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Speaker 1: Our guest is Gary Schlossberg, global strategist at Wells Fargo

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Speaker 1: Investment Institute. Gary, we did a story a couple of

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Speaker 1: days ago that essentially said it's it's hard to find

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Speaker 1: recession in these earnings reports, and probably even more of

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Speaker 1: the case today. We reported on a lot of the

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Speaker 1: earnings that came out that we're pretty solid here. Yet

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Speaker 1: you're calling for a slowing economy that does morph into

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Speaker 1: a recession. What are you seeing that the companies are

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Speaker 1: not telling us about at the moment? What we are

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Speaker 1: seeing an economy that has been doing better of late.

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Speaker 1: We're getting We're gonna in all likelihood yet our first

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Speaker 1: quarter of positive UH economic growth in the two We

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Speaker 1: do think that the period ahead, just in terms of

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Speaker 1: the macro economic environment, will be more challenging. The Federal

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Speaker 1: Reserve will continue to raise interest rates aggressively through the

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Speaker 1: end of this year. We're hopeful that they'll back off

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Speaker 1: a bit over the course of twenty twenty three, particularly

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Speaker 1: during the first half of the year. UM but you know,

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Speaker 1: inflation is coming off the boil. It's doing so very slowly.

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Speaker 1: That's squeezing UM inflation adjusted incomes. Liquidity is tightening in

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Speaker 1: the financial markets. We think all these things together will

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Speaker 1: produce slowing economic growth into morphing into a recession by

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Speaker 1: early next year. What about in terms of whether or

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Speaker 1: not we see full capitulation like Bank of America is

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Speaker 1: saying in terms of a bottom for equities and then

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Speaker 1: you see a rally later into next year. I know

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Speaker 1: that's twelve months away when we're looking at that forecast,

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Speaker 1: but is that something that could happen if a recession

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Speaker 1: is only a shallow one. Well, as the outlook becomes clearer,

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Speaker 1: we do expect to see the market anticipating improving, approven

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Speaker 1: and rallying on that. The market is at through all

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Speaker 1: a leading economic indicator. But we think over the next

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Speaker 1: several months, as the economy moves toward a recession, if

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Speaker 1: we're right in that forecast, that will produce some more

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Speaker 1: challenging environment for earnings and for the market, particularly if

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Speaker 1: as we expect interest rates for moving up as well

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Speaker 1: as we move into the early part of next year. Yes,

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Speaker 1: visibility hopefully will improve and we could see the market

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Speaker 1: beginning to turn. At the moment, investors are most bullish

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Speaker 1: on cash, on healthcare, energy, on staples. The typical areas

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Speaker 1: they're most bearish on equities, on stocks in the UK

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Speaker 1: and the Eurozone as well as bonds. Does that fit

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Speaker 1: with where you are now? And do we just you know,

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Speaker 1: look at that model and flip it sometime early next year, Well,

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Speaker 1: to some extent we may, we may turn that model,

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Speaker 1: But yes, for now, at least, that is pretty consistent

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Speaker 1: with our recommendations. We continue to focus much as we

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Speaker 1: have in the past year on US equities, particularly the

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Speaker 1: large cap, more liquid, healthier US equities in a balanced portfolio.

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Speaker 1: It's just a question of underweighting UH stocks. In international markets,

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Speaker 1: both developed and emerging market economies, they do face a

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Speaker 1: more difficult economic environment, we think than we do over here,

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Speaker 1: higher energy costs, greater pressure on liquidity, and something we

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Speaker 1: don't have to contend with at the moment, the deflationary

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Speaker 1: effects of the strengthening dollar. Gary Slushberg, global strategist at

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Speaker 1: Wells Fargo Investment Institute, joining US from San Francisco and

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Speaker 1: Doug telling us that the US is planning to release

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Speaker 1: those fifteen million barrels of oil from emergency reserves. With

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Speaker 1: the energy crisis devening, particularly in Europe, how much of

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Speaker 1: a focus is this for investors, and how should you,

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Speaker 1: I guess, kind of hedge against this? Oh, I think

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Speaker 1: I think it simply underscores the pressure on the European

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Speaker 1: economy from the potential for royal shortages. They're already dealing

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Speaker 1: with fuel costs that are considerably higher than those in

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Speaker 1: the US. All that to say that we think the

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Speaker 1: risk of a more v sche the recession in that

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Speaker 1: part of the world is greater than it is here

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Speaker 1: in the United States. And again our focus is on

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Speaker 1: the US market as a hedge against that deeper recession

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Speaker 1: in Europe. I guess I wanted to ask you about

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Speaker 1: the housing UH market and what sort of signals you're

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Speaker 1: getting there. So we talked about energy. Let's move into

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Speaker 1: that surprises are coming down a little. Um, is it

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Speaker 1: enough to help really bring inflation down in the United States?

