S&P 500 could see another '10-15% correction downwards': Strategist

Threadneedle Ventures Founder Ann Berry joins Yahoo Finance Live to discuss the FedEx warning, macroeconomic challenges, and the outlook for markets.

Video Transcript

- A tough day for markets, all major indices in the red, the S&P 500 falling more than 5.5% for the week. It's the worst five-day performance that we've seen in just about three months. We want to bring in Ann Barry, founder of Threadneedle Ventures. And great to see you here, a very tough week for the markets, ending it on a down note. What's ahead? do we see further risk?

ANN BERRY: I wish I could be more positive, particularly on a Friday, but I'm not. I feel downside risk. I think we haven't scratched the surface of seeing the impact of the strong dollar. I'm just back from Europe. I'm seeing demand is clearly going to create it going into winter with rising energy prices. I think the worst is still to come.

- So, Ann, how much worse are we talking here potentially?

ANN BERRY: I think the S&P could still see another 10% to 15% correction downwards, unfortunately. And I think that really is exposed to downside risk, depending on how energy prices continue to trend, particularly internationally. So I'm not optimistic. But I do think there's some glimmers of hope in terms of certain kinds of stock picking, if one would have the courage to go out there and start picking up value names.

- OK, let's ask then. What are some of those names? You led me there.

ANN BERRY: Well, it's interesting. One of the things, one of the learnings I have from this FedEx situation is I do think it's the recessionary outlook. But it's also the lack of credibility that now the management team's got hanging over it. I think there are some companies like Netflix. This is a bold one I'm going to throw out there. Netflix got absolutely crushed.

- Taking notes.

ANN BERRY: Taking notes, famous last words. Got crushed until it came out with a credible plan, until it announced a partnership with Microsoft, until it talked about pricing. And it has managed to convince the street. You've seen a bunch of pricing upgrades that team can execute. Those are the kinds of businesses I'm looking for now as earnings season starts looming.

- And going back to what you were saying before with the S&P, we have another 10% to 15% to drop from here. What's going to stop the selling? What do we need to see to turn things around?

ANN BERRY: I do think inflation needs to start rapidly turning the corner. I think that's one piece of it. I think the second thing we need to see is the labor market stop sending these really mixed messages. On the one hand, we feel that consumer sentiment is beginning to waver. We've seen layoffs being announced. But unemployment claims are actually, thankfully, are pretty robust. But people are confused. And until that confusion settles, it's really hard to see things stabilizing.

- So, Ann, do you think the markets are confused as well? How much risk do you think they're pricing in at the moment?

ANN BERRY: I think not enough. I think where the market has fully priced in, what is to come is with respect to Fed rates. I think there is clarity on what's going to happen next week. I think that there is a sense that Jay Powell is now communicating clearly with the markets. But it's the broader macro pieces that I think are not yet fully priced in, the strong dollar being one of them and commodity prices being the other.

- You just said you were back from Europe. How bad do you think it will get there? And is there any upside in that international investors could see our equities as a safe haven?

ANN BERRY: Let's take some of the biggest economies now. Let's take Germany, for example, right the grand dame of the eurozone. Natural gas has been shut off to the major pipeline there. Energy prices have soared north of 100%. We haven't even hit winter yet. Consumers haven't yet seen the impact on their heating bills. Once that becomes visible and discretionary consumer spend starts dropping off, I think that's when the pain becomes more obvious.

- What are the implications from the pain over there? What does that mean for investors here?

ANN BERRY: Well, if we think about the S&P 500, roughly 40% of the revenue generated comes from international, so non-US, non-domestic markets. A stronger dollar means all of those currency revenues become worth less, but also volumes come down. So I think that's where we'll see it. I think we'll see it across the board.

- And obviously, Anne, it's also been a very volatile week for oil as well, some optimism, though, for next year from the IEA, really expecting that growth, though, really dependent on China's economy reopening on the back of its zero-COVID policy. How optimistic are you, though, about what's happening with China and that potential impact on the US?

ANN BERRY: I think that's an extraordinary metric out there. If you go and look back over the last sort of 10 to 15 years, Chinese GDP growth drove roughly 50% of the increase in GDP-driven global demand. China is through that secular expansion. And so I am optimistic that it provides some pickup. I don't think we can expect to see the kind of recovery that China would have driven in the past. I think that's just a function of that economy having matured somewhat. And I think that the total dynamic has shifted somewhat.

- This is not going to come easy. But it's Friday, and it's 3:20. We've had no good news yet. So give me something. Give me some glimmer of hope to take into the weekend.

ANN BERRY: Wow, I'm going to have to really take a pause on that one.

- I know you are.

ANN BERRY: I'm really having to take a pause on that one.

- The labor market? No.

ANN BERRY: Well, yeah, look, the labor market--

- You think that's bad news?

ANN BERRY: No. I find it heartening when unemployment is low. I think that's a good thing as a human being. But I do think there needs to be a little bit more clarity that there is an easing in the wage inflation that we're seeing for overall inflation to start to subside. I think where I do see a little bit of positive news is I think that there are some stocks that would have been too expensive that retail investors should be investing in for the long term, particularly really stable companies with good dividends.

Those are the kinds of things I'm personally investing in right now. So there's a little bit of buffer. If stock prices continue to go down, those dividend streams can help take some of that pain away. But in the long term, if you hold it through the recovery, that's an upside and light at the end of the tunnel. So go bargain shopping is what I would say.

- It's a nugget. We'll take it.

ANN BERRY: Friday shelfing, best I can do.

- Thredneedle Ventures Founder, Ann Barry, lovely to have you here as always in studio.

ANN BERRY: Thanks.

- Thanks. Have a good weekend.