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Debt ceiling, Fed rate hikes running parallel to ongoing recession risks

NewEdge Wealth Senior Portfolio Manager Ben Emons joins the Yahoo Finance Live show to discuss the performance of the stock market despite the debt-ceiling decision, and how consumer spending trends impact the retail sector.

Video transcript

- Stocks seem undeterred of late, pushing higher despite lingering uncertainties from the Fed's June meeting to recession and the never-ending debt ceiling talks. Those are the overhangs. Then there's this debate over the health of corporate America more widely. Now, S&P 500 companies have delivered a healthy amount of beats, but accusations of corporate sandbagging or lowering expectations just to surpass them has also been a theme. So where do we go next?

Joining us now is Ben Emons. He's the senior portfolio manager and head of fixed income at NewEdge Wealth. Ben, thank you so much for joining us. Let's talk about this rally. I know today we're seeing-- I mean, today is like a one-off, kind of rangebound, given just the day of the week it is, and you have some-- that witching effect, if you will, coming into play today. What do you-- how would you characterize where the market is? There seems to be kind of a risk-on attitude.

BEN EMONS: Yeah. On one end, it's about the data itself. You know, as you mentioned, the earnings are better than expected. The retail sales were better than expected. Some of the ICM and employment data are better. The jobless claims start to turn lower again. So the market picks up that the economy hasn't lost its resilience just yet, despite all the recession fears.

And that matters, I think, fundamentally. Technically, as you mentioned, there's a lot of options expiration going on, and there's a lot of like, I think, short positioning in the market, which is about fear of a recession and other worries that are out there. And that, I think, is kind of pushing the market a little bit higher. So this is very key level, as you mentioned, and it could well lead to higher levels from here, temporarily.

- Temporarily.

BEN EMONS: Temporarily.

- OK, so what's the speed bump that changes things?

BEN EMONS: Well, as you indicated, so we have the Federal Reserve coming up. We now have Powell on a panel with Bernanke at a conference.

- Right now.

BEN EMONS: Right as we speak, I was just watching the headlines. And, you know, he does say, like, you know, rates don't have to go as high, but they're going to go potentially higher. That's echoing what other Fed members are saying.

So this is a live meeting in June. And that makes it, for the market, a bit of a tension point, because if this debt ceiling passes, then we're going to get focus really on how high will this rate really be. And we'll revisit where we came from before the banking crisis in February. Maybe rates have to go as high as possible to get inflation down. And that could put pressure on the markets.

- So the debt ceiling is in focus right now and has been recently. We've been here before, as well. Do you think we're going to pass this hurdle?

BEN EMONS: So it looks really strong indication that all parties want to get this over with before June 1st deadline. So Yellen has done a very good job in maneuvering that because, again, she met with bank CEOs and expressing her concerns about this is a real risk at June 1st. The Treasury has a balance at the Fed that's now almost depleted.

So there's an urgency on the part of the GOP and the Democrats to get at least a debt ceiling extended, and then work out a further budget over the next year. To the markets, it's all about the extension of the debt ceiling, there's no default. And then we'll have to look further how, ultimately, it all impacts.

The Treasury probably has to replenish its balance and issue some more debt. I think actually that it ultimately is about confidence in the economy. This debt ceiling episode seems to have not so much of an effect on confidence as it did in the past, given the short time that they are seeming to get together and resolve it.

- OK, I've got to ask you about recession risk. My sister called me recently-- she's very smart, lawyer, et cetera-- and asked me, are we going to be in a recession. So I've got to ask you. I'm going to ping that question to you. We're not in a recession right now. What's the recession risk for this year or next year?

BEN EMONS: So there's always a recession around the corner. That's just the nature of the economy, right? We're in a good economy right now, and things could turn quick. But there's a lot of indicators that people look at as they are signaling that there could be a recession. For example, the yield curve being inverted or some forward-looking indicators or new orders, or confidence, for that matter.

So it points that the Fed is putting enough pressure on the economy to try to get inflation down, but it will never be without, you know, a true soft landing, as they say. In fact, it probably will lead to some level of downturn. But the idea is that it will be a mild downturn because the Fed feels that it could raise rates to a certain level and then bring them down again next year. So this recession that we're looking after is a bit elusive, in a way.

The timing is really difficult, but I would say that, you know, is it in the cards? Yes, it is. But one major indicator that says it isn't is the unemployment rate and jobless claims.

- Yes.

BEN EMONS: Really, that says to me there is no recession [INAUDIBLE].

- Yeah, the job market has been strong, even in the face of, you know, just the changing economic climate. So, you know, it just continues to remain strong, to your point. One more question I want to ask you about is just the retail sector has been in a lot of focus this week, next week, et cetera. What's your assessment about the retail sector?

BEN EMONS: So there were good results there, but there was also a lot of caution, and inflation is biting consumers. They have to buy food, so that's a big part of their budget, currently. So they're moving away from other goods into food. And so apparel is one example. But then there's also a lot of digital sales that are happening. That's really the pandemic effect, I think, that has accelerated that.

So by and large, the consumer is holding up, but there's still a lot of substitution effects going on. And I think at some point, if inflation stays this high, it is sticky and doesn't really go down, then yes, the retail sector will start to really decline in activity. So far, it's holding up relatively well. And I think part of it is, too, that we're still in a reopening sort of phase-- maybe the very last phase of it-- because a lot of it is leisure activity that's driving part of the retail momentum currently.

So I say, again, that's another signal of the retail earnings show there is really no recession. There's no retail recession. But it is a sector that is very vulnerable. I mean, that is the last bastion, because the manufacturing sector has already shown significant slowdown.

- Yeah, you know, you make excellent points there. I mean, people are still-- like, they have to buy their necessities, so Walmart is going to be strong because they dominate in grocery, whereas you do see some challenges in, like, we saw challenges with Home Depot. Target did beat, but they pointed some challenges that they're having. So, you know, excellent points there. We will have to put a bookmark in our conversation. And I look forward to our next one.

BEN EMONS: Thank you. Thank you for having us.

- All right, our Thanks to Ben Emons, senior portfolio manager and head of fixed income at NewEdge Wealth.