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Market recap: Tuesday. Nov. 2

Brad McMillan, Commonwealth Financial Network and CIO Chris Retzler, Needham Small Cap Growth Fund Portfolio Manager join Yahoo Finance to break down the day of trading.

Video Transcript

ADAM SHAPIRO: We're roughly a minute, 10 seconds from the closing bell. Let's let you know who's going to help us to discuss what happened today after we get that gavel.

Brad McMillan is Commonwealth Financial Network CIO. We also have Chris Retzler from Needham's Small Cap Growth Fund portfolio manager.

Gentlemen, with roughly 50 seconds, I want to keep it tight, but, Brad, what's the one thing ahead of the FOMC tomorrow that investors should be paying attention to? Brad, do I have you there? I don't know if they can hear me.

All right, let's check markets and see where we are going right now. We've got all three indices are trading higher. We've got the Dow up 135 points. S&P 500 up about 16 points, and the NASDAQ is up about 50 points.

We are going to have a slew of earnings, as Jared Blikre was telling us just a second ago, after the closing bell, and we're going to keep you tied into all of that. We are on the lookout for Lyft to see how they performed and also Match, but right now the closing bell.

[BELL RINGING]

All right, let's see where we are settling because, again, we were closing-- going into the close higher, and we are going to finish out there. Dow up almost about 1/2%. You've got the S&P 500 same thing, up 17 points. NASDAQ up about 53 points.

Let's go to Chris Retzler from Needham's Small Cap Growth Fund. He's a portfolio manager. And, Chris, one of the things that you have talked about is that you expect to see some of the risks and pressures begin to alleviate in 2022. We're talking about the supply-side risks. What is leading you to believe that things may ease up next year?

CHRIS RETZLER: So we're here in the middle of earnings season, and we're listening to company calls every night. And when you listen to these management teams, you know, they're navigating through really turbulent times. But I think that there's a significant level of hope that this begins to dissipate.

You know, semiconductors are certainly a problem and logistics, but once we get past the holiday season, I think it begins to open up. We're hearing again from companies where we thought that there was more significant strains. The optical space last night had some good news out of some companies, and I think you look at that industry and you're seeing it trading up today.

So the economy is strong. Demand is strong. And if you can alleviate the supply-chain constraints and logistical issues, I think that there's a good runway into next year for a lot of good companies.

ADAM SHAPIRO: We're going to talk in a broader sense about next year, especially since we have a lot of data that's coming at us. We have FOMC tomorrow. We have the jobs report on Friday.

But let's talk about some of the companies you would have people pay attention to. There's this one company-- if I pronounce the name incorrectly, correct me. And then tell us what they do. Is it Heico, ticker symbol HEI? And what is it about what they're doing that you think investors should pay attention to?

CHRIS RETZLER: So it's a play on the reopening trade for aerospace, and what they provide are aftermarket parts where you have to repair the planes for wear and tear, hours flown. So I think as you begin to see a lot more commercial flights and then potentially professionals beginning to travel, the airline industry is probably well positioned into next year and as international travel begins to open up.

So Heico is, you know, parts that go into just about every plane out there, and it's a great, well-run company. It's been around for many years.

ADAM SHAPIRO: We've got Brad's tech issues worked out, and it's good to have you back, Brad. One of the things you like to point out to people who may be considering future investments is that we're pricing on third-quarter earnings right now and the tailwinds from the end of the pandemic in July. Help us understand where we are at this point with those tailwinds as we move forward because one of the headlines we keep seeing is winter is here. Everyone's going to be inside, and get ready, there could be another COVID wave.

I think we're having a tech issue with the gremlins. Is Brad there? Do I have you, Brad?

Let's get back to Chris. Chris, let me ask you, there's been a lot said that while these markets may appear to be expensive, investors right now, in reality, if you're looking at where we're going for potential earnings growth, even if it's slowing down, that, no, not expensive right now. What do you say to people who are having that discussion?

CHRIS RETZLER: Well, I think where you're finding a lot of the money has been more concentrated in the very large mega-cap names. What we'd love to see is the market breadth begin to widen out, and I think that that is what we're at the cusp of here, and that would help small-cap companies.

Again, we think that the just economy is healthy. You know, we will be talking tomorrow about the Fed and what their taper program is, but the Fed is still very accommodative at this point in time.

The yield curve has flattened out. It almost self-corrects in many ways. There's a lot of inflation fear out there. You know, I do think inflation's probably around for the next 12 to 18 months, and that is a concern. But if some of these operational logistical bottlenecks begin to improve, I think that also helps the overall picture.

You know, companies are really held back on their top-line revenue growth because of supply constraints. And if we can fix that, they can begin to supply a lot of the demand out there.

And once we get some certainty out of DC on these bills that are going to be quite a bit of spending, that too should provide a tailwind to a lot of, you know, top-line growth for companies.

ADAM SHAPIRO: Something that jumped out at me from your most recent note was, quote, "we were cautious going into earnings season and had raised our cash position." So I would imagine you're sitting on cash right now, looking for the opportunity, whether it's a dip or a specific number of stocks with a percent fall.

What do you say to investors-- because I know you're not going to try and time the market. But what should we consider if we're sitting on cash as to the signals that this is the right time to put our foot back in the water?

CHRIS RETZLER: Yeah, so we really are listening to earnings calls every night. And for those companies that we've done our diligence on and are really excited about the long-term prospects, if they have a stumble of a quarter and they trade down 15%, 20%, those are real opportunities for a GARP strategy to step in. That's why we want to have cash in these periods of time.

You know, also we find going into earnings season a lot of buyback programs have to go into quiet periods. So our more illiquid small-cap names tend to dip before earnings season, so we try to get in front of that and then deploy that capital into our best ideas.

So this week and next week are really big periods for small-cap companies. We're going to be listening to the management teams who, again, are working very hard. The American worker's working very hard in a difficult situation. So I'm not giving up on them, and I think that there's some great opportunities that are coming.

ADAM SHAPIRO: And you're also going to be listening to Jay Powell tomorrow. But in the note that I just quoted you from, you very succinctly-- very simple for someone like me and a lot of us as investors to explain. Treasury yield curve is of significant interest as the long end of the curve portends slower future global growth. And you say this could actually be positive for higher-growth technology stocks. It sounds to me like you're looking at an opportunity. Would it now be the time to get in on some of those higher-- you know, more expensive technology names?

CHRIS RETZLER: Exactly right. I mean, we witnessed the yield curve steepen significantly earlier this year in February and March, and you saw technology sell off very hard at that point in time. And that really gets to terminal values and how you calculate discounted cash flow, present values.

And right now, the yield curve has flattened quite substantially, which we think is, again, portending that there is some slower growth out there than what had been projected earlier this year. And investors are going to then reach for growth names.

Value has done very well this year. It has outperformed growth, and that tends to revert back to the mean. So we are getting significantly more excited about growth names. I'd just like to get through this third-quarter earnings and see what they're forecasting going forward, which I think is mostly improvement from where we were. It feels like the worst of the Delta variant that impacted the economy is behind us.

ADAM SHAPIRO: Fingers crossed, and we hear you loud and clear. You talk about getting through third-quarter earnings.

I have to say thank you for joining us, Chris Retzler, Needham's Small Cap Growth Fund portfolio--