The ‘saving grace’ for U.S. markets amid recession fears, according to a strategist

Truist Chief Market Strategist Keith Lerner joins Yahoo Finance Live to discuss the global economy, recessionary risks, and rate hikes, as well as market expectations.

Video Transcript


- Welcome back to "Yahoo Finance Live," everyone. With markets attempting to price in a mild recession, we spoke with Mohamed El-Erian last week who had this to say about the global growth projections. Take a listen.

MOHAMED EL-ERIAN: Not just should, we will see growth projections coming down more. We got some pretty awful PMI numbers out of Europe. The three biggest areas in the world are all slowing simultaneously-- China, the US, and Europe.

And what you're seeing in the old market tells you that demand is now in control. For a long time, supply was in control of the oil market. And that drove prices higher and higher. So now it is demand. And as people worry about a global slowdown, they worry about demand for oil and oil prices have been coming down.

- That was president of Queens College, Cambridge, Mohamed El-Erian. And joining us and for more, let's bring in Keith Lerner who is the Truist chief market strategist. I want to get your reaction to the commentary from Mohammed and particularly on the kind of face of some of these global economic slowdowns that we've been tracking but also some of the projection pullbacks that he's expecting.

KEITH LERNER: Yeah, well, first, Brad, great to be with you and the crew this morning. I think there's no doubt the global economy is slowing down. If you take a step back, we've seen one of the most aggressive global tightening as far as rate hikes from central banks that we've seen over the last decade. And that interest rate increase works with a lag. And we're already starting to see that somewhat in the overall market.

The only saving grace, I would say, for like I said, the US markets, as an example, at the lows before last week's rebound, we were down about 24%. The median decline around recessions in the US has been 24%. The average is a bit more. We can certainly overshoot that but at least some of that bad news is reflected in markets today.

BRIAN SOZZI: Keith, is the reality that the markets can't go on a sustained rally until we get a more pronounced decline in gas prices?

KEITH LERNER: I think it's more about-- and it's hand in hand, Brad. I think it's more about inflation, like the market really has to feel comfortable that inflation is not only peaking but going to be coming down at a pretty aggressive pace. And that way you can see stabilization in valuations. On a year over year basis, valuations are down for the S&P about 28%.

I mean, that's one of the most aggressive re-ratings we've seen in the last 30 years. The other side, though, is it's also about earnings. I heard you all talking about that earlier as well. I mean, one positive line potentially on the earnings story just to kind of inject that is that even though economic growth has been moving down, real economic growth, what was less talked about today is nominal GDP growth for the US, which includes inflation, has actually risen from about 8 to about 8.2 since the beginning of the year.

JULIE HYMAN: And I guess that has to do with what we've seen with inflation and companies taking advantage of it perhaps. But, Keith, I want to ask about tech in particular because we had tech lead on the way up, tech lead on the way down. And I'm curious, what now? If and when we get out of this, is it going to be tech that once again sort of comes to the rescue and leads the gains?

KEITH LERNER: We've been underweight tech for most of this year. We're still under way. I will say you're starting to see some signs of stabilization at least on a relative basis. So we're watching this. I don't know that it's going to be leadership.

It's been leadership for the last decade. It often after you go through one of these downturns what comes out of the downturn, the leadership shifts. And I also think it also depends on like how sticky this inflation.

Part of the reason why tech outperformance in a long is they have slow economic growth and slowing inflation. If inflation stays somewhat stickier and for a bit longer, then that may not be the best overall backdrop for tech. But, again, are there opportunities within there? Sure and it's something we're watching. But at this point, we're still underway the sector.

BRIAN SOZZI: Keith, is this bear market over?

KEITH LERNER: Brian, I don't know that it's over yet. I think there's going to be a difference in the way that we come out of this relative to the last decade. If you think about the last decade, you had a lot of V-shaped recoveries for the market. And why did we have those V-shaped recoveries? Because the fed had the markets back.

And I think we'll probably go more back to this kind of-- you talked about earlier-- a bottoming process where you have a move up and then moves back down and retesting, which we didn't really see the last couple of years. But now the Fed is not going to save the market necessarily.

So I think we'll see more of that. I think the best you can say right now, Brian, is that we had a very oversold market. We had basically 2% of stocks above their 50 day moving average. That's a very oversold market. You've had a bounce.

We think the bounce likely has further to go. But we think that's in the context of a wide choppy range that's likely to continue. And it's premature to say that the bottom is in.

BRIAN SOZZI: That's why we asked you these hard questions, Keith, because we know you can answer them. Truist Co-chief Investment Officer Keith Lerner, always good to see you. Great work as always. We'll talk to you soon.

KEITH LERNER: Appreciate it, guys. Thanks so much.