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Market recap: Monday, Aug. 30

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Matt Brill, Invesco's Head of North America Investment Grade Credit and Senior Portfolio Manager along with Ross Mayfield, an investment strategy analyst at Baird help Yahoo Finance wrap up the week's first day of market action.

Video Transcript

SEANA SMITH: Just about a minute to go until the closing bell. And we have full coverage for you. We have Matt Brill. He's Invesco's head of North America investment grade credit and senior portfolio manager. We're also joined by Ross Mayfield, investment strategy analyst at Baird. But let's take a look at where things stand here in the final minute of trading. Because when you take a look at the major averages, you're looking at a mixed picture. The Dow off 54 points, the biggest laggards in the Dow today, American Express. That stock off just around 2 and 1/2%, Boeing and travelers at three, worst performers in the Dow.

You can see the S&P and NASDAQ though, holding onto gains, both of those averages hitting intraday record highs earlier as we head into the close. The S&P up just around a 4/10 of a percent, the NASDAQ the outperformer up nearly 1%.

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- Right. And there is the closing bell down there on Wall Street. It looks like right now, everything's settled down. The Dow did end the day negative in the red with the S&P 500 and the NASDAQ getting even the NASDAQ up almost 1%. But again, let's bring in our panel to wrap up the day. So let me direct this question to you, Matt, first. Obviously, the big story headed into today was the remarks from the Reserve Chairman Jerome Powell with regards to where a fed policy could be going from here.

He sounded a little bit more dovish on the possibility of an interest rate hike and said, don't get it twisted and don't get it confused with the timing of our taper which could happen sometime this year. What does that tell you about the market positioning headed into the fed's next meeting on September 22?

MATT BRILL: Hey, good afternoon, Brian. And yeah. We thought that Chairman Powell was extremely dovish with his speech on Friday. You saw the market react positively on Friday. It reacted for the most part positively again today. So I feel like the market's really starting to understand that yes, they will be tapering at some point. They're probably going to do it quite slowly. But the removing of accommodation in terms of hiking interest rates is still way, way off. The chairman told you that it's going to be a while before it happens. And they're going to have to really hit some hurdles that are going to be much higher than the standards needed to be able to start tapering.

SEANA SMITH: Ross, what was your big takeaway? I mean, I think it was largely in line with expectations just in terms of even how the market reacted. But in terms of what you were hoping to hear from Powell, did it meet what you were thinking that we would hear?

ROSS MAYFIELD: Yeah, I think first and foremost, the mantra from the fed right now is do no harm. Don't surprise the markets. In 2013, the tapering announcement caused a taper tantrum partially because it was a surprise to investors. It was kind of hinted at at congressional testimony. It was a bit of a surprise. And so lately, the fed has been all about transparency, kind of telegraphing their moves.

So Fed Chair Powell did that. They've done that to perfection lately. Leaning dovish, I think that's probably a good thing for the markets. It does make sense, I think, to remove some of the extraordinary policy accommodation. But we still have a market that is, a recovery I should say, that's very fragile, a labor market that's nowhere near healed. And so I think it makes sense to say let's take six 12 months, taper a little bit, and then take a look at rate hikes down the road. But there's a long way to go to complete this recovery. It's been a bit uneven.

- Matt, I want to turn things over to the credit side of the story. Obviously when we take a look at where longer dated bonds are, government bonds are, they have come up a little bit. But we're not anywhere close to the rates that we saw at the beginning of the spring really. So what's been going on in high yield investment grade markets? What has been interesting is that there's been some chatter about the possibility of getting a lot of upgrades across the board, especially with the blowout earnings that we've seen this earnings season.

MATT BRILL: Yeah, one of the key themes that we have on in the portfolio right now is still this rerating theme. So companies being upgraded out of high yield into investment grade. It's a great source of total return we believe over the next 6 to 12 months. So the cash flows are there. Yes over the near term, things like the Delta variant will cause some issues to the economy. But for the most part, corporations have really figured out how to work in this environment. And they've been really paying down debt to go along with it just to make sure that if this gets worse, that their financial profile is much better.

So we like the high yield portion of the market. You had a little bit of a sell off the last few weeks. And unfortunately, it kind of came roaring back the last few days. So we're hoping for a little more time to take advantage of it because we did think it was a buying opportunity. Investment grade spreads are on the tighter end. But they're still maybe not quite as tight as they've gotten to. We are expecting a very large calendar in the month of September. Our new issue, a calendar, what we call companies issuing a lot of debt, we're going to see about $150 billion of supply for the month of September.

