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Market Recap: Monday, June 14

Stocks narrowly eked out fresh record levels as traders awaited a key monetary policy decision from the Federal Reserve. The S&P 500 pushed into positive territory in the final minutes of trading, logging a fresh record close. The Dow ended lower, while the Nasdaq gained and set its own record closing level. Treasury yields advanced, and the benchmark 10-year yield hovered just below 1.5%. Cheryl Smith, Economist, Portfolio Manager, Trillium Asset Management and Robert Dye, Comerica Bank Chief Economist, joined Yahoo Finance Live to discuss.

Video Transcript

- Got just around two minutes to go until the closing bell. We have Cheryl Smith, an economist and portfolio manager at Trillium Asset Management. We're also joined by Robert Dye. He's Comerica Bank's chief economist.

Cheryl, let me start with you. Just around 90 seconds to go here. Some action at least in the NASDAQ, the big outperformer today. We're seeing investors buy some of those big tech names. What do you make of this move that we're seeing to the upside there?

CHERYL SMITH: I would say that we're seeing the effect of the somewhat lower interest rates. We've broken out of a channel. So the 10-year treasury has gone down quite a bit. And those longer duration big tech names are benefiting from it.

I think the sentiment is getting a little bit more clear that the Fed is not going to start raising interest rates on Wednesday, or the next meeting, or the next meeting after that. So I think it's really a reaction and a relief.

- All right, we have just around a minute here. So let's take a look at today's performance here overall. We have the Dow still in the red, although, we're seeing a bit of a comeback in the final couple of minutes. Now off just 108 points. We were up over 200 points as we started the hour.

The worst performers in the Dow today, JPMorgan. That stock off nearly 2%. Walgreens off about 1 and 1/2% as well as Dow. And Goldman Sachs and Cisco rounding out the five worst performers in the Dow today.

The S&P, looks like it's going to hold onto gains, up just around a tenth of a percent. And the NASDAQ, which has been the outperformer for the entire trading day, now up just around 7/10 of a percent.

Take a look at some of the sector action. Financials continuing to be the underperformer, with the XLF off just around 1 and 1/2%. Materials also in the red, as well as industrials and energy. On the flip side, we have technology leading the way. Not too surprising when you see the performance of the NASDAQ, as well as communication services.

[BELL]

- And we have a closing bell. We're just waiting for the gavel. And that applause you were hearing were probably the members of the Armed Services who were walking up to gavel in the closing bell.

The Dow is going to settle down about 84 points. But the S&P 500, as Seana pointed out, flipped to positive territory with 15 minutes left in the trading session. It'll settle around positively 8 points higher. The NASDAQ will settle up 104 points.

Let's go back to our guests and talk about what we're witnessing here. Because there's a lot of back and forth about inflation. And as we go to the guests, let's bring in first-- I want to go to Cheryl. And I want to go back to you on this issue of inflation and stock picking. Because although the S&P 500 flipped to positive territory, couldn't that have just been driven by the big names, like Apple and Microsoft, which we saw buyers going in towards the end of the day?

CHERYL SMITH: That's certainly a part of it. But they are challenged in an environment if you see interest rates going up, which we had been seeing for the prior couple of weeks.

So I think having the interest rates drop down with a little bit more calm sentiment about the Fed really is helping those. And, you know, those large names, they're 25% of the S&P 500. So when the interest rates are going up, that's a challenge for them.

- Robert, a lot of the tension from investors is going to be on the Fed announcement on Wednesday and what we hear from Fed Chairman Jay Powell, of course. The big debate out there what Adam was just talking about is on inflation, whether or not it's transitory. What is your view, just after the CPI data that we got last week, and the other data points that we've been collecting over the past couple of weeks?

ROBERT DYE: Well, I think the Fed has got a problem on its hands. Because clearly inflation has gone well beyond what Richard Clarida and other Fed members said about a year ago that said they might tolerate inflation in the 2, 2 and 1/2% range. And we got the CPI print, as you just mentioned, at 5% year over year. We'll get a pretty hot PPI number here this week.

And I think the Fed has got a lot of pressure on it to define, or clarify, or say something other than inflation is transitory, because inflation has been here for a while. There's no signs of it letting up. We're seeing inflation expectations starting to become unhinged. New York Fed data today talked about that. And so we're seeing wage data also under pressure. So all aspects of inflation here are starting to become a little unmoored from this near 2% band we've been in for a while.

- And Robert, we still see the 10-year struggling to get anywhere back close to 2%. I wanted to ask you, could the Fed send us, you know, a contradictory statement if they say, don't worry about inflation, but then they begin to reduce their asset purchases?

ROBERT DYE: In my mind, that's not a contradiction. Actually that's an interesting development from the Fed in that they're reinforcing this idea of first in, last out. And we think about three Fed programs, interest rates, asset purchases, and then special programs.

They've already started to unwind the special programs. They're talking about talking about unwinding asset purchases. And then the last thing will be the eventual lift off from the zero lower bound. So we have to respect that sequencing, which tells me that the Fed is still 12 months minimum, likely much longer, 18 months, 24 months away from liftoff in terms of interest rates.

- Cheryl, do you think the Fed is downplaying the inflation risks at this point?

CHERYL SMITH: I don't think that they are downplaying it, because downplaying seems to indicate that they are overdoing it. I think they're being appropriate about it.

I would agree with the Fed that this inflation is going to be transitory. And I'll point to, for example, lumber prices are down 40% since their high in May. Whenever you have a complex economy with things that take longer to produce than three minutes or even three months, you're going to see spikes as an economy restarts. So it's really been a historic change in that. And I think that a couple of months is really too short a time.

When I think transitory, I think the Fed is really thinking in terms of eight months, nine months, a year. It'll take that long for supply chains to start getting back into shape. And we'll start seeing that. So I think that the Fed is being very appropriate on that wait and see. I do agree with Mr. Dye that it will be a long process. Special programs are under.

We will see eventually-- I don't expect that they will actually start tapering until the end of the year. And then we probably have a year of tapering. But I think that that gives them plenty of time to really look at inflation and compare what wage rates are doing, what different elements are doing, commodities versus finished products, versus consumer products.

And, of course, what they really are looking at is the PCE. So that is a much broader measure than the CPI, which is sort of your flash estimate.

- OK, everybody, hold on. Let's get back to Jared Blikre, floor of the New York Stock Exchange. Cause we have a record on the NASDAQ.

JARED BLIKRE: It looks that way, over at the dealer's network. And let's take a look at the Wi-Fi interaction and just check out what happened in the final minutes of trading here. Pretty big surge into the close. That's probably stops going off. And that's because it was reaching its highs from earlier in the year. And when we set those off, it's just off to the races.

But you can see now, we have the S&P 500 at a record high, NASDAQ at a record, Dow almost there. So things kind of shaping up there.

I just want to point out one more thing. The value versus the cyclical trade. This is year to date, Russell 1,000 growth versus value. Value's up 16.8%. Growth, only 9%.

But I'll tell you what. You look at the last month, it's a reversal. So growth has been definitely the favorite trade. Have to see if this carries through the summer. That would be a major pain trade for the value and cyclical crowd.