Market recap: Friday, Nov. 12
Robert Dye, Comerica Bank Chief Economist and Victoria Fernandez, Crossmark Global Investments Chief Market, join Yahoo Finance to discuss today’s market action, inflation, outlook on the Fed, and potential market impact of a winter wave of COVID-19.
Video Transcript
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ADAM SHAPIRO: All right, two minutes to the closing bell, and helping us get there will be Robert Dye, Comerica Bank Chief Economist, and Victoria Fernandez, Crossmark Global Investments Chief Market Strategist. Before we take a look at where these markets are going to close, let's bring them into the stream and talk about what we've seen this week and where we're headed. Victoria, you talk a lot about the strength of the consumer and the extent of, quote, "transitory inflation." I think most of us are looking forward to the day we no longer say "transitory." Not that we want inflation, but do we really believe when the Fed says transitory? What's coming our way with that?
VICTORIA FERNANDEZ: Yeah, I think-- I mean, most people will agree that there is a component of the spikes in the inflation that are transitory, and there's a component that's going to be much more permanent. In our opinion, the scare that we saw this week, at least what we saw in the bond market with the rates moving significantly high after the CPI, that headline number, the majority of that was really driven by the energy component. And we would assume that through the pandemic, as we start to reopen and things really begin to come back to normal, some of that is going to come back. Not all of it, but some of it.
And when you look at some of the other items that have really been pushing, you are looking at some of those pandemic sectors that are driving that. However, we're looking at more widespread inflation than we were six months ago. So looking at owner equivalent rents is extremely important. Obviously, wages, we've seen wages go up. So there will be a more permanent component to inflation, but there is some transitory. And we should see that number come down over the coming months.
ADAM SHAPIRO: All right. Well, I like to use what I call the "dairy index," because I'm paying, what is it, $6.99 for a half gallon of milk. We're going to hit all of this inflation. I hope you're not paying that much for milk where you live. But let's see where the markets are going to settle as we head into the closing bell. The Dow is up 184 points. S&P 500 is up 34 points. NASDAQ up 158 points. Winners on the Dow today-- 3M, Home Depot, and Apple. Let's head to the weekend with a closing bell in the green.
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SEANA SMITH: And that wraps up the trading week, what has been a pretty eventful week when we take a look at the inflation data spooking investors earlier. We're ending the week in the red. But for the day, you can see Dow, S&P, and NASDAQ regaining some of that momentum. The Dow closing up 178 points. Biggest gainers in the Dow today-- 3M, Apple, and Microsoft. S&P up just around 7/10 of a percent, and NASDAQ up 1%. The NASDAQ was the hardest hit earlier this week. When we did get that inflation data, we saw investors selling some of those high flying tech stocks because of exactly what that could mean if we do see higher rates.
But let's bring back in Robert Dye, Victoria Fernandez, help us make sense of where we're heading from here. And, Robert, just your reaction to the inflation data. I mean, does this make you rethink your strategy at all? And what do you think this tells us just about the Fed's timeline when they could potentially raise rates?
ROBERT DYE: I think this is a very interesting and difficult passage for the Fed coming up because they're trying to manage transitional issues going from a COVID policy economy to a self-sustaining virtuous economic cycle. We're in that transition. Obviously, inflation heating up. So now they've got to balance growth versus inflation. There are leadership issues at the Fed. We know there's going to be some turnover. We don't know exactly the full extent of it. That dovetails into political issues in Washington.
And then there are emergent risks. I mean, the Fed issued a financial stability report, their recent financial stability report, which talked about China. Now they're doing an about-face on China, saying that there are significant risks there that we have to be aware of. So this is going to be a very interesting, challenging balancing act navigating this very interesting environment here for the Fed for the next, say, 6 to 12 months.
ADAM SHAPIRO: Victoria, I think that phrase "virtuous economic cycle" is one we all pray we get to. Isn't the fact that there are so [AUDIO OUT] Americans have in savings accounts right now something that would help us achieve that? I mean, we know prices are going up. But so far, consumers have been able to cover those, and the stock market continues to go higher. Is there really going to be pressure, do you think, on the, you know, margins with companies as we head into 2022?
VICTORIA FERNANDEZ: Yeah, I think that's going to be something we're really watching when we look at next quarter's earnings information coming out. We have had record margins for corporations, 13%, 14%, over the last couple of quarters. So the question is, what does that pricing power look like? We were just talking about pricing power of Disney and Netflix a moment ago. You have to look at these corporations and see if they can pass that on.
Now, one thing that is in the economy's favor is that we are in this fourth quarter, this holiday season, so we do have some strong tailwinds for the consumer. If they're ever going to push themselves to pay a little bit more for something, it's probably going to be during the holiday season. So I think the consumer is strong. Their savings is there, even though it's coming down somewhat. But I think as people go back to work, which we anticipate we'll see in the next couple of months' labor reports, those wages are there, they're making more money, it will continue to be a positive for the equity markets.
SEANA SMITH: Robert, one potential headwind that we don't really seem to be talking about a lot, at least when it comes to the market, is this uptick that we've seen in the number of COVID cases. We've had a number of doctors on the program warning that this could be the start of a winter wave. How much of that do you think has been priced into the market?
ROBERT DYE: Well, I agree there's still significant risk factors out there, and we certainly don't want to discount that. But what I also think is that the propensity for COVID to weigh on the economy is rapidly diminishing. And we're going to see a decoupling of caseload relative to economic impact, I think, in the future with COVID because we are seeing better treatment, higher vaccination rates, pills, shots, everything like that. So while COVID remains a very, very serious issue, I think the ability to weigh on the economy diminishes going forward.
ADAM SHAPIRO: I just want to follow up on something, Robert, because we also see large numbers of baby boomers leaving the workforce. People talk about the Great Resignation, but those people, presumably, are not coming back. Has anyone factored in to what the long-term impact of that's going to be? Wouldn't that open up jobs for younger people and perhaps keep wage pressures higher?
ROBERT DYE: Well, it certainly does make for a very, very dynamic job market right now. We just got the JOLTS report, the Job Opening and Labor Turnover Survey, for September. I do want to scale that a little bit because, yes, the quits rate is at a record high, but it's gone from 2% to 3%. It's not 80%. So while we are seeing marginally higher quits, most people are not quitting. There's a lot of stability out there. But I do think there's going to be a lot of opportunity also, particularly for younger workers, in this job market.
SEANA SMITH: Let's talk about opportunity in the market because, Victoria, I think investors are trying to figure out where they want to put some of that money that we've been talking about on the sidelines to work. Where are you seeing the most opportunity right now?
VICTORIA FERNANDEZ: Yeah, we really have the feeling that they need to move a little bit more towards cyclical right now. And, you know, for a while, we had such a back and forth and that rotation going on between the different sectors, the growth versus the value and which ones were really going to be working for you. We think right now that cyclical component is going to do well. And when you look at the market, you can see that, you know, cyclicals are doing better than defensives. You've got discretionary doing better than staples, high betas doing well, small caps are outperforming large caps. So you kind of have that risk-on component.
And with the belief that the consumer is strong that we do have for the reasons we mentioned earlier, we think some of those consumer-facing names, cyclical names, and even value names would be important. So we've actually added to our Ford position. We've been buying TJX, Lululemon. And we get retail earnings next week, which will be a great key to see how the consumer is actually faring and what supply chains possibly look like for the next quarter.
