KeyAdvisors Group's Eddie Ghabour and Morgan Stanley Managing Director Kathy Entwistle join Yahoo Finance Live to discuss the market close, consumer sentiment, inflation, recessionary risks, and more.

Video Transcript

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SEANA SMITH: The momentum in the markets continuing today. All three of the major averages closing in the green, rebounding from the massive sell-off that we saw over the last couple of weeks. Dow, S&P, and NASDAQ all higher. You can see the Dow up just about 1 and 1/2%, the S&P up 2%, the NASDAQ up just over 2 and 1/2%. Ines was just mentioning the strength that we're seeing in some of those retail plays, Dollar Tree, Dollar General, really setting the tone for the consumer discretionary sector. All 11 of the S&P sectors closing in the green. Technology, financials, and communication services were some of the other leaders.

For more on this, let's bring in Eddie Ghabour. He's KeyAdvisors Group and author of "Common Sense Bull," Kathy Entwistle, Morgan Stanley's managing director, both of them here to help us break down the recent action that we've seen. Kathy, let me start with you. Another day of gains-- is there enough here to keep this rally going?

KATHY ENTWISTLE: Thanks for having me, Seana. It's great to see you. I think that it's great to see a day like today. I think we're all enjoying an up day for a change. I think it's a great opportunity to make some changes in the portfolio, maybe take out some of the things that have risen a little bit that you don't think have legs going forward, and reinvest into areas that we like a little bit better. I'm not sure it's here to stay. But I do want to take advantage of the up days to clean up portfolios.

DAVE BRIGGS: Eddie, is it here to stay?

EDDIE GHABOUR: I don't-- this is nothing more than a bear bounce, in our opinion. When you look at these bounces we've had, they've been on very light volume. There's not a lot of conviction. I think the S&P is going to be down at least 30% before we can see bottom. And I expect the VIX to be in the 40s. And I say that because the data that we're getting now that's been causing this sell-off, remember, is first quarter data.

The data come in the second quarter is going to be worse than first quarter. And we're not going to get that news till July. And I expect to see a lot of companies guide down before their earnings calls that we'll see in the month of July. So I think we're going to have a very treacherous market here in the next few months. And I agree with the fact that on up days, investors should reassess risk and sell maybe some of the higher beta plays that we think still have a lot of legs down.

RACHELLE AKUFFO: And Kathy, in terms of what the bond market is telling you, are we headed for a recession? Or does the economy have the legs to really withstand some of these pressures?

KATHY ENTWISTLE: At Morgan Stanley, we don't think that we're seeing a recession ahead. I know that's contradictive to a lot of what others are saying. But we just think that this is a sort of recovery from the very rapid V-shape recovery that we had post-COVID, and we're just normalizing at this point and do not see that recession ahead. There's too many fundamental strengths that should hold up the economy, going forward.

SEANA SMITH: So, Eddie, what are you doing to your portfolio at a time like this, when there's so much uncertainty, a lot of that relying on what the Fed is going to do over the next couple of months. So what moves are you making?

EDDIE GHABOUR: So, as you all know, we started getting bearish back in November. And basically, what we've done is, we've raised a lot of cash in our tactical strategies. The only equity holding sector that we own right now in our tactical strategy is utilities. We finally got rid of the rest of the staples holdings we've had. And we're starting to incrementally add the treasuries. We think the 10-year bond is going to test the 2% level over the next 8 to 12 months because of the deterioration in the economy. And I think the bond market has it right. So we're as defensive as I've ever been in our career. I think the most upside in the near term is going to be in treasuries and utilities.

DAVE BRIGGS: Seana, first quarter GDP, easier said than done, declined 1.5%. That was worse than thought. What does that tell you is coming? Seana.

KATHY ENTWISTLE: I'm sorry, were you asking--

DAVE BRIGGS: Yes.

SEANA SMITH: Kathy.

DAVE BRIGGS: Excuse me, Kathy.

KATHY ENTWISTLE: Oh, Kathy.

DAVE BRIGGS: Apologies.

