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Market Recap: Monday, January 25

Stocks traded choppily ahead of a busy week that will include a slew of corporate earnings results, economic data, Federal Open Market Committee meeting and debate over the Biden administration’s $1.9 trillion stimulus proposal. Chief Market Strategist at Truist / SunTrust, Keith Lerner, and
Optimal Capital Director of Strategy Frances Newton Stacy joined Yahoo Finance to discuss.

Video Transcript

[UPBEAT MUSIC]

- We head into the closing bell with Keith Lerner, chief market strategist at Truist, along with Frances Newton Stacy, Optimal Capital's director of strategy. Thank you both for joining us.

Let me start with you, Frances. It brings a smile to the face even when you talk about resistance, the S&P 500 at 3,887 and the NASDAQ at 13,750. Why should we be paying attention to that technical resistance-- still seems far off?

FRANCES NEWTON STACY: Yeah. So this is on my long-term chart of 256 days. We've kind of turned around a perfect harmonic from our oversold during the lows in March up until now. So this should be some significant resistance, technically speaking. And then we just sort of pair that with the news narrative about delays on stimulus.

And we can see that that's affecting sort of the reflation trade. And the NASDAQ is trading ahead because they're banking on earnings this week. And that's sort of what's happening.

- Keith, last time we spoke to you-- I know you've been bullish now for a while. I read through your notes. You're still bullish. My question to you is, though-- is what's going to sustain this bull market at this point?

KEITH LERNER: Well, first of all, great to be back. And we are bullish overall. I think the underpinning for further gains this year is a transition to the next phase of this bull market. And that's earnings.

I know a lot of people have been talking about earnings. And normally, when you head into a new year, their earnings estimates are too high and analysts have to bring them down. However, that's not the case at turning points as-- such as what we saw in 2010, coming out of that downturn, right at 2003.

That said, more short term, I think it's going to be a choppier market here. If you look, we're up about 70% from the lows. This market has been tracking that 2009 recovery to a tee. And at this point, you start to see some choppy waters.

We do think over the next six to 12 months the market moves higher. But we do think we're in more of a consolidation. And you're seeing that internal rotation here over the last week with the defensives, and also NASDAQ.

- All right. Let's bring in Jared Blikre, heading to the closing bell.

JARED BLIKRE: Yeah. I'm looking at the 10-year T-note yield right now. And I think that's telling kind of the story of the day because we got up to almost 1.2% just a couple of weeks ago.

We consolidated a bit. And now we're heading back down-- so probably going to dip below 1%. And we'll have to see if we enter this previous consolidation era-- area right here. But this is going to determine and help guide investments for the remainder of this quarter here.

So let's take a look at the heat map in the NASDAQ 100. We can see some big out-sized gains by Tesla and Apple, both at record highs, Microsoft up over 1%, as is Facebook here. And just looking at the sector actions heading into the bell, utilities, staple, and real estate and tech all outperforming-- here's the bell.

[BELL RINGING]

- All right. That does it for us today. You can see a mixed picture here with the Dow closing well off the lows of the day, but in the red, off just around 35 points, S&P and NASDAQ, though, holding on to gains, NASDAQ closing at a new record high, closing at 13,635, S&P also holding on to gains, up just around 3/10 of a percent, Jared mentioning the sector action there-- utilities, real estate, and consumer staples among the out-performers today. We saw that shift to some of those defensive plays, investors favoring them today.

Also, the 10-year note, something that Jared also mentioned, coming under a bit of pressure today, posting its biggest daily drop in just around 10 weeks-- so falling closer to that 1% level.

We want to bring back in Frances and Keith here for rounding out this discussion. Frances, let's just start with the 10-year. We haven't talked about that yet, with yields falling back just a little bit towards that 1% level. What does this indicate just in terms of, I guess, the market's reaction, what it could mean for the markets here going forward?

