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Market Recap: Friday, July 23

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Wall Street on Friday completed a four-session win streak, setting fresh records after another batch of strong earnings. Rebecca Felton, RiverFront Investment Group Sr. Market Strategist and Hal Reynolds, Chief Investment Officer, Los Angeles Capital joined Yahoo Finance Live to discuss.

Video Transcript

ADAM SHAPIRO: Three minutes to the closing bell. Taking us there are Rebecca Felton, RiverFront Investment Group senior market strategist, as well as Hal Reynolds, chief investment officer of Los Angeles Capital. And as we look at these markets, it looks like we are in striking distance of some record closes. Let me start with you, Hal. Are we surprised? Because a lot of earnings surprises coming as we get earnings so far for Q2. Is that sustainable going into Q3?

HAL REYNOLDS: Well, it's a good question. I mean, we really had the most remarkable uptick in expectations over the last couple of months that we've seen in over a decade and that clearly has had a huge impact on stock prices-- and this week. I mean, it was just a few days ago we were really quite concerned about the Delta variant's impact on the reopening around the world. We saw the PMIs fall in China. And then of course, these earnings expectations keep going up.

There's no doubt that, you know, a year from now, as the fiscal spending unwinds, as tapering begins probably by year-end, these are going to be choppy waters to navigate. So probably not sustainable, but right now, certainly supporting the market.

SEANA SMITH: Rebecca, what do you make of the gains that we're seeing not only today, but over the last couple of days following that sell-off on Monday and then also the leadership that we're seeing? Because taking a look at today's action, it's a pretty mixed bag.

REBECCA FELTON: Yes, but you have seen a return to sort of interesting growth over the past week. So you know, it's been that sort of back-and-forth between growth and value over the last several weeks. But to Hal's point, the earnings have certainly been coming in strong, revenue numbers are good. And we expect more of the same as we navigate through earnings period. But of course, what we are concerned about is what companies talk about in terms of expectations for margin pressure and supply shortages and that sort of thing.

ADAM SHAPIRO: All right, we're going to take a quick pause as we get ready for the closing bell. That's going to take place in roughly one minute. Let's see where some of the stocks are performing right now. Big loser right now on the Dow on a day when the Dow is going higher by 238 points, Intel. Intel is off by almost 5.5%. Honeywell is also down not dramatically as much as Intel, but Honeywell down about 1.5% and then Dow Inc is off about 0.5%.

Sector action today, communications services up almost 2.75%. Laggard in the sectors would be energy, off by about 0.5%. And then when you consider where we are headed to the closing bell, for the S&P 500 to close in record territory, it has to settle at 4,415. We're going to keep an eye on that, obviously.

The NASDAQ, however-- the NASDAQ right now trading around 14,836. It would have to, for record territory, close at 14,846. So we're going to see if we can get there, but it doesn't look as if that's going to be the case. Here is the closing bell.

[MUSIC PLAYING]

[BEEPING]

[APPLAUSE]

SEANA SMITH: There we go, getting the bell in at the last second. Now, you're looking at gains across the board today. Dow, S&P, and NASDAQ all moving to the upside. You can see investors shaking off some of the fear that was out there in the market earlier this week.

The Dow closing to the upside for the fourth day in a row. The Dow up 238 points. Adam was just pointing out some of the outperformaners in the market today. Visa, Home Depot, McDonald's leading the Dow higher. S&P closing up just over 1%, as well as the NASDAQ. The 10-year yield also rising a bit, hitting 130 in earlier trading. So we see a little bit of a comeback in yields as we wrap up the week.

But we want to bring back in Rebecca Felton and Hal Reynolds to help us make sense of the action that we've seen. And Hal, I guess, we started off the week with investors very concerned about the developments on the Delta variant. It seems like investors got a little bit more comfortable about where things stand as the week went on. How big of a threat do you see this being for the market?

HAL REYNOLDS: Well, I think from a health care standpoint, you know, I think everyone's confident we're going to get through. But to the extent that it slows down the recovery, we're already seeing that in China, and it could well happen here. Cases are rising to, what, 550,000 a day. Two months ago, they were 300,000 a day. You can't ignore it.

