Julie Biel, Portfolio Manager at Kayne Anderson Rudnick, joins Yahoo Finance Live to discuss how to forecast economic outlooks after downturns in retailers, travel demands, and defensively investing into the health care space.
- Joining us now with more on the markets, Julie Biel, Kanye Anderson Rudnick portfolio manager. Nice to see you. So it's been a wild ride this Tuesday alone. Forget about the days ahead. What do you see driving this action today, in particular on the NASDAQ, now up 1.2%. What's driving it?
JULIE BIEL: I think there's a couple of things. I think, overall, we're concerned about demand, especially in the US consumer, which is a huge part of the economy. And so you're seeing actually kind of a flight to quality. If you think about a lot of the software names, particularly the ones that are serving other businesses, they have recurring revenue models. And that allows them to plan their expenses and have a lot of better earnings durability. So I think that's what's actually happening is people are worried about the state of the economy. And they're flocking to businesses that can weather that.
- And where do you think we are in terms of the timeline of things getting worse before they get better with that eye on some of those quality stocks?
JULIE BIEL: So I think it's a good sign to see so many of the bulge bracket strategists coming out and saying more dark daisies are ahead because most of the firms have been putting a recession risk at 5%, 10%. And now we're kind of in the 30s and 40s and 50s. You have something that we're going to gap down another 50. It's better late than never. It would have been great if they told us this 30% ago. But I'll take it because as you see, sentiment starts to capitulate towards the downside. And that is when we tend to get towards the end of at least the stock market declines.
- You mentioned the fluctuating predictions of a recession. Bloomberg Economics right now has it at 38%. What do you think about the likelihood of a recession?
JULIE BIEL: Recessions are just part of cycles. And we haven't figured out a way to avoid economic cycles. So we expect a recession at some point. We can't predict when it's going to happen. We can only prepare. And so I think finding good quality names-- some of them are on a discount because they'd really gotten beaten down-- is a good opportunity for investors. And I think this earnings season could be very choppy. So for your best long-term investors who can kind of take it on the chin if the bad news continues, this is actually a great opportunity.
- And in terms of the picks, what do you see as the main opportunities? And what are you definitely staying away from?
JULIE BIEL: So we are definitely staying away from retail. That's not a genius call. Most of retail has gotten pretty beaten down. But I wouldn't view that as any kind of value name to be invested in. I think there's still way more bad news to come from retail. If you have a company as well capitalized and well managed as Target having problems with inventory, that is such bad news for the rest of the retail sector which doesn't actually have that skill set necessarily well founded.
A lot of these companies missed out on selling inventory last year. And they ordered really heavily coming into this year's back to school and holiday season. And now with consumer demand starting to get really quite soft, they're going to be stuck with a lot of inventory that they have to sell on a big discount. You're going to see margins be much softer as a result. So we're avoiding retail at any cost.
- Beyond Target, though, Julie, what are some other examples that tell you you want to say stay away from the sector? And particularly, what are you seeing from the consumer at this moment?
JULIE BIEL: So I think it's hard because we don't have really clear demand. What we have is a savings rate starting to decline finally. And I think a lot of people have planned vacations for a long time. So it's going to feel good this summer. It's going to feel like everyone's going out on vacation. We're going to see lots of great pictures on Instagram, that sort of thing.
But I think when people get back in August, they're going to realize, wow, I've spent down some of my savings. I'm not feeling very good. A lot of firms are already starting to either cut back on hiring or start firing people writ large. That's really going to hammer the sentiment that a lot of consumers have. So that's my concern is that really becomes a self-fulfilling prophecy where consumers are concerned and then realize, oh my gosh, this inflation has really taken a hit out of my spending power. And I'm not going to be out there wanting to spend.
- And in terms of where the rubber meets the road, we did start to see some of this in first quarter earnings. We're seeing these companies either meeting or perhaps beating expectations. But that forward guidance weighing on the stock prices. Do you expect that to continue when we start getting some of these second quarter earnings?
JULIE BIEL: Yeah, I do. I think, overall, if you look at analysts' estimates, they haven't actually come down very much. And most of these companies have very little visibility into their cost structure. They don't know what labor costs are going to look like, if they're going to continue to increase. We can't say that inflation has peaked. So at least on the cost side, most companies are going to be a little bit nervous.
And then on the demand side, if we're starting to already see a pullback in consumer spending, that makes it very hard for them to forecast. So I think second quarter earnings themselves will be OK. But I think guidance is going to be not great. At a minimum, uncertain. And if not, people are going to be cutting numbers. And that is typically what really takes a bite out of stocks.
- Finally, Julie, you say health care is a nice place to hide. But you say there is an important caveat. What is that?
JULIE BIEL: So I think it's important to think about the types of health care that are protected and do well, especially if we have any kind of return to COVID, which if you're in California right now, you're hearing a lot about caseloads increasing with an even more virulent strain. So I think it's really important to have businesses that can weather any kind of health care outcome, businesses that are not necessarily tied to a lot of changes in regulation.
So I would avoid pharmaceuticals because we know that drug pricing probably is on the way down. But I like a company called West Pharmaceuticals. It's a drug delivery company. And, obviously, they've benefited really well from COVID vaccines. But they're involved in lots of the new biologics that are coming out. And those are high-value products. Good margins. It's a good, solid, steady business.
- Thank you for breaking down today's market action. Julie Biel there, portfolio manager at Kayne Anderson Rudnick. Thank you so much.