FRANCES NEWTON STACY: Well, what I find interesting about the 10-year is it had really taken off. And I think that what's happening now is there's some sort of selling on this point because Fed intervention at a certain point was expected.

It was going up a little too far, a little too fast. And that's going to incite the Fed to apply yield curve control for a couple of reasons. Mainly, debt service is going to be a huge issue. And so we don't want these things to get ahead of itself.

But anyway, I think there was some anticipation that the Fed could come in and intervene. And that's why you see this yield curve backing off.

What it means for stocks-- I generally agree with Keith that I think that the $1.9 trillion package will probably go through in some form. With Yellen in the Treasury and the Fed still calling for fiscal stimulus, we're going to have to sort of paper over the record amount of COVID debt. We're going to need down dollars.

So I expect interest rates to be moving higher through the second quarter of this year. And then we're probably going to see some, you know, rough roads ahead. I think tech is going to be particularly sensitive to interest rates rising because they're the most extended valuations. And interest rates coming up puts pressure on PE ratios. That's the simplicity of that.

And so unless there is really a change in the stimulus narrative, I expect growth coming off of low comps to increase. I expect inflation to go up. And I expect rates to go up through the second quarter until we probably have some pressure in the credit markets.

- Keith, I want to pick up on something you said before the bell about the S&P 500 from its low last March up about 70% with upside to go in a-- essentially, a bull market. A specific stock I was looking at actually only gained in comparison to the S&P 500 about 38%. As an investor, should I be looking for those that under-performed last year against the S&P 500?

KEITH LERNER: We want to be looking at where the relative opportunity as far as earnings momentum-- valuation is important. But that's just one component. And where is the economic momentum?

So last year, for most of the year, we were really growth-tilted. And as the year progressed, we became more cyclicals. And as we mentioned, cyclicals with interest rates coming down are our pause. But we would use any pause over the next month or two to continue to add to cyclicals.

Some of the areas that are still below their lows are, like, the financials. We still think there's upside there. We still think there's upside in materials. We've been very bullish on small-caps, upgrading them last November.

Now, they are very extended on a near-term basis. But if you look over the last two or three years, they're still underperforming large-caps by a wide margin, another area we're staying long-- and we be using pullbacks as an opportunity as a whole in that area.

- And Frances, as you said in your notes that the markets have already priced in that $1.9 trillion package, the one that you were mentioning just a few minutes ago-- if we get a slimmed down version of that, which I don't know where you put the odds at, at this point-- but if we do get something through, but it doesn't live up to that $1.9 trillion expectation, how does the market react to that?

FRANCES NEWTON STACY: Well, it's going to be interesting to see what the cause for the slimming down is. And, you know, if it's Republicans in the Senate or what kind of forces that are going to be met-- but with Yellen calling for further stimulus, with Jay Powell calling for further stimulus, and with the administration there and, you know, most of the Senate supporting that and the damage from COVID kind of coming into real time, I think that the stimulus narrative is going to be around for a while, even if it doesn't come in this one package.

- And Keith, if it comes in a second package, like a second COVID-19 inoculation, would that juice the markets even better if it's the infrastructure bill, say, as well?

KEITH LERNER: It depends. I think the first thing I would say is their stimulus is important. But we are in an economy that is spring-loaded based on household savings already. So any more stimulus that we get will just juice the economy even more.

Now, there could be a negative effect that if we move too strong, you see interest rates moving up quicker than even we anticipate. And that would hurt multiples if we got, you know, significantly higher. That's not our base case, but something to think about.

But again, I think a big story is the economy-- as these COVID numbers come down, as vaccinations roll out, this economy is on a trajectory to improve meaningfully even without stimulus. More stimulus, obviously, will help. And there are segments of the economy that, obviously, need it. But that's an important point I want to just highlight.

- And Keith, real quick, we're in the midst of earnings season right now. This week is supposed to be the busiest week here. We have over 100 names of the S&P set to report. What are you looking for in these reports when we're trying to figure out exactly, I guess, what sectors are going to outperform and what names you're favoring at this point?

