‘Big macro clouds’ are looming over the market, strategist says

Bank of America Senior Investment Strategist Marci McGregor joins Yahoo Finance Live to discuss Fed expectations, recessionary risks, stock futures, and the outlook for market volatility.

Video Transcript

- Welcome back to Yahoo Finance Live, everyone. The Fed making that expected 50 basis point hike a few weeks ago. General consensus now is that they will stay on path with half point hikes at both the June and July meetings. But what comes after that is still up in the air.

For more, let's welcome in Marci McGregor who is the Bank of America Private Bank senior investment strategist. Marci, great to have you here with us this morning. From your perspective, I mean, soft lending, it sounds like that's out of the equation or the expectation right now. So what does come after June and July?

MARCI MCGREGOR: Yeah So I think the Fed still has a very narrow path to a soft landing. Our view is, like, the market expects 50 basis point hikes in June and July, and then 25 basis points at each meeting after that. I think about a year from now, we'll probably land at a terminal rate of 325 to 350 is what I would expect.

The curve right now is telling us, though, the Fed is way behind. So the question is, how far does the Fed have to go? And I think that's what markets are really dialed into right now.

- And yet the feeling out there is heavy, as we have been talking about a little bit this morning with all of the talk of recession. So how far can sentiment drive stocks downward?

MARCI MCGREGOR: Yeah. So we've had six negative weeks now in US equities. And market internals are telling me that this choppiness is likely to continue, especially if you look at market breadth. There's a lot of crosscurrents there right now.

So I think, like I said, the market really needs visibility to when the end of the Fed cycle is. Of course, there's a lot of question marks around growth in Europe and China too. So these big macro clouds are weighing on sentiment. In the near term, sentiment is quite bearish. I don't think we've seen capitulation in this market just yet. So unfortunately, I think we still have a choppy road ahead of us.

- Marci. If a large percentage of someone's wealth is tied up still in the stock market, should they be buying on dips?

MARCI MCGREGOR: Yeah. So we've lowered our risk a little bit in portfolios at our most recent investment strategy committee meeting. I would be diversified here, really diversified and balanced. So we're still overweight equities.

I do think we're starting to see some opportunities, especially for long-term investors. But the biggest factor, of course, is positioning for inflation. So I'd also think about real assets in a portfolio as well.

So energy and industrial commodities. But again, I think it all goes back to being diversified. And then while we're still overweight equities, I think the balance of risk is getting a little more attractive in bonds.

So we added a little bit to investment grade bonds in the last couple of weeks as well. I think those days of Tina, there is no alternative to equities are behind us, and this is about being diversified balance and really disciplined in what's been quite a challenging market.

- But, Marci, let me push back on that nothing's working right now. You have tech stocks that have been slaughtered. Gold is under pressure. Crypto has been pitched to us the past year and a half, two years as a great inflation hedge that has blown up in the face of many investors. Wouldn't it just be better to raise cash right now?

MARCI MCGREGOR: Yeah. I think in an inflationary world, though, having too much cash or using cash if anything more than a tactical tool, you, of course, see your purchasing power eroded. So I still think equities where earnings tend to grow with inflation is a way to position, especially things like energy and materials, those commodity sensitive sectors.

And then one area that has worked a bit defensively is dividend payers. This is all about free cash flow. This is all about where we are late in the cycle.

So I do think while they've been the kind of least bad out there, those dividend paying stocks, there's going to be a lot of reasons to like them going forward. So it's all about quality, all about free cash flow in this environment.

- Even if the investment opportunity remains sustained in energy, the higher oil prices that particularly have been driving some of the performance for energy more broadly, that's going to create some demand destruction elsewhere. What are some of the sectors that would see that impact the hardest and earliest on?

MARCI MCGREGOR: Yeah. So I do think-- we haven't quite really seen demand destruction interestingly enough, if you look at miles driven. Of course, we're heading into those peak summer driving months. But energy is a sector where business investment has been underinvested for years.

I think North American energy is going to have to play catch up, especially as Europe has been sleepwalking into this energy crisis they're in for a number of years now. They're looking for new sources for energy. That's going to be a theme going forward.

So even though energy has been a strong performer all year, I still think it's under owned. I still think it's undervalued. And while we've seen some consolidation, I think ultimately it's a healthy thing for the sector.

The other area I would think about is metals and mining. If you think about all of the clean green energy goals that many policymakers have as a priority around the world takes a lot of dirty inputs to get you to this clean energy world. So I think metals and mining again are really undervalued part of the market that I think is going to start growing again this year.

- Marci McGregor, Bank of America Private Bank senior investment strategist, good to see you this morning.