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Market Recap: Tuesday, January 19

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Stocks rose Tuesday as traders returned from a long holiday weekend in the U.S. and eyed signs of mounting support for significant fiscal stimulus out of Washington. Annandale Capital CEO George Seay and Wells Fargo Senior Economist Sarah House joined Yahoo Finance Live to discuss.

Video Transcript

SEANA SMITH: Under 3 minutes till the closing bell. All three of the major averages holding onto gain. We want to bring in George Seay. He's the CEO of Annandal Capital. We're also joined by Sarah House, a senior economist at Wells Fargo. And George, let me toss it over to you first. We're looking at gains today across the board seeing some buying action. What do you think is driving today's move to the upside?

GEORGE SEAY: Positivity over a new administration and a fresh start and turning the page. I think that whether you like the election results or not, I think people are ready for a fresh start. They usually are after four, eight years of an administration. And I think they're optimistic about stimulus. And I think they're looking forward the year.

If we finish the first week in January positive and if we finish the whole month in January positive, although that's not exactly a substantive illustration of what's coming in the future's been good in past years for a full year of gains. And the economy's going to have a really big resurgence once this vaccine gets widely distributed. And I think people are anticipating, Seana.

ADAM SHAPIRO: Sarah, hold on. We're going to get you in a second, especially about your call for GDP. But we want to bring in Jared Blikre because we're getting very close to that closing bell. And Jared, what do you got your eye on?

JARED BLIKRE: Yeah, well, let's go straight to the Wi-Fi Interactive where we see tech. That would be the NASDAQ and small caps. Russell 2000 really outperforming and see the Russell was up 1.3% and the NASDAQ at session highs and adding to gains at the end of the day up 1 and 1/2%.

Let's take a look inside the NASDAQ. And we can see some outperformance in the communication services sector. Facebook is up 4%. Alphabet is up 3%. And so that's really powering those gains there. You see Apple and Amazon each up about half a percent. And Microsoft has come in. And it's up 1.8%.

But it's not just the mega caps that are outperforming here. And we're seeing some strength in Chinese stocks, like Pinduoduo and Baidu, but also in the semiconductor space. Now, you take a look at this. A lot of these issues here are these securities at record high, like Lam Research, Qorvo. And you can see from 2% to 5%, most of these guys really putting in some nice gains here as we round out the first trading day of this holiday shortened week.

Now, here's a sector action for today. You could see energy is in the forefront. It's up 2%. We have crude oil up over 1% today followed by communication services and tech. Those are the outperformers. To the downside, it's a pretty defensive setup here. We've got real estate, staples, and utilities. Those are in the red. And here's the closing bell on Wall Street.

[RINGING]

ADAM SHAPIRO: Put a fork in it. That is the last trading session of the Trump era. Tomorrow at this time, it will be Joe Biden's economy-- Joe Biden's presidency. The markets right now preparing to settle around. The Dow is going to be up about 120 point. The S&P 500 up 31 points. NASDAQ was settled close to positive within sectors.

Here, Jared hitting about some sectors. Energy was up 2% today. Information technology up about [AUDIO OUT] communication is up about 2%. Health care is up nearly 1%. And then you get material, about half a percent.

We're going to talk about all of this with our guests. We want to go to Sarah right now, because I alluded to what you had told your client that in 2021, GDP growth will be roughly 4.6%. In 2022, 4.8%. There could be the unexpected. But what makes you so confident?

SARAH HOUSE: Well, I think when you look at the positions of households, You have a potential for a really strong second half of the year when you look at the amount of savings that consumers have. We've had tremendous fiscal support through this crisis. And yet, at the same time, consumers have been able to go out and safely spend the same way.

And so there's a lot of firepower that we expect to see drive consumer spending in the second half of the year. And we're looking for GDP growth to accelerate toward somewhere around 7% annualized in that second half.

SEANA SMITH: George, going off of that, we see this consumer come back. We also possibly get another round of stimulus. I guess the question is how much of this has already been priced into the market, or will it actually provide a bigger boost here to the markets going forward?

