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Fed rate hikes likely to weigh on the economy 'within the next 6 to 12 months': Strategist

Truist Chief Market Strategist Keith Lerner joins Yahoo Finance Live to assess the impact of the economy amid Fed rate hikes and July's positive jobs report, also looking at growth stocks and the outlook on a recession.

Video transcript

DAVE BRIGGS: For more on the markets, let's bring in Keith Lerner, Truist chief market strategist. Keith, good to see you, sir, and happy Friday. Let's start where they left off there. What is the 10-year movement telling you?

KEITH LERNER: First, great to be with you today. I think this report today caught the market a bit off sides today. It's telling you that although there's a lot of concerns about recession and we still think there's actually a greater than 50% chance of recession over the next 12 months, it wasn't in the first half. And that was a debate before today.

But what's interesting, Dave, what really caught my eye about this market today is, the market's relatively flat. But underneath the surface, what you're seeing is that the long duration assets, technology, consumers-- or communications, consumer discretionary, those are all kind of growth sectors that account for almost half this market as far as the weighting. And those are all down today.

And most of this rally since June has been a revaluation of these growth sectors. And now this move in the 10-year and interest rates is likely to cap that. And our message is that at this point, we actually think the risk-reward is somewhat less favorable for the market after this big runoff that we've seen.

SEANA SMITH: So, Keith, the pop that we've seen, then, in some of those larger cap tech names, the ones that you mentioned that are under pressure today, do you think that's likely to remain the case, I guess, at least for the short-term?

KEITH LERNER: Yeah, I think in the short-term, though, I mean, they've had a nice run. They are showing leadership. I don't-- I think the one thing about today's report we have to think about is that all this monetary tightening that's in the cycle, that works with the lag. And the Fed only began to raise rates in March. And we have a global central bank tightening cycle that has accelerated since then.

So our view is later this year, we'll continue to see these higher rate hikes weigh on the economy. And that should be good for growth. But I just think short-term, you've moved so much so far, you're likely to see some consolidation in some of these names, especially if rates are moving up here short-term, which it looks likely to continue.

DAVE BRIGGS: 30,000 foot level, though, Keith. What do you make of this strange dynamic with consumer sentiment, recessionary fears, on one hand, and this robust month after month job growth on the other?

KEITH LERNER: Well, I think right now, I mean, we don't have a great playbook for this, right? We have to have a dose of humility about this cycle, even as strategists. I know that's hard to say, sometimes, is that part of this is you have this unwind of this huge stimulus that we had, and we had the sugar high. Durable goods, as an example, spending on retail spending was well above the historical trend. And that's coming back to Earth.

So I think what the struggle, what the market's trying to figure out is, how much of this is a still strong economy, but coming from very elevated levels versus you're looking at those base numbers and growth rates are coming down and saying this is recessionary?

So I think that's the strangeness of it. And a lot of this is anticipation of what's going to happen in the future because right now, if you go shopping, you go to restaurants, hotels, it's still pretty busy. Our view, though, to be more succinct, though, is, I do think these rate hikes are going away on the economy later in the second half.

SEANA SMITH: To what extent?

KEITH LERNER: You know, to an extent, I mean, I think in the earlier segment, you talked about the yield curve or some discussion about the yield curve being more inverted. Jobless claims are starting to move up off of depressed levels. So I would-- base case is over the next 6 to 12 months, and it lines up actually earlier next year that there's a greater than 50% chance that we still see a recession.

But again, I think what happens is right now, this shows that it wasn't the first half. So I still think it's likely to happen, but again, policy works with a lag. But we've seen such aggressive tightening. I don't see how that doesn't impact the economy in a pretty major way later this year.

DAVE BRIGGS: Is that anything like the 18-month long recession that-- one Elon Musk is predicting?

KEITH LERNER: Yeah, that's a big debate, too. Like, if we-- first of all, are we going have a recession, right? So we're saying it's about 50. It's not a foregone conclusion. But at least, the indicators we look at suggest that risk has risen over the next 6 to 12 months. And then you look back historically and say, OK, the baseline is the average recession is 10 months. The last one was about 18 months. That was a financial crisis. Not every recession is a financial crisis.

I think our baseline, which is kind of the default right now as far as kneejerk reaction, is that you see something mild. I think the risk that it would be longer, like what Elon is talking about, is that if inflation stays stickier, that's what happened in the '70s. And we had some longer recessions then. So not the base case, but I think that's certainly a risk that it could be more prolonged than kind of this default that it's going to be mild, which is where we are today.

SEANA SMITH: Keith, when we talk about how aggressive the Fed could potentially get over the next couple of months, the next meeting where we are going to get a decision in September, so we still have another jobs report before then. But your best guess from this jobs report, 528,000 jobs added, do you think the likelihood of 75 basis points is pretty much a given at this point?

KEITH LERNER: Yeah, you know, like you said, there's so much time. That's like an eternity in Fed speak, till September. So listen, I think these odds have been changing so much. I would say that the base case would be that you go 75 basis points. But we'll have some inflation data before then. We'll see what happens with commodities and inflation expectations. We're also seeing some supply chain starting to ease a bit.

So, listen, I think the base case is 75. I think that the Fed, if there's any doubt, they're going to err on the side of raising rates because right now, inflation is enemy number one. And I think they really want to make sure that that comes down. And I think they'll likely overdo it if necessary because they're more worried about that than recession at this point. And they've said that.

SEANA SMITH: Keith Lerner, always great to speak with you. Have a great weekend. Thanks so much for joining us.

KEITH LERNER: Thank you.