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Market Recap: Friday, October 1

In this article:
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Stocks advanced on Friday, with equities recovering some losses after closing out a volatile month in the red. Dana Peterson, The Conference Board Chief Economist and Sam Stovall, CFRA Chief Investment Strategist joined Yahoo Finance Live to discuss.

Video Transcript

- Less than two minutes here until the closing bell. And again, you are looking at gains across the board, Dow, S&P, NASDAQ, even the Russell 2000 all rallying today. The Dow up 492 points, S&P up just over 1%, and the NASDAQ is posting gains. We have Dana Peterson, the Conference Board's chief economist, here to help us break down today's action, along with Sam Stovall, CFRA's chief investment strategist.

Sam, let me start with you. Certainly what a difference a day makes when you take a look at today's gains. What's your big takeaway from today's rally?

SAM STOVALL: Well, my feeling is that, certainly with the Merck COVID pill that's a possible game-saver here because we're looking at a lot of the groups such as transportation, leisure, hospitality, et cetera that are doing very, very well, but it's also simply a reminder, as Jared said earlier, that this is a seasonal play, that we had the worst month of the year primarily because you have mutual funds that have window dressing that they want to engage in in September because they have fiscal year-ends in October, and they want to look as good as possible. So a lot of the selling took place in the latter part of September, and they're buying right back in early October.

- They certainly are buying today. Again, when we take a look at where we stand, Dow up 466 points, S&P up just around 1%. The NASDAQ is in the green. Taking a look at the sector action quickly, all 11 of the S&P sectors trading to the upside. It looks like energy by far the leader today, with the XLE up just around 3.5%. We're also seeing some solid gains from communication services, financials, materials and technology.

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And that does it for the first trading day of October. And going through some impressive stats for you, with the Dow closing up here just around 483 points. We were on our way to the best start to October for the Dow since 2003. I believe that will hold. The S&P and Russell 2000 also having their best starts to the month of October in quite some time.

In terms of some of the leadership that we're seeing today, Sam was just mentioning the action that we're seeing in Merck, with Merck shares closing up pretty substantially today when you take a look at those leaders, up just around 8.5%. We got news from the company that their COVID-19 pill, that it significantly reduces the risk of hospitalization and death when it comes to COVID-19. So we're seeing that stock pop on that today. And that's also pushing the reopening trade higher, Disney being a clear benefit of that today, with shares up just around 4%.

We're also seeing some solid gains in the airlines, cruise lines, hotel chains, some of the other names associated with the reopening. But again, we have Sam Stovall and Dana Peterson here to help us break down the action. And Dana, let me go to you because, in terms of what we've seen over the last couple of months, taking a look back, we certainly have seen the economic recovery slowing just a bit. Do you that's going to be the case in the fourth quarter, or are we going to regain some of that momentum?

DANA PETERSON: Well, the big issue is whether or not we're beyond the Delta variant surge. Indeed, that slowed activity in the third quarter. But we're pretty constructive that, just given the fact that consumers are still going to be receiving money from stimulus checks, certainly consumers with families-- with children, rather-- also further gains in the labor market, that all of this will shape up into a better fourth quarter.

However, there are some pretty big risks out there, certainly with respect to consumption. Our own measure of consumer confidence waned for three months in a row. And also, when you think about the holiday season, will businesses be able to restock their shelves ahead of the holidays? And then finally, there's that big question around inflation. Are we going to continue to see elevated inflation for consumers, as well as businesses, in terms of inputs and wages?

- Yeah, and Dana, what is your reading on that? Do you expect to see higher inflation now for a little bit longer than we initially thought?

DANA PETERSON: Well, it looks like we're probably going to see elevated year-on-year rates at least through the balance of this year, and somewhat into next year. The hope is that we will settle that close to 2%, in terms of the consumer inflation, by the middle of next year. But there certainly are risks that maybe we don't. Certainly, we're seeing the chip shortage, the semiconductor chip shortage is placing upward pressure on prices for cars, both new and used cars, and certainly for high-tech goods. And then also, there's the big wage question. We're still seeing labor shortages, and that's placing upward pressure on what businesses have to pay both incoming workers, as well as to keep workers from quitting.

- Sam, let's take a look at some of today's action, specifically what's going on in the bond market, because the 10-year yield falling back below 150, a pretty significant move. We got that reading out on core inflation today, which is interesting, then, when you take a look at the reaction that we're seeing in the bond market. I guess how do you sum up the drop that we're seeing today, and I guess where do you expect the range to be going forward?

SAM STOVALL: Well, I think that one reason why we saw the drop in the 10-year yield is because expectations for third quarter GDP continue to erode. We actually reduced our estimate now to 3.6%, and it was sort of a stair step downward. So our expectation is that we'll see a bounceback in the fourth quarter, a gain of about 6% in GDP, but the question, as you asked Dana before, about inflation, that's going to remain fairly stubborn. We have to take a look at what the jobs data will be posting next Friday. We're looking for a 400,000 gain. So in general, I think that we are going to have to sort of tiptoe our way through some of the negative numbers that we'll likely see, but I think the market will look across this valley.

- And Sam, speaking of, I guess, the market now taking a-- looking across the valley, using the words that you just said, in terms of what we could see play out over the next couple of months, how would you suggest investors be positioned, then, heading into the fourth quarter?

SAM STOVALL: Well, the S&P likes to save the best for last, because when you look at the price performance for the S&P, whether it's every year since World War II, whether it's the first-- the fourth quarter of the first year of a president's cycle, and so forth, it's about twice that of any of the other sector-- any of the other quarters. And also, the frequency of advance is pretty high. And when we're looking for 26% earnings growth to be reported soon for the third quarter, followed by a 20 plus percent jump in the fourth quarter, I think that there is reason for seasonal optimism to kick in once again.

- And Dana, as we wrap things up here, of course investors keeping a close eye on the developments down in DC. We've reached a little bit of a stalemate here just in terms of what we could get on the bipartisan infrastructure deal, also that $3.5 trillion spending plan that the Biden administration has put forward, and then also, of course, we have the debt ceiling later this month. In terms of how big of a risk that could potentially be to the economic recovery, what's your view on that?

DANA PETERSON: Sure. Well, the good news is that we do have a CR, a continuing resolution, in place through December 3rd. And hopefully, between now and then, the folks in Washington will be able to fund the government for the balance of fiscal year 2022. But the debt ceiling, you know, still is a big risk. Certainly, if we do breach the debt ceiling, that's a huge negative not only for the US economy, but for the global economy. We could see a big financial market upheaval, and potentially even another financial crisis that results in very weak growth rates. But more so, it's really negative for the US if people can't trust that we're going to pay our bills on time. And certainly, that would raise borrowing costs for investors in the US.

- Dana Petersen of the Conference Board, Sam Stovall, CFRA chief investment strategist, always great to speak with both of you. Have a great weekend.