GEORGE SEAY: Most of it's been priced in. but some of it has not depending on how strong the recovery is. And I think we all just have to hold our breath and see how strong the surge really is. I think it's going to be very strong I'm more pessimistic on 2022. I'm worried that we're going to run out of rocket fuel at some point I think most analysts are estimating the S&P is going to make somewhere between $190 and $200.

A share of earnings in 2022-- that's wildly optimistic. And I think it's going to be really hard to make that. And also watch interest rates and inflation, because if the 10-year gets back up above two at some point this year, it's going to start to pull money out of stocks and into bonds because it's more attractive from a yield standpoint. And the multiples on stocks will come down. So I think those are the things to kind of watch.

ADAM SHAPIRO: George, you are the first guest we've had who's actually said we might see 200 basis points. We might see the 10-year above 2%. First guest-- what makes you think that could actually happen?

GEORGE SEAY: I think we're seeing an unprecedented even from a Great Recession standpoint amount of money printing by the Fed and stimulus by the legislative and executive branches of the government that the stimulus is ridiculous in size. It's so big.

It's like we're almost taunting or daring inflation to come back. And we may get what we want. But it may bite us and instead of cozy up to us. You look back at the Volcker years, which very few people remember anymore when he was raising interest rates over and over and over again. The 10-year peaked out at about 17%. We're just over 1% now.

So just getting up to 2%, 3%, 4% over the next several years isn't much of a move compared to where it was several decades ago. So I think this 40-year bull market in bonds is going to unwind. I just don't know how much. And if the 10 year stays in the 1 to 2 and 1/2% range, I don't think that's a big threat to stocks. But inflation rips back, that's a threat to everything.

SEANA SMITH: Sir, how about the part of the equation when it comes to the labor market or at least as it pertains to the economy. Do you think we're going to continue to see job losses, at least, in the near term when you look out, I guess, just one month, even two months from now?

SARAH HOUSE: I think it's going to be a rocky few months ahead. So when you look at where jobless claims are this past week, we saw the largest number of filings since August. Now, some of that might be noise around the seasonals. But the trend has drifted higher, which does portend the potential for another negative print.

Now, I think it's important to dig down to the composition of that. So we saw really the job losses concentrated in those industries that have been directly hit by COVID and social distancing. So leisure and hospitality was pretty much responsible for the entirety of the decline in jobs, whereas you have other sectors continue to plot along.

So other services where you can work from home, you see activity in the good sector, maintain its rate of growth in terms of employment. And so it's really a split picture. And I think in some ways, the job losses really distort the fact that you're actually seeing the labor market hold up pretty well, considering.

ADAM SHAPIRO: So Sarah, as the senior economist at Wells Fargo, when you hear George talk about the 10-year possibly above 2%. You're watching changes at the Fed. And they're going to be changes subtle this year and even next year. Does any of it concern you?

SARAH HOUSE: So we're taking a look at the voting composition of the Fed this year. So you have the normal rotation that we'd see with the regional Fed presidents on that mildly more dovish. But it's really just more a consolidation I'd say of the center.

And so I don't think that that really portends any shift in policy this year. You have the Fed officials really coalescing around this view that they're not ready to talk about normalizing policy any time soon. They're not ready to talk about potential tapering. We saw that pushback last week.

And so really when we look at the voter composition and what's ahead, I think this is going to be a Fed that's steady as she goes for for a while-- still waiting for really the pandemic to be under control before they even start thinking about the potential for normalization and, of course, wanting to see what happens on the inflation front is also continued progress in the labor market.

SEANA SMITH: Sarah and George, stand by. We want to get to some breaking news. Jared Blikre has Netflix earnings for us. Netflix shares jumping here after hours. Jared, what are the numbers?

JARED BLIKRE: That's right. And there was a miss on their bottom line. But the shares are up almost 8% as I sit here-- excuse me. So the headline number is for fourth quarter EPS. That miss was $1.19. The estimate was for higher, $1.38.

Fourth quarter, their fourth quarter revenue was a tiny, tiny beat, came in at 6.64 billion. The estimate was for 6.63 billion. Now, the numbers everybody's focusing on are those subs. And they got above 200 million for the first time ever.

Fourth quarter streaming paid, and that changes. I came in at 8 and 1/2 million. The estimate was for lower at 6.06 million. And their outlook for the first quarter where they got some tough comps, they're expecting 6 million subads in the first quarter.