KATHY ENTWISTLE: Oh, OK, I apologize.

DAVE BRIGGS: My fault.

KATHY ENTWISTLE: So the question was about the-- I'm sorry. Can you just repeat that?

DAVE BRIGGS: The GDP declining 1.5%, which is, of course, greater than once thought.

KATHY ENTWISTLE: Yeah, I don't think that that's going to end any time soon. I think that where there's a little bit of risk still ahead or some volatility and risk, and that includes in GDP, as was being spoken earlier. There is more numbers that will be coming out. And we're not expecting everything to be positive. And there's opportunities for the market to, I guess, correct a little bit more. We think there could be a 5% to 10% additional correction on the S&P, which I think lines up with the other guest, Eddie.

RACHELLE AKUFFO: Eddie, I wanted to talk to you about the consumer. Obviously, it's a consumer-led economy that we're in. And we're obviously seeing people starting to make some difficult choices in terms of discretionary spending. How much more of a bite do you think how the consumer is feeling is going to take out of future earnings?

EDDIE GHABOUR: I think it's going to be very tough on earnings. The consumer's in the toughest spot they've been in years. They haven't seen inflation like this in an extremely long time. I mean, when you look at food costs and fuel costs alone, there's nothing the Fed can do with raising rates that's going to affect that here in the near term. It's interesting to see as we start to track credit card data. We're starting to see credit card debt really start to increase for the consumer. And unfortunately, I think that's going to continue.

And they're in about as tough of a spot that they've been in. And I just don't know how these families that were living paycheck to paycheck before all this happened, how they're going to survive. So that's why we think we're more than likely going to see a recession sometime in the first quarter of next year.

SEANA SMITH: Kathy, in terms of what investors should do at this point, or maybe what they shouldn't do, because I think a lot of people are looking at the tech sector, seeing the recent sell-off that we saw there. A lot of those large cap names, though, have been the favorite amongst investors most recently. Are you finding any reason-- do any of those names look attractive to you now?

KATHY ENTWISTLE: No, actually, a lot of the growth, overpriced names, we are definitely not interested in. We are trying to stick a little bit more closer to utilities, some of the real estate, some of the financials, some of the energy, areas that you would normally think would do well in an inflationary economy. And also, basically, what Eddie was saying about the consumer, they have to stop putting tomorrow's spend on today's credit card. It's time to regroup and really think about what you need to spend and what you don't need to spend and cut costs. So that will affect the economy as well.

DAVE BRIGGS: Eddie, are you seeing sectors that are on sale? And can I ask you about the success today of Dollar Tree and Dollar General both popping and what that tells you about the consumer?

EDDIE GHABOUR: Look, I think in regards to that, look, some of these stocks were really oversold, obviously. So you're going to get bounces. In bear markets, you're going to get bounces and some of the most violent bounces. It doesn't surprise me to see Dollar Store, Dollar General, type of companies where people go for value. I think that trend is going to continue as they continue to get tighter and tighter in regards to the amount of discretionary income that they have. But again, I don't see this inflation coming down fast enough to make this consumer survive. And I think it's going to be a very tough summer, not only for the economic data, but more importantly, for American families.

RACHELLE AKUFFO: And Kathy, in terms of the mindset people should have right now when they're investing, is it about patience, or is it really about getting your shopping list together and finding a way into the market?

KATHY ENTWISTLE: I think it's about patience, actually, and that's what we've had over the last six plus months. We haven't been adding into the equity markets, for the most part, for our clients. And I think that's because we know that there's a little bit more of that can happen in the markets, and we want to be cautious. So we're waiting for the PEs to look better. We're waiting for the opportunities to show up. And we will advise clients to start dollar cost averaging into the markets, maybe in August, when we have a little bit more insight into what's going on with Fed decisions with the economy and some of the numbers that show up after the second quarter.

RACHELLE AKUFFO: A big thank you to our market panel there. Kathy Entwistle there, Morgan Stanley's managing director, and Eddie Ghabour, KeyAdvisors Group and author of "Common Sense Bull." Thank you both.