Retail numbers going ‘sideways’ is a precursor to a recession: Wealth advisor

WealthWise Financial CEO Loreen Gilbert and Opimas CEO Octavio Marenzi join Yahoo Finance Live to discuss market sell-offs for retailers like Walmart, the Fed's interest rate hike cycle, viable sectors to invest in, and mortgages.

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- Always admire the enthusiasm on a day like that. There is the closing bell on an ugly day on Wall Street. You can see it. 1,161 points on the Dow. 4.7% trimmed off of the NASDAQ on a devastating Wednesday. For more market action, let's bring in our panel, Loreen Gilbert, WealthWise Financial CEO, and Octavio Marenzi, Opimas CEO. Nice to see you both. Loreen, what triggered it?

LOREEN GILBERT: Well, it's all about retail and what's going on in those profit margins. On the bargain stores are already very slim margins. So they don't have a lot to play with. And then when you see a 40% decline on Walmart's profit margin, significant decline on Target as well, those stocks are being hit. And the bigger story is that if retail continues to go sideways, that is one of the precursors to when we see a rolling over of the economy if retail continues to go sideways. So we'll wait and see.

- And Octavio, in response to-- obviously, this is a consumer-led economy. When you see what's happening with these big retailers and we're looking at that mismatch between consumer sentiment and consumer spending, how much longer do you think this can go on before it starts to eat in further into things like earnings?

OCTAVIO MARENZI: Well, I think what it has eaten into earnings. But I think it's very telling to see what it ate into earnings, and why did earnings sort of fail both at Target and for Walmart? Just yesterday, a bunch of people were looking at Walmart saying, well, that was a weak earnings result, we weren't expecting that, but that's probably a one-off. Walmart probably just had a poor quarter. And then Target came around today and basically did even worse. So that was really interesting and telling.

What is much more telling is sort of breaking down why that happened. I mean, the revenues themselves were OK. Revenues were up at both places 3% or 4% year on year, which is not spectacular, but that's fine. But what really was the problem was the increase in costs. So they had increased wages, increased transportation costs, increased supply chain costs. So it's all about inflation.

So I think what's really unfolding here in front of our eyes is that it's clear that the Fed is going to have to take even stronger action than it's announced so far in terms of getting inflation under control. And it looks like inflation might be spiraling out of control and is having a big impact now on corporate earnings. So the Fed is going to be under double and triple pressure to do something about this and raise interest rates even further and faster. And that, of course, is putting a very negative spin on the entire market.

- So Octavio, what does that look like, the Fed policy, then, going forward? How much more aggressive do you see them being?

OCTAVIO MARENZI: Well, they've basically said they're going to increase the Fed fund rates to 3.5% and 4%, which historically speaking is still quite low. And I don't think inflation is going to react that well to that. It's not going to move that well. I mean, it took the Fed years to get itself into this position now in terms of very, very loose monetary policy. And I think it's going to take some time to get it back out. It's not going to happen that quickly.

So this idea that we increase the Fed fund rates over the course of the next six to seven months by 3.5%, I think is a bit illusory. It's going to be much more aggressive increases than that to get inflation under control. And the pressure is going to increase on the Fed to do that.

Now, we did see today some sort of racing into bonds and Treasury bonds. And that drove the yields down a bit there. But I think that's going to be a short-lived thing there. I don't think bonds is a good place to be hiding at all at the moment.

- Interesting to hear you say that, Octavio, because earlier in the show, Jack Ablin from Cresset actually said he thinks if there's any silver lining today, it's that the consumer is actually doing some of the work for the Fed. Loreen, do you think there's any truth to that statement?

LOREEN GILBERT: Yeah, I think consumers are pulling back a little bit. That's going to help. I think the other thing that we need to mention is that the fiscal stimulus is gone. And that's going to have deflationary pressures on the economy. So while we've had a lot of inflation, we see that rolling over and starting to go down. And without the added fiscal stimulus, that's going to help.

- So Octavio, a lot of people are probably wondering, looking at their 401(k)s and sort of tearing their hair out. What should people be thinking in terms of how they should be positioning themselves when you do keep seeing these steep declines and swings from one day to the next?

OCTAVIO MARENZI: Well, it really doesn't look like there's any asset class to hide. I mean, you were talking about that earlier, that nothing seems to be working. And that is really what we're seeing unfold. And the only thing that seems to be sort of a safe bet right now is cash. And by cash, I mean very, very short-term bonds and really sort of bank account deposits and things of that sort. So that seems to be somewhat of a safe haven.

