Recession: 'There's a lot to be positive about' on U.S. growth dynamic, strategist says

RiverFront Investment Group Senior Market Strategist Rebecca Felton joins Yahoo Finance Live to discuss earnings season, allocating portfolios, and a potential recession.

Video transcript

- Right, well while markets have seen some gains year to date despite a turbulent year thus far, consumers are feeling less optimistic amid economic uncertainty. Here with more on the rift between Wall Street versus Main Street, we have Rebecca Felton, RiverFront Investment Group Senior Market Strategist. Thank you for joining me in this morning. So I first want to start with earnings season. The expectations did seem to be relatively low going in.

But then when you look at what we're seeing between this consumer sentiment most recently from May versus sort of off to the races in year to date versus especially for big tech, what are we missing here in the Wall Street to Main Street story?

REBECCA FELTON: Well, Thank you so much for having me. And it really is a very stark difference when you think about how the company management tones were as we navigated through Q1 earnings reporting period. And then you look at some of the sentiment numbers that we got last week, the University of Michigan preliminary numbers were very disappointing. And their consumer inflation expectations over the longer term ticked up higher too. So clearly, they're feeling the pinch across the board in terms of their prices that they're paying.

We will be watching those retail numbers that you spoke about earlier in the segment. This week, we have a lot of consumer facing data. And that's really going to give us an indication as to what happens when we think about overall GDP, consumption trends, and that sort of thing.

- And it does seem to be that at least some parts, especially big tech really jumping ahead to beyond the pause, which we still haven't actually had yet from the Fed to then pivot at a certain point. But then how do you allocate your portfolio in this sort of environment when we still don't even have the pause yet, but you're watching markets sort of off to the races?

REBECCA FELTON: Well, and when we look at our portfolios in general, we are fairly neutral across the board. Because to your point, there are so many unanswered questions. Inside of that US equity space we actually have a full allocation to technology where we're sort of neutral, maybe slightly over, but we're playing that space primarily in the mega-cap tech area. We like the consistency of earnings, the consistency of revenue, almost the subscription like aspect to the cloud.

So we would prefer to be there because they do tend to have the ability to weather bumpy economic situations a little better. If you think about it from a barbell standpoint, we've also started adding back some energy and some industrials and that sort of thing.

- And as I'm looking at some of the sectors that you like, you mentioned energy. They're also mining, health care, as well as the mega-caps there. We know that energy has been under pressure so far this year. What is the criteria that you're looking at when you're picking out these sectors?

REBECCA FELTON: Well again, what we're looking for in addition to consistency and improving momentum in earnings growth, we're watching yields and the ability of companies, not just to pay those yields, but to grow them. We have an acronym here we call it PATTY, pay attention to the yield. So that's been a very important component as well.

- And when you look at where valuations are at the moment, and then you look at how some of the recession signals are flashing, what does that mean? Then how do you sort of take all that information and decide which part to follow?

REBECCA FELTON: Well, we are of the mind that if we do have a recession, and of course, as you mentioned, the indicators have been deteriorating since the beginning of the year. Those leading economic indicator numbers that came out recently were a huge disappointment. But we believe that if we have a recession, it will be probably late in this year or more likely early 2024. And it will be mild. And of course, some of the data that we're looking at the employment levels again corporate earnings growth resuming perhaps in the back half of this year.

There is a lot to be positive about when we think about the growth dynamic of the country. But it is probably going to be a bumpy ride. And we think we're going to be stuck in a trading range here from about 3,800, 4,200 for quite some time.

- So then when you balance that with some of the stickier parts of inflation, the labor market, housing, wages, of course, still a focus for the Fed as well. How do you invest for a pause versus a pivot?

REBECCA FELTON: Well, going back to those sectors, inside of equity, we are still overweight US. We recognize that international markets are cheaper. But we haven't seen a recovery in those economies such as we have here, and certainly the earnings growth characteristics are a little behind us. We've also added back to our fixed income exposures. If you had talk to me a few months ago, we were underweight. Now, we're getting closer to neutral as those yields are going over 4%.

And we find them more attractive. We are playing it from the standpoint of how it's allocated, shorter end of the curve inside of five. And then if you look at the longer part of it, it's about 20 years in terms of our exposures. But again, so many unanswered questions, we think neutral is the best place to be right now.

- We do appreciate you joining us with your insights Rebecca Felton, RiverFront Investment Group Senior Market Strategist Thank you so much.