Market Recap: Tuesday, July 20

Jeff Klingelhofer, Thornburg Investment Mgmt. Co-head of Investments and Mark Lehmann, CEO at JMP Securities joined Yahoo Finance to discuss the latest market action

Video Transcript

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SEANA SMITH: Just around 2 minutes here until the closing bell. We have full coverage for you. We have Jeff Klingelhofer. He's the co-head of investments at Thornburg Investment Management. And Mark Lehmann, CEO of JMP Securities help us break down today's action.

Let's take a look at the rally that's underway here in the final minute of trading because certainly, a totally different picture than what we were looking at just 24 hours ago. You can see the Dow now up 549 points. We are well off the highs of the day but still posting gains to the upside.

That's a gain of just around 1.6%. The biggest leaders or the leaders I should say in the Dow today-- Boeing, Honeywell, American Express, Goldman Sachs, and Apple. Apple, we were talking about the fact that that stock has been a standout today. UBS hiking its price target to $166 ahead of its earnings next week. So that's helping that name move to the upside. But certainly a lot of winners inside the Dow today.

You can see the S&P up just around 1 and 1/2% and the NASDAQ up 1.6%. That's a gain just around 224 points. Taking a look at some of the sector action today, we're seeing a rebound almost across the board with all 11 of the S&P sectors trading to the upside. The biggest gainers coming from some of the sectors that were hit hardest yesterday. Financials leading the way that the XLF off just around 2 and 1/2% as well as the industrials. And the XLI up just around 2.7%.

Some of the other top performers-- technology and consumer discretionary, consumer staples even holding on to gains. That was actually flipping between positive and negative territory today. But the XLP up just around a tenth of a %.

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ADAM SHAPIRO: We have a closing bell with the gavel. Let's hear where we will settle. It's going to be better than it was yesterday. But we still have a way to go to catch up on what we lost. The Dow will settle up about 550 points. The S&P 500 is going to be up 64 points. The NASDAQ up 223 points.

And just want to let you know too, crude oil today settled higher. At least WTI was up a bit. Let's bring in the stream-- the guests to talk about this because it is a bit of-- it's a recovery. But we're not where we were yesterday. And the real question is where are we headed next?

So Jeff, one of the things that you've pointed out is that you don't think-- your team doesn't think that this discussion about inflation is of a concern. In fact, you think low inflation, despite what we're going to hear from Kevin Brady in about 45 minutes, that low inflation is actually the law of the land right now. What are we getting wrong here because I know Kevin Brady's going to go inflation is out of [? control? ?]

JEFF KLINGELHOFER: Yeah, I think for sure, there's the potential for [? tail ?] risk inflation. As investors, we have to weigh that. But still, the reality is today that coming out of the world of COVID, not only do we still have a long ways to make up in terms of the labor market, there's been no substantial shift to what we should expect, right?

And so coming into COVID, unfortunate that we've had low inflation for a decade-plus in many countries and decades-plus in places like Japan. And I just don't see that changing. So we have to weigh the extraordinary fiscal and monetary stimulus that we've seen. But a lot of that is very transitory in nature.

And the high-level conviction that I have is at this point, every single inflation print that we see, it is transitory in nature. Used car prices are going to continue to go up 10% year over year. What we really need to see is wages increase to get a durable inflation cycle. I think that's at least a few years off. And so if nothing else, the market is premature in its concern today.

SEANA SMITH: Mark, what do you think? Do you agree?

MARK LEHMANN: I do agree. I think there's obvious pressures on certain things that we're dealing with every day-- travel and leisure and cars that we talked about. But wage inflation is what we're talking about. And frankly, some people just cannot find the employee base to staff some of those places. And that's the most important thing.

The digitization trend that we're seeing across technology is one of the greatest deflationary trends that will not abate. And we're going to continue to see that. And COVID, frankly, has accelerated that. That is the great deflationary piece of the puzzle. And that's just not going to change that we see hot jobs number and hot inflation numbers. That is a trend that obviously is here to stay and that is wildly deflationary.

ADAM SHAPIRO: You also talked, Mark, about trends that some people are now saying are gone but might still be here. And that would be SPACs. I mean, SPACs got a bad rap. Then they were all the rage. Now, they seem to be a little bit quiet. A lot of people looking to make a quick buck think they can do that with a SPAC. What do you say?

MARK LEHMANN: Well, like most things, if you think you're going to make a quick buck, it's probably too late. SPACs, as you know, got a four-letter word. About three months ago, I think we've had a little bit of time to digest that kind of overhot market that we saw the beginning of the year and the overcold market that we saw maybe over the last quarter.

I think you're going to start to see more of the companies trade like regular way IPOs, which is you better pick the right ones. You better pick the right management teams like we've all been taught. And I think we're in that period now. You're going to see some wildly great companies go public buy a SPAC. And like anything else, the investor base has to do their homework. But just to categorize, all them as good. And all them as bad is obviously a terrible idea.

SEANA SMITH: We have some breaking news. Netflix out with its earnings report. Shares under a bit of pressure, off just around 4 and 1/2%. Dan Howley has those numbers for us. Dan.

