Recession risk: The American consumer ‘is reasonably insulated,’ strategist says

J.P. Morgan Asset Management Global Market Strategist Jack Manley weighs in on the chances of a U.S. recession and how it might impact American consumers.

Video transcript

BRAD SMITH: To continue this conversation and joining us now for more on today's market activity, we've got Jack Manley, who is the JPMorgan Asset Management global market strategist. Jack, good to have you here with us today. You know, first and foremost, I hearken back to what the Fed had said most recently following their March meeting.

The probability of a recession within the next year is not particularly elevated is what we heard from Fed Chair Jay Powell. It would certainly seem that the economic data is starting to point us in the direction that that propensity or that possibility for a recession, with some of the added factors since that meeting, certainly does point towards the looming risk of one.

JACK MANLEY: Well, I think there certainly always is a risk of a recession at any given point. That's just sort of the nature of business cycles. There's never a zero probability that we will have a recession in any given year. But when we think about what's going on right now, I would, generally speaking, agree with that sentiment, that there isn't a whole lot of outsized risk in terms of recessions, at least for 2022. Obviously, there is a whole lot of concern about what's going on with the war in Ukraine at the moment, the impact that that's having on commodity prices in particular.

But we see that the American consumer in particular is reasonably insulated from this. We just consume less fuel than we had in the past. We are more energy independent than we had been in the past. When we think about what's going on with inflation, certainly a whole much more broad conversation to have on that front. The impact that that may have is on confidence. It's not good for the consumer certainly, but again, we think about all the money that we have saved up over the last couple of years, the high standards of living that we have been able to develop. We should be able to absorb this risk.

Frankly, to me, the biggest threat to this economy right now is the Fed overstepping, the Fed playing its hand too aggressively, raising to rates-- raising rates-- excuse me-- too quickly. That is the thing that I think could potentially throw us into a recession, or at least, an economic slowdown this year, not really some of these other exogenous factors we've been talking about.

DAVE BRIGGS: On that point then, Jack, what would be too aggressive? What would be overplaying its hand? Everyone expects two 50 point basis hikes-- rate hikes the next two meetings. What would be too much?

JACK MANLEY: Well, I mean, it's hard to point exactly to what too much would actually be. But the way I'm thinking about the interest rate trajectory this year is that it is very easy to make the case that the Fed is behind the curve at the moment, right? We should not have had real yields being deeply negative for the better part of the last 15 years. We should not have been adding stimulus in the form of quantitative easing up until just a couple of months ago. We are far behind this story in terms of getting policy back to normal.

But the question I think we have to ask is, why is right now the time for that normalization? And especially when you look at what's going on with inflation at the moment, so much of that is being driven by supply chain issues. Energy having an outsized impact on this morning's inflation reading having a whole lot to do with that ongoing war in Ukraine. Not a whole lot the Fed can do about that story, right? The Fed can't fix supply chain issues. It can't end this conflict.

What it can do instead is make the supply side problems not matter because the demand story starts to go away. And it does that by making borrowing costs go up such that as consumers, we just kind of throw in the towel. So I don't know if there's a specific number we can point to. But I do want to say that if the Fed hikes rates twice consecutively by 50 basis points a pop, as you said, I don't know how much that's going to actually do to inflation. It may just make our lives as consumers more challenging than they would have otherwise been.

RACHELLE AKUFFO: So then as we look at that 8.5% headline number coming in even higher than a lot of people expected, still, we're expecting the bad news. Did that overshadow perhaps any good news, any good changes that we're seeing that are offsetting inflation within this data?

JACK MANLEY: So there isn't a whole lot of good news in this inflation data, but there are a couple of things that I think are worth pointing out. The first one, as I already mentioned, is that energy in particular had an outsized impact on this inflation reading. Fuel prices up around 18% year over year. That, of course, going to have a pretty dramatic impact on that 8.5% reading we saw earlier, and I think very easily triable to exogenous geopolitical factors, right? Nothing really domestically going on that is causing oil prices or fuel prices to spike that aggressively.

The other thing that is worth pointing out, the sort of one bright spot in the inflation print, is that used car and truck prices move down around 3% year over year, reflecting some of the easing in global supply chains. Now it's very good news if it is a bellwether that supply chain issues are getting resolved. And I think it, frankly, is.

But we can't take it as being too exciting because prices for these things are still extremely elevated, excuse me, relative to where they had been pre-COVID, relative to probably where they should be. So a couple of glimmers of hope in this otherwise pretty dismal report, but I do think that when it comes to the inflation outlook, this 8.5% reading may be the peak.

BRAD SMITH: Do you expect there to be any reprieve offered by earnings season coming up?

JACK MANLEY: I think the earnings season this quarter is not going to be great. But I think that markets are already anticipating that and looking beyond it. We look at the first quarter season. We see that margins in general are coming under pressure. We see that high flying, high growth technology names have come under a lot of pressure on the back of rising interest rates. We see the financials are likely coming under a lot of pressure on higher costs, on reduced volumes, because of poor markets.

A lot of challenges that I think we'll be dealing with in the first quarter, but not challenges that are going to persist much beyond that. We still believe in the cyclicality trade this year. I think there is more room to run, not just in financials, but in industrials and materials and even energy this year.

And as long-term investors, we continue to like that technology and that technology story, those tech adjacent names. This is where growth in a US-focused portfolio is going to come from, maybe not over the next six to nine months, but certainly over the next 10 to 15 years. So maybe not so great for the earnings season this quarter, but I think 2022 should still be a reasonably good year for earnings.

DAVE BRIGGS: We'll take that, and you had me at inflation has peaked. Jack Manley, we appreciate you being here with us. Thank you, sir.