Recession in China could ‘slow down some big companies’ like Apple: Strategist

Huntington Private Bank CIO John Augustine joins Yahoo Finance Live to discuss recession in China, Fed policy, potential upside in markets next year, and finding yields in cash.

Video Transcript

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BRAD SMITH: Continuing on with our discussion on some of the largest protests in China seen in years, as people fight COVID lockdowns. Markets are reacting negatively, fearing the impact on China's manufacturing as the holiday season begins in earnest.

Joining us now for more, we've got John Augustine, who is the Huntington Private Bank CIO. Thanks for joining us here on set today, John.

JOHN AUGUSTINE: Thanks for having us.

BRAD SMITH: Absolutely. All right, so start--

BRIAN SOZZI: Thank you.

BRAD SMITH: --things off with what we're seeing right now in China and how that kind of has a more outsized impact. From your perspective, what do you believe are some of the biggest areas that could be reactive or continue to be volatile as a result of what we're seeing in China?

JOHN AUGUSTINE: Well, markets are reacting the way you'd think so far this morning-- stocks down, commodities down, bonds up. Except one thing, the dollar is down. So it'll really interesting to watch this afternoon to see if it impacts European markets this morning, but then we have some rebound action in the US this afternoon.

So China does more trade with Europe than the US. So we're seeing Europe stocks down a little bit more today. Obviously commodities that impact, obviously Apple. But it's really Europe that's the epicenter with China more than the US right now.

BRIAN SOZZI: If the situation in China, John, continues to escalate, is that enough to push the US into a recession?

JOHN AUGUSTINE: Probably not. We're a pretty closed economy. About 15% of our economy is exports. So we're fortunate we're pretty closed in that environment. Probably the Fed's gonna have more and more to do with the recession than China will.

But, but it's gonna slow down some big companies. Yeah, it's gonna slow some things down. And Apple's the one today. And every day, we'll probably discover one.

JULIE HYMAN: OK, so let's get to the Fed then. If the Fed is-- if the Fed-- I mean, and that's pretty-- I think there's broad agreement that the Fed is the big risk factor, right? Or a big risk factor for US recession. So how are you gaming that out at that point. What do you-- at this point, what do you think is gonna happen?

JOHN AUGUSTINE: So our call from our economic team, Fed goes 50 on December 14. That'll put them at 4 and 1/2. The expectation for inflation next year is 4.3. So that may give them, if they want-- if they want, a reason to pause.

Now, their next meeting won't be till February 1. You know, it's thought-- 50, 50, 25. Then the following one's in March. But if they get above the expected inflation rate next year, if they want, that should give more reason to pause. We'll see. More to come, obviously.

BRAD SMITH: Interesting. OK. And so with that, where do you believe that the economy will stand at that point?

JOHN AUGUSTINE: We're thinking the economy maybe a little bit better than expected. So it's really uniform right now that earnings are gonna be down, S&P 500 GDP is gonna be down first half of next year. To us in our equity team and economic team, it's a little bit too uniform.

And right now, we're going in this fourth quarter-- we're 2/3 of the way through the fourth quarter, where the Atlanta Now Cast model says the economy is doing much better than economists think it's doing and the Fed thinks it's doing. So that'll be interesting as well.

So we may be going into next year with more upside economic momentum than downside, even though our economy always slows in the first quarter of the year because it's cold out. But we may be going in with more upside.

BRIAN SOZZI: You know, we're coming up against the year end here, John, what do you-- are you seeing any customers or any clients take some interest in tech stocks? It's been a horrible year. Notably, in big cap tech but these stocks can't go down forever just given their cash prisons.

JOHN AUGUSTINE: Not big-- not big cap tech yet but some small caps. So for instance, our equity team the other week they bought some Electronic Arts but then they bought some Emerson Electric. So they're kind of coming in baby steps, smaller tech.

Probably large tech, you want to keep some. Obviously, it's so big in the indexes now. But our team-- our equity team's underweight. But the moment the Fed utters, yeah, we're about done, they're gonna scream up.

JULIE HYMAN: And John, it's interesting that Sozz asked about clients because you guys are private banks so relatively high net worth individuals. Are you seeing any change in their sentiment as we get towards the end of the year, especially with what stocks have done this year? Are they changing what they want to invest in, what they want to spend on? What are you hearing from them?

JOHN AUGUSTINE: Cash. So cash yields 3 and 1/2 now. Well, it hadn't done that since 2007. So for the first time in 15 years, cash and bonds are interesting. Now, we caution them. OK, that's fine, 3 and 1/2 is fine. But if these accounts you want them to grow over the inflation rate for the next generation, that's not gonna get you there.

There's a lot of happy retirees in Florida right now who are finally getting some interest on their savings they haven't had for 15 years. So cash is where we're seeing the most questions right now because it's not zero.

JULIE HYMAN: And it-- but is it because of the yield, or is it because they want safety, or both

JOHN AUGUSTINE: Yield.

JULIE HYMAN: The yield?

JOHN AUGUSTINE: The yield.

JULIE HYMAN: Interesting. Huh.