But that's a very uncomfortable place to park your money in an inflationary environment, as inflation eats away at those savings and those positions. But it looks like that's the best bet. So you sort of have to bite that bullet and accept that. There might be a sector here or there that outperforms and does well, but it's very, very hard to predict and trade in that way. But I think right now, nothing is looking safe.

And as all this monetary stimulus is unwound and now pulled back-- I mean, basically all asset classes have benefited from this very, very sort of expansive monetary policy. And as that is unwound, they're all going to suffer on the downside. So there is no good place to hide other, I think, than cash. And that is not a good place, either.

- Yeah, Bank of America's global fund manager survey actually said that, that they're seeing the most cash on the sidelines in quite some time. But Loreen, what do you think about that strategy? Obviously, there's interest here. But should investors be piling into cash now?

LOREEN GILBERT: So I was going to mention that same survey that came out by B of A. So there's already cash on the sidelines for many money managers. We're also holding cash on the sidelines. So it's a matter of how much. Certainly, some cash makes sense. And then the strategy with the cash is, how do you then deploy that? And since these kinds of bear markets tend to last about seven months, I'd say over the next six months to be putting money back in over a period of time-- in a sense, dollar-cast averaging over the next six months.

- And so then, Octavio, as you look beyond the US, are there any other countries or sectors that could be a way to sort of be a defensive player right now if you're not seeing that many opportunities in the US?

OCTAVIO MARENZI: Well, the dollar itself is actually strengthening against other currencies, so you have to take that into account as well. And that is, of course, betting on the idea that the Fed will increase interest rates and make dollar holdings that much more attractive. So I think not really, no. I mean, many other countries see themselves in similar positions and many other markets.

So if you look at Europe or the UK or Switzerland or Japan, it's not looking that encouraging either. I think we've seen sort of a very, very similar process unfold in those markets as well. And the US seems to be a bit ahead of many of those markets in terms of actually starting to tighten interest rates and moving along that path.

So I don't see anything terribly encouraging coming out of other markets, too. It's much of the same story. And actually, positioning in the US dollar as a currency, I think, is probably one of the better places to be. It doesn't look like any other currency is really going to compete with that.

- Loreen, circling back to where we started here, Target, what you said triggered all this, what everyone acknowledges, still posted increased revenue-- 4%-- increased same store sales, increased traffic. Are we making too much of the struggling consumer when they've posted some relatively solid numbers in that capacity?

LOREEN GILBERT: Well, I think what happens in these kinds of routs is that things get oversold, and eventually people will start buying. I mean, that's what I'm saying. This quarter is going to be a quarter looking at bargain hunting. So for those investors who have the stomach for it and looking at really good valuations on some of these stocks as they pull back, looking for those opportunities to go in.

Like you said, these companies are not going anywhere. They're not going away. People are still going to be shopping at them. And I do think my concern is that the consumer sentiment has been very low. But when you really look at it, people are still spending.

However, they're having to go into savings to do that spending, so that's where, how long can that consumer continue to do that? We'll be watching the consumer carefully. And I do think that, like I said, I think there will be some buying opportunities in some of these areas that have been hit so hard.

- Octavio, when it comes to retail, obviously lots of trouble there. We've seen investors kind of turn on some of those tech trades. What do you think is the next problem sector? And how do you see that playing out?

OCTAVIO MARENZI: Well, I think the next problem sector is likely to be the housing sector. And we're sort of starting to see signs of cooling off there already emerging. So again, it's all about interest rates. We've seen the interest rates on 30-year mortgages go way up. They've almost doubled, basically, since late 2021. And so that's not a good sign at all.

And I think there again, it's a reflection of the fact that the Fed has been a very, very heavy buyer of mortgage-backed securities. And I think it's also telling to sort of see what kind of mortgage-backed securities they've been buying. They basically only buy sort of conforming loans. And that basically means, in most parts of the country, under $700,000 mortgages, and in certain parts of the country, under a million. So it's that end of the market that I expect we'll start to see some pain.

Bear in mind, the Fed has really built up an enormous portfolio and position of mortgage-backed securities. They've got almost $3 trillion worth of mortgage-backed securities on their balance sheet now. And they've said they're going to start to unwind that. So for a long time, they were by far the biggest buyer of mortgage-backed securities. They're saying now they're going to turn into a net seller at some time in the future. That's going to drive mortgage rates even higher, and that's going to have a very, very detrimental impact on the housing market.