Markets ‘not correct’ in pricing of recession, strategist explains

Invesco Investment Solutions Senior Portfolio Manager Alessio de Longis joins Yahoo Finance Live to discuss the likelihood of a global recession, market uncertainty, rising bond yields, the tech sector, and the outlook for the economy.

Video Transcript


BRAD SMITH: Good morning, everyone. US stock futures have dipped into the red this morning. As they were green earlier, we're barely positive. We're now barely to the downside. The Dow futures down by about 2/10 of a percent. S&P 500 futures flat but to the downside. And the NASDAQ futures, you're also seeing that lower by about 2/10 of a percent. And that's all today following yesterday's sell-off as the third quarter comes to a close.

But our next guest says the likelihood of a global recession is far from certain. Invesco Investment Solutions Senior Portfolio Manager Alessio de Longis joins us now in studio. Alessio, great to have you here with us. Help us not just kind of wrap up the quarter, but also kind of put in perspective what markets are clearly pricing in right now and the risk of a global recession.

ALESSIO DE LONGIS: Thank you for having me. Yes, look, I think the recession is our base case, right. It is more than a 50% probability at this point. But it's important to focus on the fact that the economy, time and time again, has shown very dynamic ways of adjusting. And we should never underestimate that there is still relatively good probability of a good case scenario.

To go back to your earlier question, what is priced, my concern is that when you look at recession pricing is not correct. Particularly the equity market has just begun, I would say in the last couple of weeks, really to price in, more seriously, the risk of a recession. Why? If you look year-to-date, many people say, look, the market is already down 20%, 25%. Isn't that the average correction during a recession?

Yes, except that bond markets are down as much. By definition, a recession implies underperformance of equities over bonds because earnings have to correct lower. So far, equities are simply pricing in the fact that discount yields, that government bond yields have gone up.

So whatever value your cash flows had, it's now lower. But we haven't priced in a recession. Earnings have not begun to correct. You see the data this morning. Consumers are still growing. Consumption is still there. Inflation is still surprising to the upside. That is not an economy in recession.

BRIAN SOZZI: If people go and check their accounts this weekend for the first time, let's say, in three months, they're going to be shocked because this was a really-- it was a terrible quarter. Having said that, what should they be doing? And how do you prepare for the fourth quarter in this environment?

ALESSIO DE LONGIS: That is the black swan that this generation of investor has lived, the worst bond bear market since records have been kept. You see more and more historical data saying this was the worst since 1926. Oh, wait, we found a new database. It actually takes us to 1876. It's even worse, right?

I think-- what we are doing in our portfolios is we are reducing the weight of the equity exposure into bonds. We have now, for the first time since 2008, a golden opportunity to buy high-quality investment triple-A credit at 5%. Your cash, your bank account, is soon going to-- going to earn 4--

BRIAN SOZZI: Why even bother buying stock? If you can get 5% on credit, why even touch tech stocks?

ALESSIO DE LONGIS: So tech stocks, interestingly enough, are-- obviously, we all have to have some equity exposure. Within equities-- and I think you bring a very important point. Within equities, shifting towards the more defensive sectors. Now interestingly, and this may sound controversial, I think tech or communication services are actually defensive. Their underperformance year-to-date has been primarily driven by the rise in bond yields.

BRAD SMITH: All tech? Or is it-- or is it kind of focused in on some sectors or subsectors within tech?

ALESSIO DE LONGIS: Great question. Larger capitalization, dominant big-tech companies, where you have large return on assets, very wide profit margins, positions of almost total control, dominant players in the market, and-- yeah, and low leverage. So those are the characteristics of defensiveness, of quality, right, so the big, large quality stocks. That can hold its value, and it will hold its value, especially if rates peak here also. We have a golden opportunity to rebuild exposures to thematic strategic items such as technological revolution, digital revolution at 30%, 40% discounts. Those themes aren't going away.

BRIAN SOZZI: What should I be doing in this environment, just internally? What question should I be asking myself? Should I be-- should I even be an investor?

ALESSIO DE LONGIS: You should-- so don't look in the rear view mirror. The past is the past. That's rule number one. First of all, are you-- the only lessons from the past is are you able to stomach, again, what just happened? If the answer is yes, stay the course. If the answer is no, revisit your strategy.

So what the market has done in the past is just an opportunity for you to test your behavioral comfort zones. Otherwise, stick to your plan. And the plan here, I think, always stay invested. Going to cash has worked for the last three quarters. But historically, it never pays off for more than that short window of time.

There is a-- investors are always compensated over the medium term for owning bonds, for owning stocks, for owning credit. So running away and putting the money under the mattress, it's never a wise decision. You may feel like a rock star for a couple of quarters, but be ready to get back in very quickly.

BRIAN SOZZI: I have a waterbed, anyway, Alessio. I can't stick all my cash under there. It would just disintegrate. All right. Well, good to see you in person here. Invesco Investment Solutions Senior Portfolio Manager Alessio de Longis, it's good to see you, as always. Have a good weekend.