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Market Recap: Monday, January 3

U.S. stocks closed at record highs on Monday, as investors built on momentum from last week into at least the first session of the new year. Giles Coghlan, HYCM Chief Analyst and Art Hogan, National Chief Market Strategist joined Yahoo Finance Live to discuss.

Video Transcript

ADAM SHAPIRO: All right, we are roughly 40 seconds to the closing bell. On the other side of the gavel, we're going to be talking with Giles Coghlan, HYCM chief analyst, especially those of you who want to get heads or tails of trading currencies. This is one of the people you want to listen to. Art Hogan is national chief market strategist. Both will help us plot strategies as we head into the new year. But right now, let's take a look at where we're setting up for this closing bell. Look at that. First day of the New Year's trading session, the Dow is up as is the S&P 500 and the NASDAQ. Here we go. Let's get a gavel and a closing bell.

[MUSIC PLAYING]

EMILY MCCORMICK: And that is the closing bell on the New York Stock Exchange this Monday, January 3, the first trading day of the new year. Now taking a look at where the markets are settling may take a couple more minutes to get those final closing prices on the indexes. But for now, we have the Dow up more than 200 points, or about 0.7%. The S&P 500 up about 0.6%. And the NASDAQ up about 1.2% as we have the tech stocks, including Apple outperforming during today's session.

Now we want to turn it back to our panel to break down the market action for the past trading day. Art, I'll turn this first question over to you. I'm wondering as we look ahead to the trading environment that we're entering in 2022, what do you think are some of the main key differences between what we're seeing now and how investors should be thinking about this year versus 2021.

ART HOGAN: Yeah, Emily. It's such a great question. And when we think about 2022, I think the biggest change will likely be that the multiples ascribed to really fast growing momentum type companies are going to compress. We saw that in the fourth quarter of this year. We'll likely see more of that in the first half of this year. So what does that mean as an investor? You want to choose companies in your growth portfolio that are measured on a price to earnings versus a price to cash flow or price to sales.

We've seen significant multiple compression already. But I think that continues as we gradually see rates rise. We've seen that now. We've bounced off the 1.34 level on the yield on the US 10 year, and closed today above 1.6. We think we're going to average about 1 and 3/4 next year versus the 1 and 1/2 we averaged last year. So I think that the multiples ascribed to those fast growers are likely to continue to be compressed. And I think you really want to focus on those kind of technology and growth companies that actually have P/Es

ADAM SHAPIRO: Giles, I want to pick up on something we just heard. And when you look at the 10 year being up above 1.6, we know that this is going to be a rising interest rate environment. The dollar's going to start out strong. But as an investor, I've got to pay attention to the value of the dollar. And these days, the old rules, a strong dollar, cheap oil, that's out the window. So what is the trick? Or what's the danger for those of us who are not as accomplished when we consider not only the rising interest rate environment, but the value of the dollar as we try to plan our strategy for the coming year?

GILES COGHLAN: Yeah, sure. So the dollar has some characteristics around the turn of the year and the start of the year that are quite unique. So towards the end of the year, from around the 22nd of December to the 31st of December, the dollar tends to weaken. You then see the dollar strengthen from the first of January to the ninth of January. So over the last 25 years, the dollar strengthened 19 times. So over 75% of the time, the dollar strengthened.

So you have this kind of seesawing seasonal dynamic that the dollar has. So I wasn't surprised to see the dollar strengthening today. And I was putting it out on my Twitter feed reminding people of that strong seasonal pattern. Now I'm expecting that seasonal pattern to settle down, say, from about the 10th, 11th, 12th of January. And then as you rightly point out, the expectations for a bullish fed, the fed fund futures looking at three interest rate hikes according to a December contract for next year, that's looking very, very high.

So with the amount of people who are long the US dollar, it wouldn't be a surprise to see some dollar weakness if, for example, we saw some of the data points out this week. The ISM data points, weak jobs on Friday, ADP jobs weak on Wednesday, if we saw some weak fundamental data points coming through, then I wouldn't be surprised to see some dollar weakness coming into the end of this week or the start of next week.

But it's very much going to be depending on what's happening with US economic data points plus the risk climate, which is linked to Omicron and how much of a risk that is in terms of hospitalizations and deaths.

EMILY MCCORMICK: Art, picking up on that point with the Omicron variant and the risk of hospitalizations and deaths, we had a doctor on earlier who said we should expect to be hunkered down the next two to three weeks at least in the US, given this latest surge. How are you thinking about the virus risk to economic activity and corporate profits this year? Is this a short term risk, or something that could exert considerable pressure for longer?

[INTERPOSING VOICES]

ART HOGAN: Emily, I think the fact--

EMILY MCCORMICK: Sorry, I think Art, go ahead.