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Speaker 1: And if so, you know when will we see that reflected? Well,

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Speaker 1: we think that's really next year's story. The shelter cost

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Speaker 1: Housing costs within the CPI continues to accelerate, but leading

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Speaker 1: edge indicators of the housing costs already are beginning to

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Speaker 1: roll over. The inflation right there for rents nationwide is

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Speaker 1: beginning to slow in some measures showing an outright the

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Speaker 1: climb and with a lag. We think that will show

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Speaker 1: up in shelter costs for the c P I probably

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Speaker 1: around the middle or ladder part of next year. Is

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Speaker 1: the consumer buffeted enough to deal with these inflationary pressures

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Speaker 1: and rising rents? Is the the consumer lag I guess

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Speaker 1: going to really cause some deeper recession fears? Two, Well,

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Speaker 1: we think that the uh, the squeeze on household incomes

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Speaker 1: not only from rents, but are in a whole array

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Speaker 1: of other prices. The squeeze on purchasing power will have

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Speaker 1: an effect on consumer spending. UH. We don't expect to

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Speaker 1: see that straightaway, but by early We think that's really

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Speaker 1: central to the slowdown in the economy that we're anticipating.

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Speaker 1: Consumers sev of the economy on top of that housing

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Speaker 1: we think already is and it slow down, and that

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Speaker 1: just increases the chances of a moderate recession. We think.

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Speaker 1: In so, if we try to look at at at

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Speaker 1: the complexion of the spending, because you say that consumers

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Speaker 1: will be squeezed, is it the case where you know

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Speaker 1: in terms of goods versus services, that they'll buy the

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Speaker 1: barbecue but not go see the dentist or some reverse

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Speaker 1: of that. How were they actually cut back? I think

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Speaker 1: we're already seeing some of that. We're seeing a rotation

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Speaker 1: from spending on goods, which were so strong early in

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Speaker 1: the pandemic, rotating towards travel, entertainment, some of the more

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Speaker 1: economically sensitive services categories. We expect to see that squeezed

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Speaker 1: as well as household budgets continue to come under pressure,

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Speaker 1: and that trip to the dentist other essential services may

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Speaker 1: be postponed in some instances, but generally we think will

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Speaker 1: be more resilient and the more economically sensitive categories, both

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Speaker 1: in goods and services over the course of next year.

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Speaker 1: I know you said you favored US over international shares,

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Speaker 1: but when you're looking at the broader picture, what's your

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Speaker 1: view on China? And I guess the concerns we have,

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Speaker 1: particularly when they delayed their economic growth numbers looking for

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Speaker 1: a very weak were recovery from a very difficult year

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Speaker 1: in two a week recovery ine and China is, along

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Speaker 1: with the US, the centerpiece in the global economy, and

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Speaker 1: that week recovery simply undercuts export prospects and economic growth prospects,

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Speaker 1: not only in Asia but many other parts of the world,

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Speaker 1: even Europe that tends to be more export oriented trades

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Speaker 1: sensitive than the United States economy. So, Gary, this is

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Speaker 1: all kind of you know, down the center lane and everything. Um,

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Speaker 1: let's let's let's think outside the box for a moment.

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Speaker 1: Apart from what we've talked about, is there a is

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Speaker 1: there a contrarian call or a kind of risky call

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Speaker 1: that you're quite excited about they can share with us. Well,

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Speaker 1: on the upside, we do have a resilient labor market

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Speaker 1: and its inflation comes off the boil as quickly as

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Speaker 1: we think it will. In that certainly eases the pressure

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Speaker 1: on purchasing power, allows the little reserve to move to

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Speaker 1: the sidelines. Perhaps even were interest rates late next year,

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Speaker 1: in the second half of the year, and that could

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Speaker 1: produce a mild or slow down, or we may even

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Speaker 1: avoid a recession, all right, Gary, Gary Slushberg, global strategist

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Speaker 1: at Wells Fargo Investment Institute,