UBS Head of Asset Allocation Americas Jason Draho joins Yahoo Finance Live to discuss trading amid bearish sentiment and volatility, the labor market, recessionary risks, and Fed policy.
BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. With a tight labor market, high inflation, and a Fed tightening its belt, investors are seeking refuge in an increasingly bearish market. Joining us now to help navigate these choppy waters is UBS head of Asset Allocation Americas, Jason Draho. Jason, great to have you here with us this morning. First and foremost, people just want to know where they should be looking for any opportunity in the market that is as bearish as it is right now.
JASON DRAHO: So I think if you-- it's almost more of a relative trade at this point in time. Because as the market stays under stress-- and it's likely to be that way, at least in the very near term-- you want to look for opportunities that would be sort of better positioned. So the things that we've liked this year and that have performed well in absolute terms, not just in relative terms, include things like commodities, energy stocks. And the reason why I think they're very attractive, at least as almost portfolio hedges, is that from a fundamental supply-demand perspective, there's strong support for that.
In a scenario where we do get a soft landing, if there's geopolitical issues, you could see oil prices rising higher. That would benefit these stocks as well. And it's that inflationary type of environment, which is a possibility. They tend to outperform this on a relative basis. So we're trying to give clients the guidance to sort of tilt their portfolios in directions where under multiple scenarios, these things can perform well. So things like commodities and energy stocks are one example.
On the fixed income side, at the move we've seen in rates, we kind of think that was largely kind of over for the time being. So they're starting to get a little bit more opportunity there, but the kind of the general message is, they're up in quality, both in credit and fixed income and in equities, you know, given the uncertainty of the outlook for the economy overall.
JULIE HYMAN: And as we've been talking to people lately, Jason, the sentiment seems to be those who will lose less during this period will fare the best. I keep trying to figure out where the bottom is going to be in these markets. What do we have to wait for? What's the signal that the market is looking for and that you are looking for to see some kind of turn here?
JASON DRAHO: So I think, one, if you start with overall sentiment, it's pretty bearish. I think that goes without saying. And we're in an environment right now where inflation is high. The labor market is very tight. The Fed wants to bring inflation down. They want to sort of cool the overheating in the labor market, which means their bias is to tighten financial conditions and try and slow growth. In that environment, it's not great for any sort of financial assets.
So until we get some sort of really break on inflation that people become much more comfortable that it's moderating and moderating instead sort of a sustainable level that the Fed could be more comfortable, and they don't have to hike more aggressively that's in the market, and maybe even less than what the market's pricing, I think that's the key catalyst. Unfortunately, that might take a few more months before the data starts to clearly show inflation is definitely below its peak, and the Fed could achieve its target two years out.
So I think for the time being, it's definitely a choppy market. In terms of a bottom, though, at some level, if you start to believe that the valuations of the risk-reward become a little more attractive, I don't think we're there yet. And we look to try and find, like, signs of capitulation. The fact that even fund flows have held up reasonably well suggests that we haven't achieved that level of capitulation. There could be more downside, just from a purely technical perspective.
BRIAN SOZZI: Jason, let's say someone watching this owns five big cap tech stocks, and all five of these stocks are now down 50%. These are household names. They earn money. They're not going anywhere anytime soon. What should they do? Do they sell these stocks after these big declines? Or do they, let's say, buy options against them and hope for some type of bounce in the market?
JASON DRAHO: So one of the strategies that a number of people are doing and our clients as well has been, like, sort of writing call options. So if you don't think there's a lot of upside near term, you can generate a little bit of income, but you write call options. You give away that upside that you don't think is going to materialize, but you don't actually sell the stock.
The other thing that if you take a step back and say, well, what's your overall sort of portfolio objective, what are your long-term goals, you're selling these stocks right now, separate purpose from portfolio rebalancing. And from that perspective, I think most people want to own these investments from a long-term horizon, given that that downside, I think where you want to start to consider is, is there some tax loss harvesting can you do? I know for a number of people, a number of clients who bought into growth stocks a few years ago after significant price appreciation, even if we'd say, you're tilted heavily towards them, you want to rebalance, they didn't want to take a tax hit.
So now these things have come down significantly. I think the tax consequences have become much less of a factor. So I think that aspect right now, even though we're not in sort of tax season where people tend to do this later in the year, this is a good idea and time to sort of assess your portfolio. Do you want to sort of sell some of these things right now? Because the tax consequences are much less. So I think that's where those kind of planning considerations should be driving it more so than investment considerations at this point.
JULIE HYMAN: Jason, you've been in the industry for a little while now, including through the great financial crisis. How does this compare to other cycles that we have seen in terms of sentiment and in terms of market action?
JASON DRAHO: On sentiment, it's amazing how sort of bearish sentiment is, given in some way the economic momentum in the US economy is still relatively solid, the unemployment rate is very low. We're seeing sentiment readings that we've had maybe a half dozen times in the past 15 years, including, like, sort of the trough around the financial crisis.
I think the overall picture to me, it feels a little more certain or comfortable than when we were back in certainly in '08. Some of it is just the overall fundamental state of the economy. It's actually in pretty good shape, right? I mean, you were talking earlier about consumers had taken on more credit card debt in March. But overall, the financial balance sheet of households is still really, really strong, even in corporates. So for corporate America, their cash balances are quite high.
We've had this unusual situation where we've had a recession two years ago, a two-year expansion. You've never sort of come out of a recession like this where the household balance sheet is as strong. It's already kind of in good shape. And rarely are you sort of late cycle where those balance sheets are in such good shape. So one of the things that gives me comfort, even if we would get a recession and being relatively mild, is those kind of conditions, that there's just strong fundamentals, which is very different than the situation back in 2007.
So the closer analogy to me would be like the dot com bubble. We're seeing sort of tech stocks being hit hard. We had a recession back in the early 2000s, but it was relatively mild. So if we get a recession this time, I think it's more along those lines, versus something like in 2008, 2009.
BRIAN SOZZI: Jason Draho, head of Asset Allocation Americas at UBS, good to see you. Talk to you soon.
