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U.S. still has 'some running room' between recession: Strategist

Wall Street is in the middle of a balancing act between remaining hopeful for the September trading month and reducing its recession outlook. Commonwealth Financial Network Chief Investment Officer Brad McMillan joins Yahoo Finance Live to discuss the U.S. recession and growth outlooks amid the Fed's interest rate cycle.

"The only thing that worries me right now is the consumer confidence data, that's starting to fall back," McMillan says on recent economic data prints. "Certainly, when you look at the job growth, we will have a recession. But right now, I don't think it's until next year, and probably not until the middle of next year."

McMillan also comments on how markets are managing under revised recession forecasts and the impacts stemming from China's economic slowdown.

Video transcript

- Well, while history says September is the worst performing month of the year, Wall Street seems fairly bullish. Analysts at Goldman Sachs cut their odds of a US recession earlier this morning thanks to cooling inflation and a still resilient labor market. But our next guest says even though the economy is still chugging along, there are certainly some signs of a slowdown. Let's bring him in. That's Brad McMillan, Commonwealth Financial Network CIO. Good to have you on the show, Brad.

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So I mean, markets seem to be charging ahead, still being bullish. I mean, we look at the VIX at a 20-year low at the moment. What do you think some of these markets or these investors are really missing right now when they're really just focused on the strength of the economy and perhaps not some of the risks?

BRAD MCMILLAN: I actually think the markets have it right. I do think there are some risks out there. We can talk about those. But when we look at a recession, for example, you don't see a recession when job growth is strong, which it is. Yes, it's down off the highs, but it's still at very strong levels historically. We don't see a recession when industry is investing. And we're seeing industry continue to invest. We simply don't see any of the signs of a recession. And that's what the market is banking on.

The other thing though which is interesting is the market is fading those fears about the economy. It's taking for the slowdown and saying, OK, the Fed is more likely to cut. Now I don't think that's the case. But from the market's perspective, that's a sweet spot, potentially with lower rates and continued growth, and that's what I think we're seeing.

- So are you not expecting a recession, and you think the Fed can stick the landing based if these current trends continue?

BRAD MCMILLAN: The only thing that worries me right now is the consumer confidence data. That's starting to fall back. And certainly, when you look at the job growth, we will have a recession. But right now, I don't think until next year and probably not until the middle of next year. We've still got some running room. I think the Fed is doing about as good a job as they could have done. So yeah, I think they're sticking the landing.

- I mean, and Goldman Sachs out with their note called a soft landing some of their group lowering the 12-month estimates of a US recession, that probability to about 15%. So then what are some of the risks that people should be aware of in the economy in spite of some of the bullishness that we're seeing?

BRAD MCMILLAN: Watch the jobs' numbers. One of the things that came out, we saw the number of jobs available dropped significantly. Now it's still high, but if that drop were to happen again for a couple of months, that's something to watch for. Watch consumer confidence. We have a lot of people who are out there, and they're not feeling as good as they did. And we've got some things coming up. We've got the student loan payments starting again. That could hit confidence. Even if people were working, they might not want to spend. I think those are the two key indicators that are going to signal trouble for me. And although they're still in a good place, they're not moving in the right direction.

- So Brad, so at the moment, we're seeing bad news being good news for markets. At what point does that tide turn? When does bad news become bad news for the markets as well?

BRAD MCMILLAN: Well, when you look at what's going on with the economy, Rachelle, everybody's saying, OK, things are slowing down. And the way that's being interpreted is OK, that means the Fed is going to have to cut. So we've gone through this cycle several times where the market's convinced themselves the Fed is going to cut. And then Powell comes out and says, no, we're not going to cut. And the markets sell off again.

So I think we're in the middle of that cycle. Markets are talking themselves into believing rates are going down in the near to medium term future, and I simply don't see that as the case. But even so, because the fundamentals are still solid, we're seeing relatively limited volatility, which points to the VIX, as you mentioned.

- And Brad, I want to ask you about, I mean, even though we have some of this uncertainty, but you still have the bullishness then. Some of the sectors that you like, you listed energy and industrials. Energy has been picking up recently year to date, and industrials also started picking up in June as well. What do you like most about those two sectors?

BRAD MCMILLAN: Well, when we were talking earlier about where the growth is going to come from, I have some concerns about the consumer side, and confidence is the big one. But then when you look at business investment, one of the side effects that the labor shortage is giving us is companies are investing more in capital goods. They have to invest in capital because they can't invest in labor.

So that's driving the business sector. When you look at the Inflation Reduction Act, that's driven enormous investments in production facilities. So this is something that's not really on the radar. And because of that, we've seen those sectors of the market start to perk up. It's still not out in the public eye so much, but that's where the growth is over the next year or two. And that's where I think we need to be. And that, of course, is going to take energy. And we're seeing that price go up as well.

- Brad, I have to ask you about the impact of the slowdown that we're also seeing in China in certain segments as well. How much of that is sort of weighing into some of your estimations for the year for the US markets?

BRAD MCMILLAN: Frankly, when you look at the exposure of the US to the rest of the world, we have the lowest exposure as a percentage of the economy of any major economy. We're not an island nation, but we are pretty well self-sufficient. So when you look at China, the actual demand effects of the Chinese slowdown aren't going to hit us that much.

Where we might get hit a bit is in the supply chain aspect of it, but that's more political than economic, and that's something that's already going on. So I expect the effect here really to be minor I'm not worried about China. That's not our biggest problem.

- And we'll certainly be keeping track of those supply chains though, especially as they're getting more political pressure from the US as well as they battle it out over the chip market. A big thank you there to Brad McMillan, Commonwealth Financial Network CIO. Thank you so much.

BRAD MCMILLAN: Thank you, Rachelle.