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Markets: ‘Right now is sort of a pivot point,’ strategist says

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Citi CIO and Head of Global Wealth Investments David Bailin joins Yahoo Finance Live to discuss how markets are reacting to economic data and the Fed's interest rate hikes, inflation, quantitative tightening, and tech stocks.

Video transcript

RACHELLE AKUFFO: Well, let's digest more of this market action with our guests now, David Bailin, chief investment officer and head of Citi Global Wealth Investments. David, thank you for joining us. So as we take a look at what the markets are digesting, how much of this is fear that should be priced in versus perhaps some froth that we're still seeing in the market?

DAVID BAILIN: Well, I think that the markets are actually telling you what they think is going to happen. Markets lead the economy. And the fact that markets are lower at this point means that the consumer is slowing. Global economies are slowing. We reduced our GDP estimates for worldwide growth to 2.6%, down a full percentage point over the last three months. So with all of that, that's what the markets are telling you. And right now is sort of a pivot point.

Either the Fed is going to raise rates quickly and cause inflation to be attacked by these higher rates and quantitative tightening, or the Fed is going to be a little bit more judicious and be more careful, respecting the fact that there is this incredible sensitivity to rates and quantitative tightening that could cause us to go into recession.

I like to tell people that it's not obvious that we have to have a recession. The Fed will make the determination as to whether or not we go into one. And I think that's what markets are very fearful of right now.

SEANA SMITH: So, David, dissecting that a little bit further, because just to echo what I said a few minutes ago, we also heard from former Goldman Sachs, the CEO, Lloyd Blankfein, over the weekend. He was on "Face the Nation." And he was saying that, quote, "A recession is a very, very high risk factor." You were echoing, it sounded like something similar. But when we're looking for what the Fed might potentially do, obviously, if it gets a little bit more aggressive, that's a huge risk. But 50 basis point hike over the next couple of meetings, I mean, what exactly do you think could potentially put the economy into a recession?

DAVID BAILIN: Well, I think that's the point that Lloyd Blankfein was making is the correct one, which effectively is that the Fed will make the determination as to whether or not they force a recession. They may do it inadvertently or deliberately. And what is the wild card here is this quantitative tightening, which, for most people, means when the Fed actually sells bonds, it needs to find a buyer for them. And that can disrupt markets a great deal as we saw in 2018.

So what I think the message should be is that if the Fed follows a moderate course and actually watches the data, we can have a soft landing. And that's really what we're looking for. If the Fed causes a recession, then earnings could fall, and that could drive stock prices down another 10% or 15%. But we've already seen the markets fall considerably. This has been the first time that both bonds and stocks have fallen by this much in history because of the Fed's real U-turn that it took at the end of December.

DAVE BRIGGS: Yeah, the Dow down 10%, the S&P, 15%, and the NASDAQ, 25%. You say, bonds are back. Is that what you're telling clients at this juncture?

DAVID BAILIN: Yes, I think that people really have not taken heed to what's going on. In the event that we think the economy is slowing and in the event that the Fed is going to tighten, what is the probability that we're going to be surprised by growth on the upside? Very small, which means that when you take a look at the 30-year bond or the 10-year bond, we could be at or near peak rates right now. And whereas bonds didn't provide a lot of diversification before, we're adding those bonds, and especially some of the long duration government bonds, into portfolios right now because they're going to give us both a yield and the potential for appreciation as the economy slows, one way or the other.

RACHELLE AKUFFO: I want to ask you about your strategy bulletin because one of the examples that you gave was Apple in terms of the sort of innovation that we see that keeps going, even in these moments of volatility and as we see these rates starting to go up. Why is Apple the sort of company that's important to watch in this sort of environment?

DAVID BAILIN: You know, I like to remind people that Apple has had its price go down by 75% twice over the course of the last 18 years. And each of those times, of course, it's rebounded and had to actually reinvent itself. And we have these expectations somehow, and it certainly was the case for momentum investors for the last couple of years that stocks only go up. But that's actually not the case.

Technology stocks go through cycles, and those cycles are bigger than regular stocks, like consumer staples shares by far. And what the point of that article was to say is that as these challenges to technology go forward, we expect stock volatility. But what we think is that these are the types of companies that can reinvent themselves over and over and over again. Just think about where the cloud was just five or 10 years ago, not a major factor in the economy.

And that's exactly the kind of change we're going to see again and again, whether it's the Metaverse or in different parts of the cyber economy. These are areas of incredible growth. And we think investors would have to be positioned for them in order to get really great returns.

SEANA SMITH: David, given the uncertainty right now, the Fed's path-- we don't really know what exactly the next couple of months are going to look like-- what does your risk appetite look like now? Is it still time to mainly focus on some of those defensive plays?

DAVID BAILIN: Yeah, I mean, the market action today is indicative of how we see things right now. We want to own global natural resources because we think that those prices are going to stay higher for longer. We want to own some of the consumer staples names. We definitely want to own pharmaceuticals.

We definitely want to be in certain areas where the possibility for revenue declines are small, like cybersecurity. All of those have been added to our portfolios right now. And we've added back bonds. We could imagine, if you will, in just three months' time, or maybe even four months' time, making another rotation back into growth shares and back into some areas of the economy that will have another three to five-year run.

One of the things that we're reminding investors today very strongly of is, you don't hold portfolios for a month or a year. You're building a portfolio that's going to make money for the next three to five years. And so downturns like this are opportunities to increase the quality of those portfolios and to avoid a lot of the momentum trading that we've seen take place over the last 24 months.

RACHELLE AKUFFO: Certainly have. Thank you so much for your insights. David Bailin there, chief investment officer and head of Citi Global Wealth Investments, thank you so much.

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