DAN HOLWEY: That's right. Well, they did beat on revenue. They had 7.34 billion versus 7.32 billion. They missed on earnings per share of 2.97-- sorry, $2.97 versus $3.14 that was expected. They did, however, add more users. They had 1.54 million users net adds this quarter versus 1.12 million that was expected.

The problem, though, is what they're expecting for Q3. Now, what was expected was let's see-- 5.86 million new users. That's for Q3. But what Netflix now is saying is that they're going to see 3.5 million new users. And that's not what analysts and investors were looking for, especially after coming up short in Q1.

This also comes as they saw a lot of pull forward in [? Q ?] in 2020 because of the pandemic. And Netflix is trying to really right the ship here as far as getting its user growth back into shape. And that obviously going into Q3 not something that they want to see.

SEANA SMITH: All right, Dan. Thanks so much. Again, the stock off just around 3 and 1/2%. Mark, let me just get your thoughts just on what we've seen so far just in terms of the action of these stocks after we're getting these earnings reports. So yes, Netflix disappointing I guess on a couple measures. But it wasn't that bad of a report.

They did beat on revenue. Yet, the stock was off about 5%. Now it's off 3 and 1/2%. What do you make of the reactions that we're seeing the stock so far this earnings season?

MARK LEHMANN: Well, Netflix has obviously been in this pretty large trading range for over a year. So it's been in this kind of 450 to 550 range. And lo behold, it's halfway between those two numbers. So I think it's betwixed in between. You obviously have a lot more competition in the pure streaming wars. You've seen what HBO and others have done with that.

So like you said, they missed an EPS numbers. And some of their guidance was a little bit tepid. And the stock's down couple 3%-- a lot higher than it was three months ago. Like a lot of the FANG names, they've recovered a lot of ground in the last three or four months. So it's not surprising to me.

I think you're going to see some very, very strong numbers out of the bigger tech companies, like Apple and Facebook, as they start to report. And I think that's a great proxy for overall tech in the overall sentiment of the market.

Another proxy you're going to get is the IPO window, which you're going to see a record number of IPOs. It'll be the busiest week the next couple of weeks for the IPO market. I'd watch that as a proxy for overall, you know, NASDAQ valuation and tech companies. That will tell you whether the buyers are there or not. And [? SPE ?] exciting to see.

Obviously, you saw Robinhood launch their [? a ?] [? road ?] [? show. ?] You guys talked about it yesterday. Those are the kind of indicators I like to see. The big tech are going to trade with the overall market. Finding the growth stocks of the future is what I think investors should pay more attention to.

ADAM SHAPIRO: They should pay attention to the balance sheets too according to Jeff, because you've pointed out that terrible balance sheets are actually getting worse. Where are you seeing this? Because I'm not saying Netflix balance sheet is in any way terrible. But there are some airlines out there with huge debt loads. And I imagine that's one of the things you look at when you go to a balance sheet.

JEFF KLINGELHOFER: Well, it absolutely is, right? Of course, any investment is about potential return and potential risk. And within the corporate space, many corporate balance sheets continue to go in the wrong direction. And it's not necessarily their fault. But investors need to look through that, right?

The Federal Reserve and central banks around the world are engineering low rates. They're engineering easy accommodative environments and market policies to encourage these companies to continue to take on that leverage. But eventually you have to pay the piper. Eventually that debt comes due. And as fixed income investors, it's all about capital preservation and, of course, some income generation.

But it's about focusing on the ability of companies to use free cash flow to eventually pay down that debt. So when you're looking at the fixed income side of the coin, it's a very different universe when you're looking at the equity upside. And currently in today's environment with low spreads and a very compressed yields, that risk-return calculus has shifted against fixed income investors. And so we urge caution for our clients.

SEANA SMITH: Jeff, when you take a look at the other big headline out that we've been talking about, the rise that we're seeing in the number of cases, certainly that did spook investors yesterday, although a lot of investors finding reason to buy the dip today. Yes, how would you play the dips that we see going forward? Are they always looked at a reason to buy at least in the short term?

JEFF KLINGELHOFER: I wouldn't go so far as to say there we're always a reason to buy, but there certainly is opportunity, right? Getting back to risk and return, potential return and a lower price is unarguably higher. And so you need to be very careful, right?

I think one of the things that we're looking at in the markets is constantly questioning our general belief as we remain in the early stages of a prolonged economic recovery. But that doesn't mean it's going to be a straight line. It doesn't mean it's going to be without some potential speed bumps and hiccups.

And so while that the world moves potentially towards lockdown with an increase in cases in the Delta variant, in general, we're going to keep on marching on the same path that we've been marching. That's marching towards reopening. It's marching towards higher consumer spending. It's marching towards broader better economic conditions. But again, it's not going to be a straight line.

So it's keeping cash balances high. It's keeping liquidity. And it's keeping portfolios in an opportunistic stance so that you can step into these opportunities when the market does pull back. And I think that's exactly what we've seen over the last 48 hours.

SEANA SMITH: Jeff Klingelhofer, Thornburg Investment Management, co-head of Investments and Mark Lehmann, CEO of JMP Securities. Thanks to you both for joining us--