ART HOGAN: No worries. I think the fact as you just pointed out that the doctor talked about two to three weeks versus when the Delta variant came in February of last year, we were talking about two to three months. So I think the duration of the economic damage that follows in the wake of this particular variant is going to be shorter and shallower. And I think that we've gotten used to that with every new variant and every sort of new wave of COVID infections. And I think this will be the shortest of those. We're seeing the very rapid transmission. But that likely means a very rapid peak, and then a fall from that peak of new case discovery.

So we suspect the economic damage is going to be limited. And it won't be something we'll be talking about by the end of the first quarter.

EMILY MCCORMICK: Giles, you wanted to get in on this. And we want to hear what you have to say.

GILES COGHLAN: My apologies, Art.

ART HOGAN: [INAUDIBLE]

GILES COGHLAN: Yeah, no. I think I would agree with what Art's saying. My base case is that this will fade away. Although the tail risk that I do see is coming from China. So they have a COVID free policy. So unlike the rest of the major developed countries who are willing to accept cases spreading within the community, China wants to see cases completely eradicated. So that can mean a handful of cases could shut down an entire city for instance.

Now that could result in further supply chain issues if China maintain that COVID free policy. Now they have the Winter Olympics coming up around February. So it's unlikely that they shift away from that COVID free policy before then. So that is a sort of risk that I see as a potential risk off trigger if we see China maintain that COVID free policy and major cities shutting down that could result in more supply chain bottlenecks.

EMILY MCCORMICK: Art, I want to ask you something about China that's more political than it is COVID. And it's great to point out that we have the Winter Olympics coming up. Because as an investor, my fears about political action regarding China and its clampdown on its own people, and the impact that has going forward really don't seem to-- they wouldn't get worse until after the Winter Olympics. Is that something an investor should be concerned about? We saw the article over the last week about how they use social media to clamp down on expatriates throughout the world.

They're clamping down in Hong Kong. I mean there are other issues that can impact China's ability to supply the world than just COVID.

ART HOGAN: Oh for sure. And China has obviously gone through a lot of change this year cracking down on businesses getting too large. We've certainly seen companies delist from the US Stock Exchange that are Chinese based because they don't have a rule of law, and they certainly don't have accounting practices, and all the types of things that we want to protect investors from. So China has been-- this is not a new threat. China's been a threat for investors for the better part of your last 12 to 24 months.

Now that said, when we think about supply chains, they are clearly a big part of that logjam that we have. And if in fact they continue with some of the human rights issues that they've been proceeding with for a good period of time, that could certainly be problematic with that concern that we have that inflation won't abate in the time frame that we think it's going to. That's not our base case. But certainly, anything that happens post-Olympics that points us in the direction of things getting worse, not better, I would certainly say is going to be problematic for supply chains.

EMILY MCCORMICK: Giles, I want to ask you really quickly about something that you pointed out in a note to us. And that was the New Zealand dollar Japanese yen currency pair potentially set for a strong first quarter. I'm wondering, what does this mean for currency investors and potentially also for investors in other asset classes in terms of what that could be signaling about the market environment?

GILES COGHLAN: Yeah, the yield differentials between the New Zealand 10-year and the Japanese 10-year bonds are indicating more upside in the New Zealand dollar Japanese yen pair. Now it's not without risks, but I'll just explain the base case first of all. Firstly, the RBNZ is one of the most bullish central banks. They projected the last interest rate meeting moving interest rates way up to 2.6% from their current 0.75% at the end of 2023. So their outlook is really strong and very optimistic in terms of their growth.

So that does favor New Zealand dollar buyers over the medium term. The Bank of Japan, by contrast, yes, they have reduced their emergency pandemic program. But they still are maintaining support for medium sized businesses in Japan. And they're not expected to change from their very low minus 0.10% interest rate footing for the foreseeable future. So that means as long as the risk tone stays positive, you would anticipate further buyers in the New Zealand dollar Japanese yen pair from market.

However, the risk is that the Japanese yen does strengthen on the risk off tone. And if we saw, for instance, lockdowns taking place in China, impacting expectations of global growth, then we'd likely see more inflows into the yen. And although that wouldn't change the medium term upside outlook for the New Zealand dollar Japanese yen, in the short term, you would likely see some more selling. So that means you have to choose your technicals carefully and make sure you've defined and limited your risk so that you can always get out and re-enter at a later stage.

But I do think the New Zealand dollar Japanese yen pair does offer really good value at market with stops underneath recent swing points looking for a potential shift high coming into Q1.

ADAM SHAPIRO: That explanation is why many of us who are novices hire people like you and your firms to guide us through those issues. Giles Coghlan, HYCM chief analyst. Thank you. Art Hogan, national chief market strategist. Good to see you, gentlemen both. Happy New Year.