Markets are 'too optimistic' about a soft landing: Strategist

Megan Horneman, Verdence Capital Advisors CIO, joins Seana Smith and Brad Smith on Morning Brief to discuss why the strategist thinks investors are putting too much faith in a soft landing for the US economy and what that means for the Federal Reserve and the market (^DJI,^GSPC, ^IXIC) going forward.

“People are just getting a little ahead of themselves as far as what strength there is in the economy. I understand the labor market still remains relatively strong," but concerns around consumer spending persist, Horneman tells the Morning Brief team.

"The consumers, although they're spending, they're spending on credit, and this is a concern for us. So, eventually, the consumers are going to run out of steam. On credit cards, rates are still very high, and when you're looking at over $1 trillion in credit card debt, this is a concern for us from the consumer standpoint. We know that inflation is coming down towards the Fed's target, but we can't forget that this has been accumulating for several years now. So this is really a strain on consumers. And if you look at some surveys most Americans actually think we're already in a recession. That's how poorly they feel. So I just don't see the strength in the consumer that's going to be able to last much longer."

The strategist says, "Equity markets right now are just too optimistic on the entire scenario that the Fed will articulate and be able to deliver this perfect soft landing. They'll continue to cut rates. I think that the equity markets are just getting too complacent to that perfect scenario. If you look at every other economic indicator, aside from the actual GDP number, all of these things are looking like they're in a recession territory."

Horneman believes markets could see a 7% to 10% drop in the equity market, explaining, "There's not enough confidence that I have in the earnings expectations for next year. And we haven't seen earnings really be revised much lower, even with the fact that the economy is slowing."

“If you think it's going to be hard for this soft landing like we do, then you want to have extra cash to be able to put to work. Because eventually, even if there is a pullback in the economy, we will come out of this. You want to have the dry powder to be able to put to work during that downturn. That's when you're going to want to invest in things like small caps [and] mid caps. You're going to want to look internationally as well. These are things that there will be opportunities when the equity market starts to kind of get realistic on what the economic outlook is."

Horneman doesn't think the Fed should cut another 50 basis points at the November meeting. "The problem the Fed has is they're walking a very, very fine line. They seem to have kind of forgotten completely about inflation and that's a concern that we have. They're focused very much on the labor market right now, but you cannot forget about inflation. Inflation is still out there. It is coming down towards their 2% target. But there's a lot of areas of inflation."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Naomi Buchanan.

Video transcript

Time.

Now for today's strategy session, our next guest says that investors are heavily investing in the fed's ability to achieve a soft landing and she's not so confident that they can pull that off.

Joining us now is Megan Horne uh joining us now is Megan Horman, who is the burden's capital advisors, Cio Megan, great to have you back on the program with us.

Uh uh Why, why the cold water on the soft landing prospects here?

I think that um you know, I think people are just getting a little ahead of themselves as far as the what strength there is in the economy.

We, I understand the labor market still remains relatively strong.

I mean, we've seen an increase in the unemployment rate, but it still is relatively low, the consumers, although they're spending, they're spending on credit and this is a concern for us.

So eventually the consumers are gonna run out of steam.

Um credit card rates are still very high and when you're looking at over a trillion dollars in credit card debt, this is a concern for us from the consumer standpoint and we know that inflation is coming down towards the Fed's target.

But we can't forget that this has been accumulating for several years now.

So this is really a strain on consumers.

And if you look at some surveys, most Americans actually think we're already in a recession, that's how poorly they feel.

So I just don't see the strength in the consumer that's gonna be able to last much longer.

So what, how does that translate for equities?

Then?

What does that downside risk look like for markets?

I think the equity markets right now are, are just too optimistic on the entire scenario that the fed will um articulate, I mean, be able to deliver this perfect soft landing.

They'll continue to cut rates.

I think that they, the equity markets are just getting too complacent to that perfect scenario.

If you look at every other economic indicator, aside from the actual GDP number, all of these things are looking like they're in a recession territory, look at leading indicators, look at manufacturing, we'll get the service index this week.

All these things are showing that the economy is weakening.

So me, but what does that mean though?

I guess more specific, more specifically, are we talking about a 3 to 5% drop or are we talking about 5 to 7% drop?

I guess, how dire could the situation get?

I think you could get even another 7 to 10% drop.

I mean, we had a 7% drop, I think 7 to 8% drop, um, a couple of months ago and I think you could see that occur again.

Um, I just think there's not enough confidence that, that, that I have in the earnings expectations for next year and we haven't seen earnings really be revised much lower, even with the fact that the economy is slowing.

How much different is the, hey, they've successfully pulled off or it looks like they're gonna pull off the soft landing uh uh portfolio playbook versus the OK.

They, they have no shot of pulling off this, this soft landing and you should actually be looking for and anticipating a recession.

How vastly different are those two investor playbooks?

Well, if, if you think that they have there, it's gonna be hard for this self landing like we do, then you wanna have extra cash to be able to put to work because eventually, you know, even if there is a pull back in the economy that we will come out of this, you wanna have the dry powder to be able to put to work during that downturn.

Um That's when you're gonna wanna invest in things like small caps, mid caps.

Um You're gonna wanna look internationally as well.

These are things that there will be opportunities when the, when the equity market starts to kind of get realistic on what the economic outlook is.

So, Megan, how, what is this, how does this all translate then for the fed?

If there is this risk here that maybe the economy isn't as strong as some investors are pricing.

And right now, I mean, the consumers are a bit weaker than many realize, does that mean that the fed should go 50 at its next meeting?

Uh No.

Um, I don't think so.

And the problem, the fed is the, the problem the fed has is they're walking a very, very fine line.

Um, they, they seem to have kind of forgotten completely about inflation and that's a concern that we have.

Um they're focused very much on the labor market right now, but you cannot forget about inflation.

Inflation is still out there.

It is coming down towards their 2% target.

But there's a lot of areas of inflation, whether you look at housing, whether you look at services, this type of inflation is still running well above the fed's target, then you throw into the mix this port strike and what is that going to do to inflation?

So the feds got to be very careful.

I think that they'll probably deliver with 25 basis points.

But I'm not surprised that we saw a little bit more of a hawkish tone from Powell last week.

He's got to get the markets to be um a little bit more realistic on what they have the ability to do.

Remember they wanna be transparent, they don't wanna have, they don't wanna be in this stop and go scenario like they were in the seventies and eighties.

So they have to be very careful and walk this very fine line with how they deliver these rate cuts.

All right, we'll see how this all plays out.

Megan.

Megan Horne.

Thanks so much for joining us here this morning.

Thank you.