Twin Focus Financial Analyst Weighs in on State of Economy in Wake of OPEC Production Cuts

Paul Karger, co-founder and managing partner of TwinFocus, joined Cheddar News to discuss the market impact from OPEC's production cuts and how investors could navigate volatility, given the current economic environment.

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Twin Focus Analyst Weighs in on Economy in Wake of OPEC Production Cuts

Joining me now is Paul Carer, co founder and managing partner at Twin Focus. Paul. Thanks so much for joining me today, mixed market on the back of this OPEC Plus oil production cut surprising the market and sending oil and oil stocks higher. What does this mean for the overall market? Thank you for having me today. It's a pleasure to be here. Uh I, you know, I think really the overall market continues to grapple with inflation. Uh Oil is another indicator of that. Uh and you know, inflation higher rates uh and in the mix there a banking crisis, banking crisis, I think that did cause I know cause shock waves. In fact, down the stock exchange for a few weeks toward the end of that quarter. What's the macro view from here, Paul, what do investors need to know? Investors need to know that the banking crisis is not totally over. Well, hopefully much of the fears have subsided. The banks have some real challenges to deal with. They do have. There's no doubt they have unrealized losses in bond portfolios. There's no doubt that as rates remain high and potentially go higher, the Federal Reserve is the biggest competitor with the banks. You know, depositors are withdrawing their funds and red depositing in brokerage accounts to buy treasuries or high interest bearing money market funds. And in turn invest in treasuries and you know, the market needs to deal with higher rates. It's not touched all sectors yet. It's certainly touched sectors like commercial real estate, but, you know, it's going to take some time for higher rates to work its way through the economy. There's still a lot of uncertainty around, you know, what happens in terms of the housing market. Again, higher rates are, it's a meaningfully different world with higher rates, right? So I think by some standards expected to perhaps rise again in May, we're going to have to see what the data shows between now and the fed's next meeting in May. No one can say obviously, with any certainty as the FED has maintained that it is data dependent. But Paul, what does this mean for the economy? Right. I mean mcdonald's, we're learning that it's going to be laying off workers this week. We've already seen a whole host of layoffs yet, the jobs market has been holding up. How does this narrative evolve throughout the year? Given the current environment? Sure, you know, our belief is that core inflation will remain stubbornly high. The FED will probably not consider cutting rates until later in the year. As you mentioned, it will be highly data dependent consumer spending remains strong household balance sheets remain strong as well in a relatively healthy condition that said, you know, we could see consumer spending slow in coming quarters as higher rates take their toll on the economy. You know, obviously the jury is still out to see if we have a broad based recession. There's certainly been recession in certain certain sectors within the economy. You know, here at twin focus, we do believe that we'll see inflation come down later in the year in part due with, with wage inflation, you know, as you mentioned, the labor market seems to be easing a bit, you know, core inflation should begin to slow as you see the labor market ease a bit. But also, you know, back to the banking crisis, you know, the banks, it's recessionary to have banks that are just tightening up on lending standards and are just simply going to be lending less. So what kind of sectors do you like in this environment? And why sure we're focused on sectors that typically provide a more meaningful component of the return from cash flow sectors like consumer staples, sectors like utilities. We also really like health care given the secular trend and innovation and demographics, we like energy, we are projecting higher energy prices. Um Today's move by OPEC is is in part uh you know, a result of that. Um But you know, selectively, we like tech and biotechnology, although we believe those sectors have seen a very strong run up this year and may have cannibalized uh some some of the future returns for the balance of the year. Interesting Paul. So of course, as we wait to see the path forward for rates, we get a job report later this week as well, do we end the year higher for stocks? Because certainly the action that we saw at the start of the year would pretend well based on history for the markets in 2023 I actually believe that we could see the stock market higher at the end of this year. Remember the market is a discounting mechanism. So while we may have not seen the bottom in the economy, we may have in fact seen the bottom in the stock market. Yeah, that's I think the biggest lesson, Main Street and Wall Street, the economy and the stock market do not always add up. The stock market is usually about 6-9 months ahead. According to my market guest, we're going to leave it there. Paul, thank you so much for joining Paul Car, a co founder and managing partner at Twin Focus. Good insight.