RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina joins Yahoo Finance Live to discuss market reactions as new sanctions are placed on Russia, investor concerns ahead of Fed minutes, the possibility of a cyber attack, and the outlook for an economic recession.

Video Transcript

BRIAN SOZZI: Optimists on stocks over the next 6 to 12 months nearly vanished in a new survey done by RBC Capital Markets. Investors are concerned about expensive valuations on stocks and have little confidence in the Federal Reserve engineering a soft economic landing. Let's drill into the survey with RBC Capital Markets head of US equity strategy, Lori Calvasina. Lori, always good to get some time with you. Where did all the optimists go? And what gets them back into the markets?

LORI CALVASINA: It's a great question. Look, I mean, we saw the bears spike, and we actually saw a lot of people shift into the neutral camp in the survey, but this was really the lowest level of bulls that we've ever seen in the survey since we've been-- since we started it back in 2018. So it was striking. And I think what gets them back, I do think that some of the concerns about the Fed need to be resolved. I do think that some of the concerns about the economy need to be resolved.

We had one question where we sort of listed all the economic hot topics of the day, things like gas prices, mortgage rates, Russia-Ukraine, and the Fed. And basically, our survey respondents are worried about all of them. The biggest worry on that list was gas prices. And, you know, I was listening to you guys earlier, and Julie pointed out that gas prices have moderated just a little bit, as oil prices have moderated just a little bit. So I think that's something very clearly we want to keep an eye on because that is sort of one of the biggest worries that we're seeing at the moment. If you get some resolution there, that could help sort of calm investors' fears a little bit.

JULIE HYMAN: Lori, should we view this finding of the survey as a contrarian indicator? I mean, sometimes when you get these kinds of surveys, that's how they're viewed. At the same time, if you look at the levels in the recent action in the major averages, it doesn't necessarily-- or maybe it does feel like that we've priced in a lot of those worries.

LORI CALVASINA: You know, it's a great question, Julie. And the answer is, I haven't been doing this particular survey long enough to really be able to do a proper back test. I do think it's interesting that the level of bullishness is lower than what we saw around the end of March 2020 lows in the pandemic. So you can argue both ways, right? You could say, well, there were more bulls then that were stepping in to support the market, and we don't have that now.

But I will tell you, I try to use this as a piece of the puzzle. And some of the other puzzle pieces that we're looking at on the sentiment question are things like the AAII Net Bull Bear Survey. We also look at CFTC data on US equity futures positioning. And in both of those, we do know that we can use those as pretty good contrarian signals because we have much more history to look at.

And on the AAII Net Bull Bear ratio, you know, earlier this year, it did actually go down below pandemic lows. And over time, it's been very consistently a strong buy signal for the market. When you're below minus 10% on that ratio, you're typically off about 15% over the next 12 months in markets about 86% of the time. So I think it's telling me, sort of confirming what I'm seeing in some of those other data points. And I think where the survey really helped me was to understand what was priced in.

If you look at Russia-Ukraine specifically, people are expecting a fairly lengthy duration of the sanctions. They're actually expecting cyber attacks in the US, which was something that surprised me when I saw the survey. They are expecting a Russian debt default. So we don't think that those things are necessarily enormously damaging to the market, even if you get some shorter term downside in the market if those things happen. But what investors are not expecting on Russia-Ukraine, chemical and biological weapons, nuclear weapons. Those sorts of things we do think have the power to really pull the market down lower if they end up happening.

BRIAN SOZZI: Lori, some folks have started to tell us that they see the potential for a recession later in 2023, perhaps early 2024. Should investors that are currently involved in the market ignore calls like that? Or do they need to start building a recession-proof portfolio?

LORI CALVASINA: You know, it's a great question, Brian. I will tell you that RBCs economists are not making that call right now. They think the recession risks have grown, and they're monitoring them very vigilantly, but they actually have changed their forecast recently and pulled us down to 2 and 1/2% for this year. And they are not making the recession call for next year yet.

I actually pushed my economist the other day, and I said, what if we end up having a recession? What does it look like? Because you're seeing very different market reactions in terms of both multiples and stock prices in different contraction periods economically. And he said, look, I think if we get this, it's going to be something that's more of the milder variety. I think that's really interesting because the discussion hasn't quite gone there yet on the Street. People are kind of focused on yes or no. But I do think that that's probably the next place the conversation is going to go.

JULIE HYMAN: And sort of on a related note, one of the other things that stood out to me from another of your notes is, you're not just surveying investors, you're talking to your analysts and finding out what they're concerned about. And you found they're concerned about demand related issues, which is sort of related to recession questions, right? Which is-- I don't know if that-- it surprises me a little bit, right, because we are still seeing fairly robust consumer spending. We're seeing companies put through price increases that seem to be holding up. So did that surprise you? And then what do you kind of do with that information?

LORI CALVASINA: Well, the way that that showed up, I would say most of our analysts, we surveyed them specifically on demand. And by and large, they still see very, very robust demand in their respective industries going on right now. We asked the question, basically, what are your hopes and fears? What keeps you up at night? And we separated out the question this time to really isolate what was a hope and what was a fear. And we found on both sides of the discussion, they're talking about demand.

So they're hoping those strong demand conditions do continue. And for the most part, I think my analysts are seeing that they are holding up so far. We'll see what happens in the next reporting season, but so far, you know, it does look like the data is still pointing to pretty strong demand. And their conversations are still pointing to pretty strong demand. But they are fearful that that will go away. And that's what we really saw sort of in the risk or fear discussion in terms of what's keeping them up at night.

And, you know, when I sort of step back and I say, OK, you know, I think about earnings calls and what analysts tend to ask about on those earnings calls, you know, I'm coming into this one thinking that the Street is going to be grilling companies on how well demand is holding up or if we're starting to see some demand destruction because of pricing.

BRIAN SOZZI: Lori, your 50-50 year end price target on the S&P 500, is that still in play?

LORI CALVASINA: It is, and, you know, I said to someone the other day, I said, we're not pounding the table on this, right? We describe it as we continue to see a path towards our target. I think that these are serious and somber times, right? And I don't think people like me should be coming out, pounding the table, saying, you got to buy stocks right now, when we are in such a tough situation globally.

But look, I do know that I have lived through a lot of terrible episodes on Wall Street, everything from 9/11 to the financial crisis. And we've had a number of growth shocks since the financial crisis. And we've put this situation that we're in now with Russia-Ukraine-- and you can layer the Fed on top of that as well-- as what we call a growth shock, sort of a near-death experience where investors really do start to think about the possibility of recession, really start to price it in, or the unraveling of the financial system. We saw these episodes in 2010, 2011, 2015, '16, and 2018. They also markets tumbled 14% to 20%. So far in this downturn, we've contracted about 13% at the March lows.

Now, what I'm very cognizant of-- again, I've done this more than two decades-- on the other side of those crises, you do tend to see sort of very fast and furious rebounds. You tend to be back to pre-crisis levels within four to five months. And you tend to be up off those troughs 12 months later by close to 30%. So we are cognizant that when you sort of put the bottom in, you do tend to rebound very, very quickly.

And so we really-- we're cognizant that there may be further downside risk in markets if the war broadens out, if recession does become more than sort of a risk, but something that we see are clear and present signs of danger of. But right now, we're not there. And if this is a growth scare like we think it is, markets should be acting the way they've been acting the last few weeks.

BRIAN SOZZI: We always appreciate your level-headed analysis. RBC Capital Markets head of US equity strategy Lori Calvasina, good to see you.