Many investors are now leaning toward the possibility of the Fed achieving a soft landing, but Invesco Chief Global Market Strategist Kristina Hooper has her doubts. Hooper tells Yahoo Finance Live why she believes “we’re in store for a bumpy landing, not a hard landing or a soft landing.” Hooper says, “you can’t have such aggressive rate hikes without some economic damage. It doesn’t mean there has to be a lot, but what it spells is a bumpy landing as opposed to a soft landing, which suggests that there’s no real damage that occurs to the economy.”

Video Transcript

RACHELLE AKUFFO: The markets have been weathering several storms as of late, from central bank policies, rating company Fitch’s downgrade, and, of course, earnings. Overall, a majority of investors, though, seem to be trailing away from seeing a harsh recession, opting for seeing a soft landing after months of economic headwinds.

However, according to our next guest, we might not be that lucky. We’re in for a bumpy ride. Let’s bring in Invesco Chief Global Market Strategist Kristina Hopper to discuss more. So Kristina, you’re not buying a lot of this soft landing narrative that we suddenly started to see coming out from some of these analysts. What’s your take?

KRISTINA HOOPER: Well, Rachelle, I should preface my comments by saying I’ve believed all year that we are in store for a bumpy landing, not a hard landing or a soft landing. What’s changed is the views of others around me. I had been an optimist at the beginning of this year. Now, I’m more on the pessimistic side, because so many have signed on for a soft landing scenario.

My argument, though, is simple. It’s that you can’t have such aggressive rate hikes without some economic damage. It doesn’t mean that it has to be a lot, but what it spells is a bumpy landing as opposed to a soft landing, which suggests that there’s no real damage that occurs to the economy. We may not see that damage for some time because of the lagged effects of monetary policy, but I do think there are going to be areas of the economy that are hurt by these aggressive rate hikes.

RACHELLE AKUFFO: And what are you going to think are going to be the first shoes that are going to start to drop that would have people realize, perhaps, this isn’t going to be the soft landing they were expecting?

KRISTINA HOOPER: Well, it’s hard to predict. But, of course, we’ve already seen some accidents. We saw the regional bank mini crisis. And we’re certainly seeing some areas of real estate come under pressure. But the reality is that we just don’t know. I think of it as not so much black swans, but gray rhinos.

Issues that are out in the distance that could be coming towards us or could run off in another direction. There could be some black swans, although I should say, again, my view is not a hard landing for the economy. I’m actually, I think, fairly optimistic but realistically so, which is that because we have such a strong consumer, because we have such a tight labor market, this economy has a really good cushion as it handles and tries to weather the headwinds coming from rate hikes.

RACHELLE AKUFFO: And of course, we’re still getting a lot of Fed speak out this week as well. How is that informing how you’re viewing the road ahead? I mean, especially when we think of this idea of the potential for more disinflation?

KRISTINA HOOPER: So my view is that the next few weeks are critical. And that’s what Jay Powell said at the FOMC press conference in late July. So this data is going to be very important, because the Fed is very data-dependent. I suspect the Fed will not have to hike rates any further, but I do worry that it will feel the pressure, the need to do it, because of data points like average hourly earnings. What we got from the July employment situation report, which showed that wage growth, wages are still very sticky.

And that’s problematic for the Fed, as it tries to bring down inflation to its target. Now, make no mistake. I believe strongly that we are in a disinflationary trend and we are moving in the right direction. We will get there. But it might not be exactly as the Fed would like to see it. Not every data point is going to fit that narrative. And so I fear that the Fed may hike rates another time. I don’t think they need to. But the general theme should be that we are at or near the end of our rate hike cycle, which should be good for the stock market.

RACHELLE AKUFFO: So then in terms of how much you’re rolling in or out of defensive plays at the moment, how are you navigating that? And what are some of the questions that clients have?

KRISTINA HOOPER: Well, there are a lot of clients who got out, got spooked last fall and want to know when is a good time to get in. Certainly, they have been experiencing FOMO for months now. So that’s one set of clients. Another set, of course, is very concerned that we could be in for a very significant downturn in the stock market.

My view is that we’re likely to see some consolidation, because we had a strong rally and because markets have to price in a more realistic view on when rate cuts will begin. And because, I think, we’re just going to experience some hiccups because of uncertainty around Fed policy. So I think a defensive positioning in the near term could benefit investors.

However, I anticipate there will be a shift soon as markets start to anticipate an economic recovery next year. And so a more risk on positioning, a favoring of smaller caps and cyclicals, as well as a very diversified exposure to fixed income, including investment grade credit, munis, high yield, makes a lot of sense in this environment. So really, we have to be rather tactical or just be well diversified and enjoy the ride.

RACHELLE AKUFFO: And for a lot of people who were, you know, pouring into treasuries here trying to sort of hedge their bets here. How should they be thinking about approaching the Treasury market at the moment?

KRISTINA HOOPER: Well, I think there has to be an understanding that there is real volatility in the Treasury market. And there are a number of forces converging that should keep yields elevated on the long end. But what I think is important is to take a step back and just see how much more attractive fixed income as an asset class looks today versus the last 10 plus years.

We actually have an abundance of yield in a variety of different asset classes. So thinking less about the near term and thinking more about the opportunities there and having a diversified exposure to fixed income, I think, makes a lot of sense for the long run.

RACHELLE AKUFFO: Especially expecting that a potential for a bumpy landing, as you’ve been saying. Great stuff. We do appreciate you taking the time to join us this morning. A big thank you to Invesco Chief Global Market Strategist Kristina Hooper. Good to see you.

KRISTINA HOOPER: Thank you Rachelle.

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