Estimate was for higher, though, 7.45 million. They're also looking at some other things here. It looks like 2021 free cash flow. That should be about break even. And they're saying that they're very close to being sustainably free cash flow positive.

A lot of focus on there because, of course, they didn't have that many studio expenses in 2020. But that is going to ramp up in 2021. They're going to be spending a lot more money on programming. So we'll have to see how that plays out. Also some focus on their gross margin.

Operating margin actually is, they're shooting for 20% in fiscal year '21. That would be an improvement. So aside from that, the headline subscriber number-- that was a nice feed. But that adjusted EPS-- that was a miss. Shares are up about 8% here in the after hours trading.

ADAM SHAPIRO: I want to bring this to George, and I'm curious. We talk tech, tech, tech. And you appear to be someone who is in favor of tech. But when you break out tech and streaming, as we go through this pandemic-driven transition, do you see this playing into growth for the tech venues that have video streaming? It's really more entertainment. But does that fall into the tech category in your call on tech?

GEORGE SEAY: No question. And I am favorable in not abandoning tech. But actually I'm more constructive on value in small cap and international stocks this year. I think that that's where the-- the big money is going to be made. And I think if you look at energy that's up between 15% to 20% this month alone compared to the S&P that's up about 1 and 1/2% that that's a better trade at this point in time for people who were rotating in areas that are going to have more explosive growth.

I would also advise investors to take a look at AT&T, because HBO Max had the largest percentage gain in subscribers among any of the streamers last month. And yet, AT&T is such a hated stock. The strategy of putting out movies in the theaters and streaming at the same time seems to be working so far for AT&T.

And if you look at the growth in Netflix the last decade and you look at what happened to Disney last year as Disney Plus rolled out in such a dramatic way, I think AT&T is so hated, it could be a really good contrarian play in streaming because that could really move the needle for that company.

SEANA SMITH: George, more broadly speaking though when it comes to big tech-- and I know some of these names were moving to the upside today when it comes to Amazon, Apple, Microsoft, for example. They have been under pressure for at least the last couple of weeks when you put that in context for everyone.

But do you think that this is-- it sounds like it might just be more of a blip. And maybe they're not the best investments here going forward compared to some of those other beaten-down names. But some of these big tech names I think you're saying still has some room to grow.

GEORGE SEAY: I think when you've got high quality companies like you just mentioned, Seana, you don't abandon them. Maybe you trim them a little bit. I think the ones really at risk are the ones that have tens of billions if not hundreds of billions of market cap and no earnings. That's where you're really gambling.

But if you talk about Microsoft and Amazon and Google and some of the real blue chip tech stocks, they're going to continue to grow at very nice rates of return for investors both in terms of stock price appreciation and the amount of growth they have in their earnings per year. So they may hit some air pockets, and they may give back some of these gains and won't accelerate this year as well as some of the more cyclical or international plays. But they certainly shouldn't be abandoned.

ADAM SHAPIRO: Sarah, I want to turn our attention to something that might be considered boring when it comes to investments but housing. You actually think housing is going to remain very strong for not a couple of years but several more years. Why?

SARAH HOUSE: Well, I think when you look at-- you've seen some signs-- obviously, shared with the pandemic where people are valuing space. And so they're willing to actually spend more on-- on their housing. And so that's certainly a benefit and we expect as you get some stickiness with work from home, not necessarily at the rates that we're seeing now.

I think that that could carry through and support housing over the next couple of years. But at the same time, we're expecting rates to remain low. And so the fact that-- so that will help in terms of making ownership favorable as well. But then also the demographics are favorable.

So the leading edge of millennials turn 40 this year. So they're hitting the age in which they're having those big life events, like marriage and kids that often drive home ownership. And so I think you have a number of factors set to really propel housing.

You have to remember that in many ways, we underbuilt the last few years. And so I think there's some pent up demand that really the pandemic has unleashed and really changed the way a lot of folks are thinking about housing.

SEANA SMITH: Sarah House, the senior economist at Wells Fargo and also George Seay, CEO of Annandal Capital. Thanks to you both for joining today.

GEORGE SEAY: Thank you all.