Strategist: The U.S. is ‘at the beginnings of a significant slowdown in economic growth’

Scott Crowe, CenterSquare Investment Management Chief Strategist, and Lisa Erickson, U.S. Bank Senior Vice President and Co-Head, Public Markets Group, join Yahoo Finance Live to talk about investors digesting Fed minutes, interest rate hikes, inflation, real estate investments, and potential slowdowns in the financial sector.

Video Transcript



- And there you have it. That's your closing bell today. We're going to take a look at where the major indices settles after a very negative day, a very volatile day. They're picking up towards the end just very slightly.

As we see there, the Dow, down 2.42% there, down 143 points. The S&P 500 also down nearly a percentage point there, down 43 points. And then of course, the NASDAQ there, down over 2%, 2.22% there, losing 315 points.

Well, let's break some of that market action out with Brad, Dave, and myself, as well as our market panel who we'll bring in now-- Scott Crowe, CentralSquare's investment management chief strategist, and Lisa Erickson, US Bank's senior vice president and co-head of Public Markets Group. Thank you both for joining us.

So Lisa, I want to start with you. As we saw with the Fed, minutes announcements coming out, some shakiness there came off slightly off the session lows. But what do you think the markets were digesting the most from what's been coming out?

LISA ERICKSON: Well, thanks again for having me today. And to your point, the Fed minutes really were a big focus today. Coming into the session today, I think we already saw some of the nervousness around the potential release of the minutes because we certainly had a big backup in bond yields of even before today, 25 basis points on the 10-year Treasury.

And so really, when those minutes were actually released this afternoon, I think what you really saw was the solidification around, really, the news that the Fed is very intent on combating inflation. It certainly makes sense that it's heading in that direction because it needs to retain its credibility that it will look forward to suppress those price pressures in any way that it can.

- Scott, even prior to the release of those minutes, Deutsche Bank releasing a paper saying aggressive tightening of monetary policy will push the economy into a recession from their economists. Do you see signs of recession next year?

SCOTT CROWE: I think there is little doubt that we are at the beginnings of a significant slowdown in economic growth. And that means that if there's one word to sum up how the markets are going to behave this year, it's challenging.

And it's challenging because we have a picture that includes persistently high inflation. We are just at the beginning on a rate hiking cycle. And I think the Fed minutes highlight the fact that the Fed is behind the curve and rapidly needs to catch up.

And we're only at the beginning of a slowdown in economic growth. And so that's going to be challenging for all asset classes, and investors need to be looking for areas of resilience and areas where assets can actually benefit from inflation. And one of the areas we're focused on is commercial real estate, particularly residential real estate.

- Lisa, does the Fed have any other option, even if they do see early signs of economic slowdown, as they're forecasting their median real GDP growth projections, 2.8% going forward from here? I mean, we were looking at and talking about at the end of the last year, 4% median GDP growth.

LISA ERICKSON: Well, to your point, it really is a tough situation that the Fed is in because it's really walking a tightrope between needing to address where inflationary levels have been and yet not hopefully really derailing what growth that we have because, as Scott pointed out, it is most likely that we're going to continue to see a growth slowdown this year, just simply coming off the incredible reopening year we had last year.

We do see our base case as still balanced, though, for the US equity market. And so you have a situation where, essentially, if you look at the underlying macro picture, while we are seeing some deceleration, it's from very high and at still solid levels. So you counterbalance that with the act that the Fed is going to have to walk in terms of balancing between both inflationary pressures and yet not slowing down growth too much. And we want to continue to see how the data and policy evolves to evaluate where we should head through the rest of the year.

- And Scott, as you mentioned in your notes, inflation everywhere-- rents, wages, now energy, and you also mentioned soon to be food. And you're not expecting that to subside until the end of the year. How do you position yourself then, knowing that there's going to be this pressure on the consumer that could eventually start showing up more and more in earnings?

SCOTT CROWE: Well, the only way to combat inflation is to own assets that have pricing power, right? So at CenterSquare, we focus on commercial real estate. And the one area that stands head and shoulders above everything else is residential real estate, rental residential real estate in the US.

One of your previous speakers, Rhonda, was talking about the housing market and the fact that it is a good inflation hedge. And the reason that housing, rental housing is a good inflation hedge has to do with the fact that you have secular demand. You have a significant undersupply of housing in this country at the same time as unemployment's low consumer balance sheets are in good shape, and incomes have risen.

People are also moving around. And that all requires housing at a time when inventories are low, supply chains are squeezing the ability for builders to build. And that means you are able to actually capture and benefit some of the inflation that we're seeing that is actually the problem.

You can turn the problem into a benefit. And that's one of the areas that investors need to focus on is, how do I benefit from the problem, benefit from inflation, and invest in asset classes that not only resilient but can power through the volatility we're going to see over the next 12 months?

- Lisa, are there opportunities, to that point, to power through, and do you expect this tech stock hammering to continue the NASDAQ down 315, down 11% on the year?

LISA ERICKSON: We really believe the best stance, really, that clients can take this point is really to stand pat on its position in equities and then, on the other hand, stay a little bit more cautious towards fixed income. And the reason why is we do have this situation where, again, the underlying fundamentals are very solid both on a corporate basis as well as what we're seeing in terms of economic data.

And yet we do have some of these risks on the horizon again with dealing with the price pressures. So really, by staying in that position in equities, you are still being able to maintain some of that longer term growth as well as really pick up some inflationary hedge. And then by decreasing a little bit of your fixed income emphasis in favor of other areas-- for example, like global infrastructure, where there is also some inflationary pressure as well as some nice diversified sources of income. We believe that really helps to make for a good balance portfolio.

- Scott, really interesting position to be in if you're the banks right now because on the topic of the housing market, banks are gobbling up some real estate out there, quite frankly. And at the same time, they're also able to benefit from the Fed in this rising rate environment at the same time and also place blame on the Fed too if they trigger a recession, while, again, coming back to my first point, the fact that they are kind of barring some people from being able to afford homes in a already hot housing market. And so what detriment do they need to also acknowledge here that they're inserting into the market and the economy?

SCOTT CROWE: Well, this, in some ways, is the result of the Fed's own making. I mean, don't forget, the Fed still had been, until recently, buying a significant amount of mortgage-backed securities, depressing yields.

And you, know and inflating the housing market. And so look, as they rush to catch up, I think the biggest risk they're focused on right now is this inflation number. And so, you know, it's very possible the Fed needs to significantly slow the economy between now and the end of the year in order to contain inflation.

What is-- I think the chances of that ending up in a significant recession is still pretty low. But a significant slowdown is very, very likely. And as it relates to the banks and the financials, the challenge they have is that they do well when obviously the housing market's good, the economy is good, but also when the yield curve is steep.

And the thing that's happening right now is because the Fed is really talking up their interest rate hikes as the yield curve is flattening out. And historically, that has been a precursor to significant slowdown, if not recession. And that would not be good for the banks or the financials either in that situation.