This strategist wouldn't mind a mild recession. Here's why

As the Federal Reserve gears up to initiate its first interest rate cut later this month, some investors feel as if it's too little, too late to stave off a recession.

Slatestone Wealth chief market strategist Kenny Polcari joins Catalysts to discuss the current state of the economy and how the market (^DJI, ^IXIC, ^GSPC) may react to the Fed's rate-easing cycle.

Polcari expects the economy to continue to slow, and argues, "I wouldn't even mind if we had a little bit of a mild recession, not a deep one, because a mild recession will reset it right." In a mild recession, he expects prices to come down in key areas like food and energy.

As the Fed moves toward its first rate cut, Polcari expects small cap stocks (^RUT) to benefit. He explains that small caps often borrow a lot of money, and lower interest rates will allow for some breathing room. However, he warns that not all small caps are a good investment, and encourages investors to take into consideration the broader sector that a small-cap company may be operating in.

While the Fed has its eye on a soft landing, Polcari believes it will most likely be a "semi-soft landing," which investors should take into account. "I think you just have to be conscious of your time frame, where you are in the life cycle, where you are in the investment cycle. If you're 30 years old, it's a very different conversation than if you're 60 years old in terms of how you want to be weighted and where you want to have your exposure," he tells Yahoo Finance.

He notes that overall, the US economy is "fairly resilient," and given the current economic picture, he believes a 25-basis-point cut from the Fed would be the most appropriate move.

"I think all this panic about we need 50 basis points because we're going over the edge. I think that's baloney because I don't think we're going over the edge. And like I said, I think actually a slow down would be better for the economy long range because we can't keep going at the pace we were going because then if we do, then the correction is going to be even more difficult."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

So k then what does that tell us about your view then of the overall US economy and whether or not maybe some of that slowing of the growth that we have seen that continue.

I, I think that does continue.

And by the way, I'm not necessarily against the slowing of the economy because I think a lot of it was juiced up because of the, the, you know, injection of monetary policy injection as well as fiscal spending.

I think a lot of it.

So I think the, the economy has to slow a little bit.

And by the way, I wouldn't even mind if we had a little bit of a mild recession, not a deep one because a mild recession will reset it.

You'll see prices actually come down if we have a mild recession right now, prices, while they, while inflation is slowing, prices are still rising.

But if you have a recession, then you'll see the prices of things that we care about.

Food, energy, utility bills will all start to come down a little bit.

So I, I'm not necessarily in the camp that we shouldn't go through that cycle.

So then what does that tell us about the positioning of small caps right now?

Because that certainly has been some of the trades that we've been hearing a little bit more about but continues to lapse.

Right.

But small caps will typically benefit if, if rates go lower, small caps will typically benefit because they, they end up using and borrowing a lot of money, right.

Even in a swing.

So, so there's the, there's the rub, right?

You just have to be a little bit careful in terms of which small caps uh kind of you're looking at what space they're in, right?

Because they could be small caps in a range of sectors.

Um And so you have that, I think just be a little bit cautious on which names you're looking at, but overall, I think we're in for a semi soft landing, not a hard one, but I don't think it's gonna be completely soft.

And so therefore, I think you just have to be conscious of your time frame where you are in the life cycle, where you are in the in the investment cycle, right?

If you're 30 years old, it's a very different conversation than if you're 60 years old, right?

In terms of how you wanna be weighted and where you wanna have your exposure.

So, wouldn't that mean then that the economy is actually more resilient than markets are pricing in right now?

I'm looking at a note from Blackrock saying us earnings growth are, are broadening beyond early A I, I think the economy is fairly resilient.

Right.

I don't think we're going over the edge.

I think all this panic about we need 50 banks.

It's because we're going over the edge.

I think that's baloney.

Um, because I don't think we're going over the edge and, and like I said, I think actually a slow down would be better for the, for the economy, long range because we can't keep going at the pace we were going because then if we do, then the correction is gonna be even more difficult.

Right?

And so I, I would actually welcome a little bit of a, a little bit of a mild recession.

All right, Kenny Polcari.

Always great to have you here on set with us.

Thanks so much for taking the time to be here to join us this morning, Kenny Polcari of Slate Stone Wealth.