Megan Horneman, Verdence Capital Advisors CIO, joins Seana Smith and Brad Smith on Morning Brief to discuss why the strategist thinks investors are putting too much faith in a soft landing for the US economy and what that means for the Federal Reserve and the market (^DJI,^GSPC, ^IXIC) going forward. “People are just getting a little ahead of themselves as far as what strength there is in the economy. I understand the labor market still remains relatively strong," but concerns around consumer spending persist, Horneman tells the Morning Brief team. "The consumers, although they’re spending, they’re spending on credit, and this is a concern for us. So, eventually, the consumers are going to run out of steam. On credit cards, rates are still very high, and when you’re looking at over $1 trillion in credit card debt, this is a concern for us from the consumer standpoint. We know that inflation is coming down towards the Fed’s target, but we can’t forget that this has been accumulating for several years now. So this is really a strain on consumers. And if you look at some surveys most Americans actually think we’re already in a recession. That’s how poorly they feel. So I just don’t see the strength in the consumer that’s going to be able to last much longer." The strategist says, "Equity markets right now are just too optimistic on the entire scenario that the Fed will articulate and be able to deliver this perfect soft landing. They’ll continue to cut rates. I think that the equity markets are just getting too complacent to that perfect scenario. If you look at every other economic indicator, aside from the actual GDP number, all of these things are looking like they’re in a recession territory." Horneman believes markets could see a 7% to 10% drop in the equity market, explaining, "There’s not enough confidence that I have in the earnings expectations for next year. And we haven’t seen earnings really be revised much lower, even with the fact that the economy is slowing." “If you think it’s going to be hard for this soft landing like we do, then you want to have extra cash to be able to put to work. Because eventually, even if there is a pullback in the economy, we will come out of this. You want to have the dry powder to be able to put to work during that downturn. That’s when you’re going to want to invest in things like small caps [and] mid caps. You’re going to want to look internationally as well. These are things that there will be opportunities when the equity market starts to kind of get realistic on what the economic outlook is." Horneman doesn’t think the Fed should cut another 50 basis points at the November meeting. "The problem the Fed has is they’re walking a very, very fine line. They seem to have kind of forgotten completely about inflation and that’s a concern that we have. They’re focused very much on the labor market right now, but you cannot forget about inflation. Inflation is still out there. It is coming down towards their 2% target. But there’s a lot of areas of inflation."
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