And so the question, is that risk fully priced in? You know, VIX is at 17. You know, yep, that's higher than what we're accustomed to in the last decade but very close to the long-term average for risk. And so, you know, one could argue that basically, we've got forward multiples at 22 times earnings and earnings are going to hit peak this year much faster than we anticipate. So yeah, I don't think you can ignore it, from a market standpoint.

ADAM SHAPIRO: Rebecca, let's pick up on what Hal just said about hitting peak earnings, hitting peak and not ignoring the fact that that's taking place. Because as you look at 2022, what is the consensus telling us, and what's the reality?

REBECCA FELTON: Well, we've seen consensus come down. A month or so ago, we were looking at a mid-teens number year over year for 2022, and now it's probably in that 10%, 11% range. And you know, valuation in and of itself is a condition, not a catalyst. But a deceleration of year-over-year growth is certainly something that is going to get investor attention as we look out over the next 12 months and try to discount ahead as to what an appropriate valuation level is.

SEANA SMITH: Rebecca, earlier, you were mentioning some of the rotation that we've seen in the market over the last several trading days. Going forward, where are you seeing the biggest opportunity? What are you buying?

REBECCA FELTON: Well, we are still somewhat balanced in our approach. Rather than trying to do a hard rotation away from growth and into value, we have continued to have a fair amount of our strategies allocated to technology and health care, specific industries inside of there, such as software and medical devices. But then we've also added back to our industrials exposure, playing into the infrastructure world, if you will, and also we've added back to our financial exposure as well. So we have taken a barbell approach to our equity exposure over the last couple of months.

ADAM SHAPIRO: Hal, you caution investors to pay attention to book-to-price ratio. It rallied this year, but what are you warning them about next year?

HAL REYNOLDS: Well, one thing we observed maybe almost 10 years ago is that the preponderance of earnings are really coming from human capital, and Human capital is not reflected well on a company's balance sheet. And so things like residual income are much better estimates of the value added from human capital.

And so, you know, book-to-price has been a favorite, particularly of the index providers, you know, going back 30, 40 years now. It's a very stable metric. It's easy to, you know, come up with the dividing line between value and growth. We just don't think it's as good a predictor of return as it once was. Now, we like valuation as much as ever, but we far prefer dividend discount models where you're weighing tomorrow's earnings against today's prices. We just think that's a better metric.

SEANA SMITH: Hal, how are you looking at the action that we've seen recently in the 10-year? We saw it bouncing back a bit today, although it looks like it looks pretty flat-- one-- right around 128. Does this type of movement that we've seen recently, does it make sense to you?

HAL REYNOLDS: Well, I don't think so. I mean, I think we were all very surprised to watch the fall in the last two months. It was rather dramatic. And there's no doubt it put the advantage back to growth, and it certainly hurt the banking sector. There's no doubt about it.

You know, but the one thing I would just say today in light of what's happening as you consider all the facts, you can't ignore defensive stocks. This is the untold story. Defensive stocks have underperformed by 25% since the March 23 lows a year ago. And you know, you don't hear much talk about it. You hear about, you know, making full allocations to the mega-cap tech and then the reflation trade and those other companies that are benefiting from cyclical recovery.

But you know, we actually-- our models are starting to show improved sentiment to the defensive stocks, the lower volatility stocks, so consumer staples, you know, REITs, utilities, things like that. So as I think going forward, you think about a forward-looking view, you think of where valuations are, the fact that so much of the recovery is already baked in-- we've just gone through the fastest market recovery on record-- I don't know. I think it's time to think a little bit-- it may be a little premature, but I would think a little bit about what sort of defensive positions you like that might have some resilience, even in a rising inflation environment.

ADAM SHAPIRO: Hal Reynolds is the chief investment officer at Los Angeles Capital, and Rebecca Felton is RiverFront Investment Group senior market strategist. Thank you both for joining us on this Friday.