Russia-Ukraine war, oil prices increase chance of a recession, portfolio manager says

The chances of a recession are higher than Goldman Sachs's 35% projection, according to Capital Wealth Management's Kevin Simpson, who said the Russia-Ukraine war and oil prices increase those odds.

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BRAD SMITH: We've got Kevin Simpson of Capital Wealth Management joining us now. Kevin, investors hoping to find love in a hopeless place right now. How does this week's activity set up going into the Fed decision, where we already have a fairly telegraphed outcome, which raises the question of if we would see any relief rally off of a less aggressive tightening path in the near term?

KEVIN SIMPSON: It's hard to make that case, if we're going to see a 25 basis point Fed rate increase next week, which, as you mentioned, we're all sort of expecting. It seems unlikely that there's going to be any rally on that news. If anything, we've been trained to buy the rumor, sell the fact, sell the news. And that leads us to another volatile market next week. You know, I'm an old-fashioned stock operator. I try to read the tape, and the only thing that this tape is telling me that volatility is here for the foreseeable future.

RACHELLE AKUFFO: And I want to talk about some of the concerns that you laid out, considering what the Fed might do and how aggressive they might have to be later in the year. Stagflation, hyperinflation, and recession are the concerns you laid out. Which ones are we more likely to see in the short-term, and what sort of economic fallout could we see from that?

KEVIN SIMPSON: Yeah, Rachelle, we're almost in stagflation. You know, it's an odd combination. It's a contracting economy and a rising interest rate environment. And you can make the case that we haven't gotten there yet, but we sure as heck will next week when the Fed has liftoff. The one good thing is that we don't have massive unemployment. That's the one other part of the recipe that can make things problematic.

Hyperinflation, you know, I don't think that's going to necessarily be a problem for us. I think that this high inflation, you know, the CPI this week came in at a number we hadn't seen since 1982. So we think back to the '70s and hyperinflation. I think because of the supply chain issues being so responsible for this inflationary environment, that we might be able to sidestep that one.

The real problem I think is a recession. You know, no one wants to see it. We're all starting to talk about it. I think Goldman Sachs came out this morning with a 35% chance of a recession. And I think it's higher. I just-- because of this war and what's happened in Ukraine and the price of oil, it's taking away the Fed's ammunition to be able to keep-- maybe keep this in check.

So if we see a recession, I think it could be a short-term recession because, again, a lot of this inflation is supply chain related, coming off of a COVID economic shutdown. But I think it'll be a difficult thing for this economy to sidestep a recession, which means we can get through it. But it may be a rocky year or two, at the very least.

EMILY MCCORMICK: So Kevin, if investors agree that we are likely to see a, at least, short-lived recession here in the near term, how should they be positioned for that?

KEVIN SIMPSON: Yeah, that's the million dollar question, huh, Emily? How do you invest in an inflationary environment when you have a recession? It's really hard, especially coming off the past three years where we've had this amazing super cycle, the free stock trade because of all this free money pumped into the system. So you need to reset. With any environment, there's always risks, and we're seeing them. There's also opportunities.

So the way to combat inflation and to invest in a recessionary period, in my opinion, the best way to do it is to own stocks that not only pay dividends, but increase dividends. Because if you have a growing dividend inherent in the stock that you own, it helps to get through that time period, while still allowing for that inflationary upkeep as a result of the dividend increase. So you look for good, strong fundamentals.

Jared just talked about the fortress balance sheet of JPMorgan, still a stock that you can buy. And all of the companies that really are compressed multiples that now have good valuations, it doesn't mean we can't invest because we're scared of volatility. It just means we need to layer in those investments. And good old-fashioned dollar cost averaging has rarely cost anyone any money. And I think it's still one of the best ways to be an investor, especially in this type of environment.

BRAD SMITH: Kevin, we've increasingly heard the R-word brought up, and recessionary fears certainly rising recently. And so with that in mind, you know, how far forward would the market actually show that recession in the tape prior to us actually seeing that on a technical basis?

KEVIN SIMPSON: You know, it's so difficult because of all the volatility we're seeing for so many other things. The 10-year low for consumer sentiment today was very telling. It means that the consumer is scared. Yet, they're still spending. If you dig deeper into it, home valuations and home demand might be down a little bit, but automobile demand is up. It's crazy. You have a Russian invasion, Fed tightening, oil prices spiking, inflation, higher interest rates, worker shortages, supply chain issues, decelerating earnings. Oh, and by the way, we still have COVID.

So how far can the tape predict a recession? That's too difficult an answer. You can look back on history, and typically, it'll last a lot longer than I think would happen here. But if you're looking at 2022 and 2023, and assuming the Fed is going to go from 0 to maybe a 2, 2.5 to get to their 2.75 Fed funds rate that they're targeting, which is still really cheap money, I think that the next two years are going to be rocky.

But companies that make money can still make money in a recession. They can still make money in an inflationary environment. Their margins might come down a little bit, but they can still turn profits because they have pricing power. And that's really important. It doesn't mean we can't make money. It just means we have to roll up our sleeves and work a lot harder.

RACHELLE AKUFFO: And just quickly, for those who have opportunity on the brain, I mean, you've talked about focusing on this opportunity prism right now. Break that formula down, and talk about the investments that you're making based on that. We have about 40 seconds.

KEVIN SIMPSON: Well, that's always about being a glass half full guy, Rachelle. You never want to be in the investment world and think that there's always going to be doom and gloom, but you need to worry about everything. So I mean, I brought a few stocks just to think about in terms of valuations. And if you look at multiples, that's where opportunities come in. And don't be deceived by some of these stocks that we're looking at that are down 60%, 70%, 80%. Jared just mentioned DiDi, 87% off of its IPO. I don't think it's been trading all that long. Just because the stock's down doesn't make it an opportunity.

But stocks trading at good multiples, those are opportunities. I know we're pressed for time, but UPS is trading at 14 times earnings. They just increased their dividend by 49%. Yes, the price of gas goes up, and that makes their trucks cost more to get down the road. But they can increase pricing a little bit without necessarily affecting their sales. So parcel packages is a great thing and a great example of the stock that we would look at.

EMILY MCCORMICK: All right, we'll leave it there for now. Kevin Simpson, Capital Wealth chief investment officer, thank you so much.