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‘Expectations are above the reality’ for earnings and economic data: Strategist

Lenore Hawkins, Tematica Chief Macro Strategist, joins Yahoo Finance to discuss outlook on overall market amid the economic recovery and the moves in bond yields.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's bring in Lenore Hawkins now, Chief Macro Strategist at Tematica. And Lenore, I want to stick with earnings here because boy, oh boy, is it a busy week. And I'm curious what you're keeping an eye out for, and what are you going to be listening for most closely in these earnings reports?

LENORE HAWKINS: Well, what we've seen so far is that companies, we've had fewer companies offering guidance than you normally see and that really speaks to the level of uncertainty out there. And of the companies that have actually provided any kind of revenue or income guidance, 34% have come in below expectations with only 10% coming in above expectations.

So what we really see both in earnings and we're also seeing it in the economic data coming in, is that the expectations are above the reality. For the first half of the year what we were seeing is the reality was tending to come in better than what we expected. And now that's kind of rolling over, you can see that in the Citibank Economic Surprise Index. So what I'll be seeing is what companies are saying about rising prices and the labor market and their ability to pass on those increases to their customers because those companies who are in industries that are going to have a tough time with that, those are probably the ones you want to avoid.

KRISTIN MYERS: So to that point, as we are seeing that slowing growth and we have seen even in the markets sell-off days, especially over those Delta variant concerns. If you are an investor, how should you be approaching that protection against some of that downside risk?

LENORE HAWKINS: Well, we actually are seeing an awful lot of protection being put on. We're at levels that were being put on back when this whole pandemic started. So investors are definitely getting concerned. Understandable because as we look at the back half of the year, those expectations for this continued high rate of growth are becoming increasingly more difficult to get as, once again, the Delta variant is starting to call into question just how quickly things can open.

We're also seeing a relative play in that US GDP for the second quarter came in 2% on an annualized basis below expectations, whereas for Europe it came in 1.5% above what was expected. So it looked a little bit better. On a competitive basis, the US markets looking not quite as attractive as the European markets.

ALEXIS CHRISTOFOROUS: And I'd like to get your take on what's happening in the bond market. We spoke with a market strategist in a previous hour about the yield on the 10-year Treasury, now sitting at 1.16% today and there were still some strategists who are calling for the yield to hit 2% or more by the end of the year. Which camp are you in? And what do you think the next catalyst is going to be for the bond market?

LENORE HAWKINS: Yes, what I find really interesting is that the real yield, so when you take into account inflation, the real yield on the 10-year is actually hitting new all-time lows and it's below negative 1%. That tells you those growth expectations are really not out there. And when you look around at the inflation story, it's kind of falling apart. Global inflation has definitely never kicked in, you've got Switzerland has below 1%, the European Union below 1%, corn is going into correction, copper is down 10%. So that story about these prices that are going to continue to be out of control not really stacking up. So I'm on the camp that says growth is slowing and with that, you're going to see those bond yields starting to slow.

KRISTIN MYERS: Back over to equities, Lenore, I'm curious to know what you do see? We were just talking about that downside risk but what you see as a catalyst to the upside, especially as we do see the S&P 500 and the Dow right in that record territory?

LENORE HAWKINS: I think what could be an interesting upside risk, right, which is the kind of risk we do like, is that what we normally see when we have a recession is the Fed puts all the stimulus in, fiscal stimulus, and normally bond yields spike up way above expectations and that gets everyone really nervous about inflation but then they curve rack around. And historically, the Fed has ended up giving two additional rounds of monetary stimulus. And that is I think what could be the upside potential is that this inflation story fades away, the Delta virus or whichever new variant comes in starts to get more and more concerning, the global growth story and the domestic growth story are not nearly as robust. And so the Fed not only doesn't taper but maybe adds a little bit more of the monetary stimulus and that would just go straight into the market and push things higher.

ALEXIS CHRISTOFOROUS: Speaking of catalysts for this market, on Friday we're going to get the July jobs report. So one other thing for investors to have to absorb amidst a very busy week on earnings. We know that last week US jobless claims showed a surprise gain, well above expectations. What are your expectations for the monthly July unemployment report?

LENORE HAWKINS: Well, seeing the jobless claims come in two consecutive weeks with 400,000 or above I think that consensus estimate for 900,000 jobs on Friday is unlikely. I would be very surprised to see that.

KRISTIN MYERS: Where are you still seeing opportunity in this market right now, Lenore?

LENORE HAWKINS: I see opportunities more in the long-term plays because we're going to have a lot of volatility. There's nothing you can do about that. But I see the things that are going to last regardless of what happens with the business cycle, regardless of what happens with the pandemic, is that more of the world is going into the digital sphere, more of our lives are becoming digitized. That means that that digital infrastructure needs to be there. So all of those like the semis, all the data centers, fiber, all the companies that provide that infrastructure, those guys we're going to need regardless of what happens with the business cycle.

ALEXIS CHRISTOFOROUS: All right, Lenore Hawkins, Chief Macro Strategist at Tematica. Thanks for being with us today.