Meme, Crypto Revival Will Hit a Wall as Recession Risk Looms: Q&A

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(Bloomberg) — The S&P 500 has gotten off to a good start this year. Meme stocks are heartbreaking. The crypto is exploding higher. Does this mean it’s time to take more risks? A Wall Street veteran, who sticks to a staunchly defensive stance, says not so fast.

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Keith Lerner, co-chief investment officer at Truist Wealth, joins the What Goes Up podcast this week to talk about what he sees on the horizon.

Here are some highlights from the conversation, which have been condensed and lightly edited for clarity. Click here to listen to the full podcast on Terminal, or subscribe below on Apple Podcasts, Spotify, or wherever you listen.

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Q: What’s behind this resurgence in meme stocks, crypto stocks, etc.? ?

A: If you think about the end of last year, we actually saw a lot of tax loss selling, we saw the S&P have this correction in December, around 5% or 6%. So as you turn the timeline, a lot of these areas that were beaten, that were sold out at the end of last year are experiencing this rollback. And January is often when you see that throwback. But if you think about meme stocks, these are generally doing well in a period of increasing liquidity and were still taking away cash. So we just don’t think it’s sustainable. We think it’s more of a rebound, but we would dampen that rebound.

Q: You say investors need to stay on the defensive. Explain to us what that means in this environment.

A: We moved to an underweight position in equities at the end of October, and we moved to an overweight position in fixed income. And as we were thinking of the overall asset allocation, we think the macro risks are significant, we think there is still a somewhat elevated risk of recession. And we look at stocks and credit, and we just don’t think you’re being compensated. At best, you could say that with the correction we had last year, equities may be fairly valued. Credit markets are actually very expensive for us relative to risk. Therefore, being defensive from a stock, bond and cash perspective is tantamount to being overweight fixed income securities relative to equities. And then into the fixed income component, keeping it simple by keeping it with high quality fixed income and not really taking on a lot of credit risk at this point. And then going down a bit, when you think about global markets, you also have to go below the surface of the markets. Technology is still not leadership. So we saw more opportunities below the surface of the markets, like the equally weighted S&P. And then finally, more from a sector perspective, the barbell and defensive sectors like healthcare with things like energy and industries that have unique circumstances in that environment.

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Q: You also project a recession in the United States. Tell us about that.

A: We all know that if we have a recession, it will be the most famous in history. But we’re following the weight of evidence and we’re looking at some timely indicators, and those indicators, whether it’s the deep inversion of the yield curve, the leading economic indicators, which are down more than 4% d Year-on-year housing market, which peaked last year, these historically suggest high recession risk. But if we even look at the yield curve, on average once you invert, which happened last year, that would push us further into mid-fall of this year. So in terms of the recession, I would say right now the data suggests we’re not in a recession, but we still think there’s a risk of one happening later this year. And the main reason behind that is, as we all know, we’ve had the most aggressive increase in monetary policy, not just domestically but globally, in the last 40 years, and we just think that’s going to weigh on growth as we go further into this year.

Q: A theme we keep hearing is the rest of the world outperforming the United States. Tell us what makes you want to stay away from the international.

A: A bit of background: We have been big bulls on the US for several years, fortunately we benefited from the big outperformance. Because we thought the United States was this big, first-rate country. And if you just look at income trends in the United States, they’ve been so much stronger than the rest of the world. However, even for our shorter-term position, international markets have performed very well. And if you think why that is, there are two main factors. First, the climate in Europe was much warmer than expected. So the energy crisis that worries many people simply did not happen. And then the second positive, which was unexpected, was basically China ripping the bandage off from Covid. And Europe is a big trading partner.

So with all that said, that’s an area we’re focusing on right now. In the short term, if you look at the last two or three months, it’s had one of the biggest periods of outperformance in the last 20 or 30 years. So our position is that things get more interesting there, you had a big run because of these unexpected events that broke in a good way. We would more potentially look to level this on a consolidation or pullback after a rally as big as the one we’ve seen.

–With help from Dashiell Bennett and Stacey Wong.

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