ends up being a traditional growth scare, at which case I would think that equities would actually rebound sharply, if we get to that point. But if we are headed towards a recession-- and again, I think those probabilities around 30% are probably accurate-- then I would say there's more downside.

But if there's a silver lining here, there's a couple of things. One, we may see a peak of inflation in March. So Wednesday, we get the April CPI print. I think it's widely expected that the inflation rate comes down a little bit, maybe from 8 and 1/2% to 8.1%. You know, I think it will be trending in the right direction. I think that's a positive, even though it's going to stay elevated.

And the other silver lining here I think that people are kind of ignoring is that we still have time. There is time to correct this. If you look at leading economic indicators in the United States, they're still positive on a year on year basis, well into positive territory, about 6.4%. Traditionally, they fall below 0% prior to recession.

So I think the odds of a recession imminently are relatively low. That means there is a window, like the Fed says, where there's a plausible path that they can achieve a soft landing. And I think that is the key question. It's going to take a while to find that out, but I think we'll have more clarity in the back half of the year. And I think we could look back and just see this as a traditional growth scare.

JULIE HYMAN: Shawn, it's Julie here. You say in your most recent note, panic is not an investment strategy. So you sound very measured and very reasoned here. But I am curious, sentiment wise, if what we are seeing in the market right now is-- I mean, is it a traditional growth scare? Has that tipped over into panic? And if so, does that then provide a lot of market opportunities for people who can remain unpanicked?

SHAWN SNYDER: Well, last week was really the first time I got a sense of panic from clients and our financial advisors in some regard. But if you look back at the week, what you saw is up 900 points on the Dow one day, down 1,000 points the next day. And I think it was a really key takeaway from that. And that is that time in the market is more important than timing the market. So since 1990, simply staying invested in the S&P 500 would give you an average annual return of 10.8%. Or if you tried to time the market and you missed the 20 best days, that average annual return declines at 6.3%.

And I would also point out during that same time frame, eight of the 10 best days occurred within two weeks of the 10 worst days. So timing the market, you know, it sounds appealing, especially in difficult times like this. But you tend to miss those strong rebounds when we do get them. And that weakens returns over time. So panic is not a strategy. So what I would recommend doing, what we're recommending to our clients to do, is have a more defensive tilt.

So what you do is you move into things like companies with strong earnings growth, good track record of dividends. You can look at the S&P 500 Dividend Aristocrats Index, which represents those companies, a lot of consumer staples in there. And they're down about half as much as the regular S&P 500. So it's down 7%, instead of 14%. So I think there are some areas of the market that you can look to for a little bit of safety.

The other hedge I would recommend is natural resource stocks, agriculture, oilfield services. Those types of stocks give you some sort of insurance, should we see inflation not start to come down. And then the other thing is, I do think bonds are back in some way. I know we're still seeing yields rise, but I do think that if you saw more material lag down, so you did enter recession, holding something like a 30-year Treasury bond at these yields should provide you some sort of volatility buffer in a market that goes down further.

BRAD SMITH: How much about timing the market right now is about timing the Fed as well? I mean, you say don't fight the Fed, and that continuing to be an apt description once again. But for the Fed that's going to be looking across the strength of the economy, how much of this just comes down to timing the Fed as best as possible?

SHAWN SNYDER: Well, I think that's right. I think there's definitely one person that can kind of change this position, and that's probably Chairman Powell. But they are trying to tighten financial conditions, and that, unfortunately, means higher bond yields and lower equity markets. And that's one way you get to lower inflation. So at what point do they decide enough is enough? You know, that's difficult to say.

But I do think there is a very plausible chance that we could start to see inflation decline in the back half of the year. That will allow the Fed to have a more nimble policy and to maybe be more patient. I think what we really need to see is that they're not maintaining the same path well into 2023. If they somehow eventually pause or kind of reassess later in the year, you know, then I think that may help us get to the soft landing that we're all hoping for.

BRAD SMITH: Shawn Snyder, head of investment strategy over at Citi US Wealth Management, thanks so much for joining us this morning ahead of the market open.