Recession start may trigger 'cathartic capitulation' in markets: Strategist
Evercore ISI Sr. Managing Director Julian Emanuel joins Yahoo Finance Live to discuss the market’s reaction to Wednesday’s FOMC meeting, volatility, and commodities.
Video Transcript
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JULIE HYMAN: Let's talk more about the latest Fed moves, and the retail sales data, and the effect it's all having on the market. Evercore ISI Senior Managing Director Julian Emanuel is with us. Julian, it's great to see you.
What do you make of the Fed's sort of credibility right now? Because the market doesn't seem to be taking Jay Powell at his word.
JULIAN EMANUEL: Well, look, the credibility-- they tried to double down on their credibility. And the fact is the signal of raising their projection for core PCE inflation from 3.1 to 3.5, for the end of next year, is telling the market that they are not going to cut rates under virtually any circumstance, you know, with the exception of a very, very severe downturn that also brings down inflation faster than the rate at which it has started to decline. But that's by no means their base case.
So Jay Powell wants to be taken at his word. And I think when you look at the way markets have traded this week and the way they are trading this morning, they are taking him at his word in that respect.
BRIAN SOZZI: And Julian, to that point, I see this market actions that closed yesterday after the Fed. I see it here this morning, ugly. And my first thought is, the market hasn't bottomed yet.
JULIAN EMANUEL: We don't think it has. Basically, again, if you look go back to those summary of economic projections, they raised the unemployment rate for the end of 2023 to 4.6%. The low earlier this year was 3 and 1/2% That kind of rise, 3 and 1/2% to 4.6%-- we don't even need to get to 4.6%.
But even to approximate that kind of rise, you have always triggered a recession. And frankly, the history of bear markets is such that when you think about it in the context of that October low that we had, no bear market has ever bottomed before the recession started.
BRAD SMITH: So what's your target? Where do you believe that the range is that we should be tracking for a market to potentially bottom out, even prior to us experiencing the full breadth of or the depth of a recession?
JULIAN EMANUEL: So we don't necessarily need to see the full breadth and depth of the recession. We need to see the start of it. So part of the issue with 2022, is that when you think about both earnings and the economic recession, we've been forecasting it all along. We know it's going to happen.
The Fed confirms to us yesterday that it is very likely to happen. But yet, it still hasn't arrived. And with that arrival, we would expect to see, what we would call, more cathartic, capitulation type action in the market.
As poor a year as this has been for stocks, there has really been very little emotion the entire way down. We think that will end sometime in the first half of the year likely making a new low for the S&P 500. But the ray of sunshine here is that kind of low is going to set the launch pad for, in fact, what we think will be a year where stocks finish higher than where they are now.
JULIE HYMAN: And I guess most of that would have to happen in the second half of the year if, indeed, the timing of what you're talking about, right? Of when the recession occurs, when stocks tend to bottom, et cetera. That's when you would start to see things take off more.
JULIAN EMANUEL: That-- that's right, Julie. Again, you know, we've been waiting. It's like part, you know, of the bullish case is that the Dow is never going to arrive. Meaning the recession gets, you know, kicked out into late '23 or early '24. And that, to us, is a case whereby the stock market just could continue to grind higher until you get closer.
That's kind of what happened during the bear market of 2000 to '02, is that you had the initial sell off and then a rally. And then 2001 was the really brutal downside.
But for us, we'd actually prefer to see the forecast crystallize into reality. Which frankly, when you think about it within the context of the fact that the public has become a seller of stocks in the last several weeks. If we see more selling urgency, that's the kind of condition when the recession arrives that creates really high-risk reward buying opportunities for patient, disciplined, long-term investing.
JULIE HYMAN: Let's talk about some of those opportunities quickly. And we're actually going to be talking to an energy trader later in the show. But I got to say, it stood out to me that you like a couple of energy names, in particular, in your latest note.
ExxonMobil, Schlumberger. You wrote, actually, a bigger note about energy names. Why do you think those guys are gonna be able to perform? Because they have way outperformed oil prices this year.
JULIAN EMANUEL: So this is where we think the reasoning is faulty. The comparison of the stocks to the oil price is just-- it's misplaced. If it weren't misplaced, we would have never bought an oil stock again in 2020 when the price of WTI turned negative.
The bottom line here is that when you think about the earnings of the S&P 500 as a whole, energy, even with muted expectations for earnings next year, is going to represent 9% of the index's earnings. And it's only 5% of the weighting in the S&P 500.
And when you look at the valuations in the energy sector broadly, they are already discounting the recession multiple wise, that the rest of the S&P 500 has yet to fully discount.
BRAD SMITH: A lot to keep tabs on there. Thank you so much for joining us this morning, Evercore ISI Senior Managing Director of Equity Julian Emanuel. Thanks so much. And happy holidays to you as well.
JULIAN EMANUEL: Thank you. Happy holidays to you.