KEITH LERNER: You know, I just think as far as are we still beating expectations-- but not only are we beating expectations, because we always do almost every quarter, it's the magnitude. But it's also just the reaction to some of these beat-up sectors or these value sectors that have had a big run the last few months, how they react as a whole.

But the main thing is we've been tracking-- is the forward earning estimates for the S&P 500 are moving higher at the fastest clip since 2009. We're looking for that to continue. If that continues, any setback, any disappointment because sentiment's a little bit hot, we would look as a buying opportunity as a whole. But again, we're looking mainly at forward guidance and the reaction to those reports.

- All right. Jared Blikre, we want to bring you back in here. GameStop is one of the names that we mentioned at the top of the show-- another wild day of trading. It halted earlier, soared over 100%, closed up just over 18%. What are you looking at here?

JARED BLIKRE: Yeah. I guess we can't talk about this stock enough today. And it is kind of ironic. I mean, if you look at the heat map here, picture is worth a thousand words. And of course, it's not just GameStop. And this is only one day. You-- like if you take a look at the two-day total here, GameStop-- up 78%.

But I think one of the big takeaways for me is that this is probably the first time that I've ever seen a bunch of retail traders take down a Wall Street hedge fund. And that hedge fund would be Melvin Capital Management, which needed a $2.75 billion investment, capital infusion, from Point72. That's going to be about, I think, $0.75 billion, and then another $2 billion from Citadel.

Now, the proprietor and founder of Melvin Capital used to work for Point72. So there's a relationship there. I don't know about Citron. But here's another layer of irony. And that is that Citron is probably executing most of the orders from the Robin Hood trader because there's zero commission and they're farmed out, probably executing most of the orders that actually took down the firm.

So I just want to say there are a lot of other stocks in this basket today that are suffering from short squeezes. But it doesn't mean that they're bad stocks or that these are bad plays. They just happen to be bad at current levels.

So here is iRobot, for instance. Now, this is a stock that was very classically just basing and going sideways for about seven, eight months here. And it broke to the upside.

Usually, when this happens, you don't see it go parabolic like this. You see it come up a little bit, back-test area, then go up. I think we're going to come down. And we've already come down from some of these really elevated levels. But I just want to emphasize not all these stocks, including Dillard's, are necessarily bad.

- Jared, thank you. Frances and Keith, one quick question to both of you-- don't talk specifically about GameStop. But let me ask you, is this going to send a shudder through Wall Street that retail investors-- it's David versus Goliath. They've got the shorts. Why don't you go first on that one, Frances? Does it worry Wall Street that this has happened?

FRANCES NEWTON STACY: No. I just think that there's some mechanical things that are occurring in the market space. And I don't know that you can predict that retail investors are always going to win that tug-of-war.

I mean, earlier, you know, back in September, we had, you know, all of that call buying, which, you know, gave us artificial demand. And the underlying stocks of those calls were covered by the dealers. You just have these mechanical sort of anomalies.

I think that, you know, in a probability space, retail investors are not going to have the sophistication to take on Wall Street. But in this case, it was just a volume issue.

So I don't know that we're going to see this in the future. It's just mechanical. And you really can only win the mechanical game if you have that understanding.

- What about you, Keith?

KEITH LERNER: Yeah. I-- listen, I think it's-- I think if you're an institution or a hedge fund, you maybe keep tighter risk controls because if-- this stuff is really unusual when we see stocks moving 80% on a short squeeze in a day.

Ultimately, we think that the hedge funds, the institutions that have sophisticated investment platforms and risk management tools will be fine. But again, there's some adjusting because you don't want to be flat-footed and having a short work against you for the very reason you mentioned at the onset as far as what happened this hedge funds. But ultimately, we think the institutions are still in a good backdrop.

- All right. Keith Lerner is chief market strategist at Truist. Frances Newton Stacy is Optimal Capital Director of strategy. Good to have you both here. We appreciate--