U.S. stocks closed Thursday's session lower to end the first half of 2022, as investors continue to monitor whether the Federal Reserve will be able to get a grip on inflation and whether the economy can avoid a recession. Kevin Gordon, a senior investment research specialist at Charles Schwab, joins Cheddar News' Closing Bell to discuss.

Closing Bell

U.S. Stocks Close Lower to End First Half of 2022

Well, let's turn back to the major indexes to talk about this market close as we embark on the second half of the year tomorrow. Rounding out the first six months of this year, the worst first six months to a year for the S. And P since 1970. That's more than 50 years ago. After the Dow the worst start to a year at the six month mark since 1962. And for the NASDAQ, simply the worst start to a year on record. So joining me now is kevin, Gordon, Senior investment research manager, Charles Schwab, kevin, thanks so much for coming on. What is your reaction? And where do we go from here? Can the second half be any better? Unfortunately, I don't think so. Just because when you dissect the moves in the market and the bear market that we've had so far, our thinking around the next leg down the next leg lower and it sort of lines up maybe serendipitous in a serendipitous way just with the calendar, but it lines up with the weakness that we're probably going to see coming out of second quarter earnings season, which will start to get some of the results in a couple of weeks. Because if you look at the drawdown for the S. And P. So far this year, 100% of it has been driven by multiple compression, multiple contraction, you've seen almost a 40% clip of the S. And P. 500 forward. Pe and earning earnings estimates have have not really been touched by analysts in terms of being downgraded. So our thinking around the next leg lower is that you're probably going to start to see the fundamentals weaken because of weakening profit margins? You've seen corporate profits, uh you know, the growth in corporate profits slow down sharply and then the Fed continuing to be aggressive in order to rein in inflation. And the tough part around that is that it just automatically coincides with, you know, raining and profit margin growth as well. So our thinking around it is that you're going to move from this phase of peak inflationary peak rate fear, which was the multiple compression into a lot of that earnings weakness. And then analysts just trying to have to figure out how much lower earnings can go from here. There's no magic number that will hit. But once you get lower on the fundamental side, that just leads to more weakness with prices. So I want to run through a few more numbers here, kevin as we round out the month, the second quarter, and technically the first half of the year today. So for the month, the S. And p down 8.4%. The dow down 6.7% The NASDAQ down 8.7% for the quarter, the S. And p down 16%. The down down 11%. The NASDAQ just for the quarter down 22%. And of course the worst start to a year for the S and p Since 1970. We remain in a bear market kevin, what is your projection, how much further could we fall from here with your expectation that the lows for this year have not yet been reached? Well, I'm not, never want to put, you know, a certain level or a certain number on it. So I can't, I can't predict the future. My, my crystal ball is just as cloudy as anybody else's. But what I will say is that actually, you know, your listing off some of those pretty dismal percentage numbers for the headline indexes. But if you go to the member level and start looking at some of the carnage underneath the surface, just for the S and P. Itself, you know, the average member on a, on a one year, look back is down 31%. I mean, obviously there's a pretty big range there, but you know, there's been some significant weakness at the individual member level and even if you go down to the sector level, you know, a lot of the harder hit names that are a little bit more growth dominated like tech communication services, consumer discretionary, to some extent, those have gotten hit much worse than the traditional havens, like utilities, real estate, consumer staples and to some extent health care. So I think that there's an opportunity for, you know, investors, if they want to be a little bit more specific into the extent, they're kind of more in the stock picking crowd, definitely with a focus on quality, you can start to look for opportunities there, but in a in a broad aggregate index, since I don't think that we've seen, you know, close to the lows, especially for for multiples and for earnings interesting. Okay, and that's pretty consistent with what we've been hearing from other market watchers guests who have joined us, kevin at this very hour on this very show, which is there are some bargains to be had in stocks if you have a long term view, but still outright buying the major indexes, it could be a bit risky. We could potentially fall further from here. I'm just curious. We did get some data on inflation this morning actually, the Fed's preferred gauge of inflation, personal consumption expenditures or pc do you think that this economy will see a recession? Well, recession is inevitable because it's always a part of, you know, it's the end of the business cycle. It's really just a matter of timing. So we'll we'll get one at some point. It's just a question of when and you know, the way that we've been framing this really is if we're heading into a recession, you know, sometime in the next few months or maybe even later in the year. There's a good chance that we're already in one because the way that the National Bureau of Economic Research goes back in dates recessions as they just go back to the peak in activity. So if across the four indicators that they look at, which is payrolls, income growth, business sales, and industrial production. If all of those sort of collectively peaked a little bit earlier this year or for around that time of Peking, they're just going to declare that as the beginning of the recession and then we're already in one. So I think it's really just a question of timing. Never really a question of inevitability. But certainly as you were mentioning with the inflation data, some of it's actually starting to soften a little bit and now we're getting that pretty clear split between headline which is driven by food and energy and then core, which when you strip those out, it's actually starting to look a little bit better, especially on a month over month basis. I think we're, as I mentioned earlier, moving from the peak inflationary if you're now moving into more of the getting into the actual growth scare. So here's a question kevin indices outright steal potentially risky, but some potential deals to be had, especially if you are a long term investor looking at your 401k. Perhaps adding to that or an I. R. A. Are their individual stocks that you're keen on at these levels and other ones that you might outright stay away from. Well, I don't keep an eye on individual stocks, but I will say from a characteristic or factor based approach, which is what we've been advocating for and you can apply this to all sectors. That's why I think that this is kind of such a beautiful exercise, is that you can look for high. What we've been advocating is high quality values. So companies that exhibit, you know, things like strong earnings yields or dividend yields are strong, free cash flow. Those factors have been outperforming this year, even within some of these really sharp drawdown periods and have been underperforming in these bear market counter trend rallies that we've been having. But as we now know, with the benefit of hindsight, those have been extremely short lived. So if you've been sort of hiding out in those high quality areas, you can apply that to any sector. It could be consumer staples. It could be consumer discretionary things that are often thought of as at odds with each other. But if you have that high quality value tilt, that's that's paid off pretty well for investors this year. All right, Kevin Gordon, senior investment research manager at Charles Schwab kevin, Thank you