Meme stocks ‘the first thing’ to slow in a recession, strategist says

Wells Fargo Investment Institute Investment Strategy Analyst Veronica Willis joins Yahoo Finance Live to discuss recession risks, inflation, consumer spending, stock futures, and the outlook for investors.

Video Transcript

BRIAN SOZZI: Hi. Welcome back. Stock futures are under pressure this morning as the S&P 500 inches closer to breaking its four-week winning streak. Our next guest says patience is required as investors await a recovery. Wells Fargo Investment Institute strategist, analyst Veronica Willis joins us. Veronica, sorry about that. Good to see you here on this Friday. It's Friday vibes here on the desk.

You are still calling for a recession. We've seen a lot of folks, I think, on the Street dial back recession risks. Why are you still standing firm with that call?

VERONICA WILLIS: We think with inflation at these elevated levels, even though it's cooled down a little bit, wages aren't increasing as quickly as inflation. And we're already seeing some signs that the consumer spending may start to weaken. And that strength in the consumer is really what's kind of been the bright spot in the economy. And once that starts to weaken, I think we're at risk for some more economic contraction.

JULIE HYMAN: So then what are the implications of that, Veronica, of that economic contraction, right? Things have been bouncing off the lows, right, if you look at the stock market lately. Does that mean that things are poised to perhaps fall again or fall in particular areas?

VERONICA WILLIS: There's definitely the potential for a little bit more downside here in the equities markets. We've seen this nice little rally here. And it's not unusual to see a bit of a rally during a bear market.

And it's kind of key to remember that it's often takes a little bit of time for the market to recover from a bear market. In 2020, it was a much different situation. We had a lot of stimulus coming into the market. The Fed was very easy. And that's just not what we're seeing now.

We're seeing a very aggressive Fed. We're expecting them to keep tightening policy. They're taking liquidity out of the market. And it's not the same type of environment where we're expecting that kind of quick recovery from the lows.

And we think that there's-- investors have to have a little bit of patience here. Maybe it's time to trim from those riskier areas. Things like small caps, maybe some of those cyclicals, and move a little bit more defensive and focus on that large and midcap higher quality. Areas that are going to be a little bit more resilient if there's another downturn.

BRIAN SOZZI: Veronica, this month, we've seen a re-awakening I think, of the retail investment crowd and real wild moves in some of these meme stocks. Is there anything you and your team have found that could be triggering these types of moves?

VERONICA WILLIS: We think that it's really a sign that the consumer is still OK right now. There's still a lot of liquidity if investors are moving towards some more of those meme stock things, the areas of the market that are a little higher beta, a little bit higher risk.

And that's kind of the first thing that we're going to look to slow down once we're actually at that point where maybe the recession has started and maybe there's a little bit more conviction that we're in a downturn.

JULIE HYMAN: And so, how should people be attacking their strategy now going into the latter part of the year? If there is the potential for a recession to be happening, should people be positioning themselves differently than they have been?

VERONICA WILLIS: Yeah, I think that the shift should be more toward higher quality both in fixed income and in equity holdings. So I mentioned kind of a shift from small cap but maybe a shift from international equity towards those large and midcap equities that are gonna be a little bit higher quality, a little bit more resilient through a downturn.

And on the fixed income side, maybe a shift shorter in duration to those short term fixed income strategies that might be a little bit less at risk for sharp price movements based on the Fed raising interest rates.

BRIAN SOZZI: Are you surprised, Veronica, how the-- you know, how quickly some of these big cap tech names have rallied from the June lows and what's driving them?

VERONICA WILLIS: I think a lot of it has to do with the sentiment in the market. It's not very surprising. When investors are feeling comfortable, there has been some economic data that's come out that's been encouraging. We saw, you know, that decline in inflation from the peak in June.

And I think that has really increased investor sentiment because there was this kind of expectation that, oh, maybe the Fed will be a little bit less aggressive because inflation has started to come down.

But we are really encouraging people to be cautious when taking that kind of approach. Inflation is still very high right now. The Fed has reiterated that they are going to remain aggressive to get this inflation down. And so we're still expecting the Fed to proceed along the path that they have highlighted for raising interest rates. We don't think they're gonna kind of let the foot off the pedal right now.

BRIAN SOZZI: All right, we'll leave it there. Wells Fargo Investment Institute investment strategy analyst Veronica Willis. Good to see you. Have a good weekend.