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Market Recap: Thursday, August 12

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Stocks traded mixed on Thursday to trade near all-time highs, as investors took into account more mixed economic data and considered the likelihood of more government spending on infrastructure. Tom Graff, Head of Fixed Income at Brown Advisory and Teddy Parrish, CEO & CIO of Parrish Capital joined to discuss.

Video Transcript

SEANA SMITH: About 3 minutes left in the trading day. S&P and NASDAQ holding on to gains-- S&P on track for another record close. We'll have to weight to see what the Dow does here in the final minutes, because we're right around that flatline. We have Teddy Parrish, CEO and Chief Investment Officer of Parrish Capital. We're also joined by Tom Graff, Head of Fixed Income at Brown Advisory.

Teddy, first to you, because investors are weighing that hot inflation number that we got out this morning, then also the fact that the jobless claims picture seems to be improving just a bit, although historically speaking, still a very high number. I'm curious just what your big takeaway was from the data that we got out this morning.

TEDDY PARRISH: Well, I think that the PPI number was a little hotter than the CPI on yesterday. But you know, the Fed's still standing on the sidelines. I happen to think that the numbers are elevated and probably going to go a little higher. You know, you have to be from you know Venus to think that inflation is not going to be a problem at some point, given the level of stimulus that we applied to basically backstop the global economy.

At some point, all of that stimulus is going to come to a head and we're going to have oversized inflation. It's just when is the Fed going to notice. Either they know it and they want it to overheat or they are behind the curve.

ADAM SHAPIRO: Tom, do you think they're behind the curve? Or do you think things are going to get out of hand and they'll take control?

TOM GRAFF: Well, I think the current inflation prints we're seeing in the 5s reflect mostly transitory things, and they would calm down on their own. But I do think that once those pandemic-specific effects have passed through, that there's still going to be some inflation that is above the Fed's comfort zone. I think they're going to be able to take control of it. I think they'll start tapering QE in 4Q, and they'll probably wind up hiking either late in '22 or maybe early in '23. And then the question just becomes, how many hikes to take? How high do interest rates need to go to get inflation back under control?

SEANA SMITH: All right, let's take a look at where things stand here with the final minute of trading. And again, you're looking at gains-- we'll see if the Dow can hold on to its 2-point move to the upside. The S&P up just around 3/10 of a percent, the NASDAQ up just about 3/10 of a percent. That's good for a 51-point move to the upside.

In terms of some of the leadership that we're seeing today, the Dow leaders, Salesforce and Apple, by far the performers in the Dow today. Those two stocks, as you can see on your screen, up over 2% as it stands right now. Merck up just around 1%, as well as Microsoft and Cisco. Those five stocks are the top performers in the Dow today.

In terms of the sector action that we're looking at, by far health care is the outperformer today. Jared was talking about some of the outperformers that we're seeing within the health care sector-- Moderna, of course, one of the names that has been slipping back into positive territory today after a couple of days of losses. Technology another mover to the upside, as well as communication services.

[BELL RINGING]

ADAM SHAPIRO: Uh oh. There's something that means when they miss the ring. OK, we have a closing bell. Let's see where these markets are going to settle. Oh, we're going to all be in the green there. Look at that-- the Dow is going to be up 14 points, S&P 500 up 13 points, NASDAQ up 51 points.

Just want to draw your attention real quick-- one stock that's been the top trending stock on the Yahoo Finance platform today, Palantir Technologies. Their shares were up 13% in trading and they had a really good earnings report. Revenue grew by 49%. So let's get back to the panel and talk about some of the things that are going on here.

And I want to go back to you, Teddy, because when we're looking at the earnings we're seeing this season, this quarter-- the S&P 500, I think the beats have been over 80%-- doesn't seem sustainable. And as we're looking at the third quarter, what's worrying you? What should we as investors pay attention to, because I imagine there will be lots of revisions come the fourth quarter, and then even next year looking backward.

TEDDY PARRISH: Well, I think that truly, this earnings season, the last earnings season, has been very resilient as expected from the anemic earnings we had last year. So the comparisons have been really easy. We suspect that this year we'll finished solidly third and fourth quarter.

But as we're seeing those revisions go up, meaning growth going higher for the coming quarters, we're also seeing a little decline in growth estimates for 2022. So I think reaching the peak of positive earnings revisions is an important thing to pay attention to. And I think 2022 is going to be a little harder to come by above average growth. And we'll probably see a lot more negative surprises.

So we're focusing on companies that can actually buck the trend and actually continue to improve their earnings, namely companies in staples, financials, and even energy-- those sectors that will do good in an inflationary environment and ones that I think there's a bit of a positive potential still in their earnings forecasts.

SEANA SMITH: Tom, to move in the 10-year that we've seen this week, I guess it moved a little bit to the upside today-- up just around 1% basis point to 1.37. What do you make of this move higher? I guess, do you think we're going to continue in that same direction or will we be relatively range-bound here?