So that might create some opportunities if that weighs on the market. Because longer term, we do think that credit spreads are going tighter because of the lack of yield in government securities.

SEANA SMITH: Ross, some of the movements that we're seeing today, airlines are among those under pressure as well as the cruise lines. A reopening play's really taking a hit. After the news that we got out of the EU recommending the halting of non-essential travel from the US because of the surge that we're seeing in COVID cases, I guess, is this a buying opportunity to you? Or are some of these names a little bit too uncertain and then there's too much I guess speculation still around them to be entering right now?

ROSS MAYFIELD: Yeah, I think when you talk about the true epicenter names, so cruise lines, hotels, travel, those are more challenging to see, even in near or mid-term outlook. If you compare them to, say, banks in 2008, 2009, tech stocks in 2000, 2001, those epicenter names, kind of the names at the center of the crisis, they struggle for quite a bit of time. They take a long time to really recover. The outlook is so uncertain with the Delta variant, how governments around the world are responding to the COVID crisis, and really how this unfolds over the next couple of years.

So it might be a buying opportunity in the end. But at least in the near term, it's very uncertain. And we'd be looking to other corners of the market to find some deals.

- Ross, can I follow up on that in terms of bank stocks? Are you seeing any sort of attractive valuation there? I mean, just today Wells Fargo down 2.9%, Bank of New York Mellon down 2 and 1/4%. Obviously, you can tie maybe some of this to the lack of optimism over the yield curve steepening. But is there a Delta play as part of some of these value stocks as well?

ROSS MAYFIELD: Look. I mean, for the bank stocks to work, you do need the yield curve to steepen a little bit. You need long term rates to come a little bit higher. But I do like the financials as a story. They're kind of short duration in the sense that they're returning a lot of capital to shareholders. The buyback programs are back in vogue. They've kind of recapitalized over the last decade. They're a lot healthier than they used to be. And since the beginning of the year when the reflation trade was really in vogue, flows and sentiment has soured quite a bit.

So we think it's a good point to re-enter some of the more cyclical areas of the market. I like the financials. It is a challenging story right now. But I think at this point in the cycle, we're still pretty early. It's not a normal cycle. But I think the financials along with industrials and materials types of names could work.

SEANA SMITH: Matt, what do you make of what's going on in the housing market? We got the pending home sales, they slid for the second month in a row. That number declining just around at 1.8% month over month. Are we starting to see the housing market cool a bit? And I guess is that welcomed news by the market?

MATT BRILL: I think it is welcomed news. I think it really does show you that inflation isn't going to get out of control. Because the consumer is doing this not just in the housing market but across all segments of it is where they see the prices are going up too much, they're actually taking a step back. So this isn't like the past. This isn't runaway inflation where consumers are chasing after rising prices. They're actually pulling back, which I think is prudent. That actually does really benefit the market at the end of the day. Because these are things that the fed are looking at in terms of clues on how quickly they need to tighten policy.

And as long as you're seeing consumers do the prudent thing of not chase higher prices, that's really good for overall market. I think it's a great sign that you're seeing that.

- And Ross, are there any sort of non-equity places where you're looking at right now? I mean, obviously, a lot of people are looking at the line for the S&P 500 and thinking that's attractive too. But is their attractiveness in other types of commodities? I know gold's been talked about as an inflation hedge. But that story has kind of been a bit iffy as of late. What other types of things might you be watching in terms of asset classes that could have some attractive value?

ROSS MAYFIELD: Yeah, well to start, I think one of the reasons it's been a big story over the last couple of weeks that the S&P hasn't had a 5% pullback in the better part of a year, I think part of the reason it speaks to the lack of opportunities, or lack of alternatives for investment dollars out there. Yields are super low in the bond world. It's challenging. Other asset classes, commodities, housing are richly valued as well. So it is challenging. I do think to speak to the cyclical trade and the reflation trade, having some more legs than we've seen, you could play that with a couple of different commodities.

Copper in particular is one that was in vogue for a long time at the beginning of the year and has kind of fallen out of favor. I think that's an interesting way to play. We think oil might go a bit higher from here. But that's obviously a little bit more challenging and a little bit more volatile given some of the geopolitical issues there. We like equities. We think maybe diversifying globally is prudent for investors right now if you're looking for another way to play that. We think a weaker dollar is probably likely from here.

So diversifying into developed international emerging international, especially as the vaccine programs really pick up steam in those areas could be prudent as well.

SEANA SMITH: Ross Mayfield, investment strategy analyst with Baird, and Matt Brill, Invesco's senior portfolio manager. Thanks to you both for joining us.