TOM GRAFF: Well, we think most of them move down from the 1.50s into the 1.20s was more technical in nature. I think it was a lot of foreign buying, it was some short covering, it was various things. I don't think it reflected fundamentals. The fundamentals have only moved to growth being faster and probably inflation being more persistent, as both Teddy and I said earlier.

So ultimately, we definitely think interest rates are going to move higher. How much higher just depends on how strong this recovery really is, how much capacity there is in the labor market, how strong wage pressure is, and how much pricing power companies have to push those higher wages on through to end consumers. You know, we saw this last CPI report-- if you looked at just industries that are very labor intensive on the services side-- so that sort of means where almost all the cost comes from services-- that inflation was almost 8% on an annualized basis for the month of July. That does tell us that, at least for now, those wage costs are turning into higher consumer costs.

ADAM SHAPIRO: You know, Teddy, when we look at where you're talking to your clients and where you're currently overweight, like energy, and financials, materials-- what's going to throw a wrench, do you think, into those discussions with your clients? Is it going to be the Fed or is it going to be just simple supply and demand kinds of issues?

TEDDY PARRISH: All of the above. I think that the Fed has the potential to shock the market more than anything else. I do believe that, you know, there are some companies that have seen a lot of their demand pulled forward and the future may not be so bright. They're going to rebuild inventory, meaning their growth is probably going to be lower in the future.

And I'm really just sitting back from a personal perspective trying to figure out when I'm going to be able to find my TaylorMade golf clubs, because they're still tough to find in many areas. But you know, once we get inventories rebuilt and, you know, will those companies still see the demand to actually meet the growth estimates for next year? But the Fed remains to be the biggest question-- what are they going to do after this huge stimulus campaign from last year?

At some point, they're going to have to pull the plug or at least moderate the bond purchasing and reduce the stimulus. That's going to be the biggest thing to stop the party, in a sense.

SEANA SMITH: One of the big earnings reports that we were waiting for, Airbnb just releasing its results. We want to get over to Ines Ferre for a closer look at these numbers. And, Ines, taking a look at the stock price, moving just to the upside here on the heels of the numbers that we got. What do you have?

INES FERRE: That's right. It's a beat across the board. Second quarter gross bookings vaue coming in at $13.4 billion. That was a beat. Second quarter revenue coming in at $1.34 billion. That was a beat. A loss per share of $0.11. That was a strong beat. Also, the company saying that its third quarter revenue will be well above third quarter 2019 levels.

Also, the company giving some commentary on the variant of COVID-19, saying that it will keep affecting near-term travel behavior. Some interesting commentary also in the company's shareholder letter saying that Airbnb booking trends seen during the pandemic are here to stay, including stay outside of top destination and long-term stays. Those longer term stays in areas outside of urban cities tend to bring in higher rates.

And that is what the company has been seeing. It had been seeing that in Q1 and also in Q2-- seeing that growth in non-urban areas and longer stays. Seana, Adam.

ADAM SHAPIRO: Teddy, I want to go back to you on what we just heard about Airbnb, because they've been a beneficiary of so many people who leave major metro areas during the pandemic. And there's news that even Facebook is considering extending its return to the office. Are those plays, the Airbnb type of stocks, are they going to be able to sustain it? Eventually, we get out of this pandemic and we may have a hybrid, but you can't rent forever.

TEDDY PARRISH: That's correct. I think that the pandemic actually pushed people to isolate and actually made a service like Airbnb more favorable for folks travel and spending time away from home. As the economy opens back up and as the virus tempers down, I think more people are more apt to go back to hotels. And that will be a issue for Airbnb.

And also, we've had a lot of investors crowd into the space and actually buy rental properties to store and put on Airbnb's site. That is probably overplayed at this point. I do think that the growth profile of Airbnb will be impacted going forward once we're done with the virus.

SEANA SMITH: Tom, what's your reading on the Delta variant and the effect that you think that this could have on the recovery? Because Airbnb, like we were just talking about, saying that the variant will keep affecting near-term travel behavior-- has this caused you at all to reassess your outlook, at least in the short-term?

TOM GRAFF: Well, listen, I think it could certainly have an effect. And I think if you're looking at a stock like Airbnb, or you were looking at an airline, or what have you, I think you got to widen your range for what possible earnings could look like in the next few months. But I don't think we're going back to lockdowns. I don't think even with the percentage of vaccinated folks lagging where we might wish it was, I think it's high enough that Delta will have maybe a meaningful, but a transitory effect.

ADAM SHAPIRO: When you say it's going to have a transitory effect, I mean, at some point, the supply chains do open up. At some point, the things that have shot up in price because of these disruptions, do they come back down in price, and does that put a hit on future earnings?

TOM GRAFF: Well, look, I think that comes down to how much pricing power does your company have, right? So I think companies that have real product differentiation and can therefore pass through higher wage costs and the like will do great as long as demand stays strong. I think companies that have less differentiation and wind up being price takers are going to struggle.