Market Recap: Tuesday, September 14

Stocks ended lower on Tuesday to wipe out earlier gains as traders digested a new print on consumer inflation. Chris Retzler, Needham Small Cap Growth Fund Portfolio Manager and Sameer Samana, Wells Fargo Investment Institute Senior Global Market Strategist joined Yahoo Finance Live to discuss.

Video Transcript

OK. We've got a minute to the closing bell. And we are selling off into that closing bell. Let's meet our contestants. For the final round, we got Chris Retzler from Needham Small Cap Growth Fund Portfolio Manager, also Sameer Samana, Wells Fargo Investment Institute Senior Global Market Strategist, both returning to help us make heads and tails of what we're witnessing in these markets. But let's see where we're going to wrap up right now. Because the Dow is off 291 points. S&P 500 has accelerated. It's off 26 points. And the NASDAQ is off 69 points.

You just heard Jared Blikre, about two minutes ago, talk about sectors. And he pointed out that energy, today it's down 1 and 1/2 percent. Yesterday, the energy sector was up almost 3%. All sectors in the red today, not a good sign. But then you take a look at some of the laggards on the Dow. And they would be led by Walgreens Boots Alliance, off almost 2%. We'll break it all down after the closing bell.

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SEANA SMITH: And that does it for today's trading action. Again, all three of the major averages closing in the red, like Adam was just discussing. The Dow off 291 points, so just off the lows of the day. The S&P off just over half of a percent. The NASDAQ off just around 67 points. We want to bring in our panel to help us make sense of this selling action that we saw today. And for that, we want to bring in Chris Retzler and Sameer Samana.

Sameer, let me go to you first. Because there's been so much talk I feel like, the last couple of days especially, when we have had guests come on, more and more are saying we are due for a pretty significant pullback. We haven't seen a significant pullback yet this year. Is this the start of one?

SAMEER SAMANA: You know, it's tough to tell. I mean, in bull markets, you know, you just get these pullbacks that are very short and very shallow. So that's, you know, not our base case, in terms of, you know, could there be volatility? Sure. Is that something we'd be banking on, probably not. We're right on top of the 50 day moving average. That's been a very good kind of stopping point for these, you know, call it mini pullbacks. And you know, again, this one probably is no different.

Now, I do appreciate that seasonality is a little bit worse as you go into the fall. And we'll see, you know, there is a Fed meeting coming up. So unless they surprise markets and do start tapering, which it does seem like the market's expecting something later in the year, that could cause a bigger fallout. But right now, we don't see enough reasons for a bigger pullback.

ADAM SHAPIRO: Chris, there's a reason a lot of us rely on portfolio managers, like yourself. And one of them is that you point out areas of investment that you continue to like, for instance, mobile, electrification, communications, infrastructure. Finding the companies, though, that are going to benefit from what we're all living through, how do you identify-- for instance, I mean, our former owner of Verizon, big 5G there, but that stock's been kind of flat for several years.

So how do you identify the winning players in those?

CHRIS RETZLER: So as a small cap manager, we spend a lot of time in the supply chain that's going to help build out those services and products. So with 5G on a global basis, we had announcements today with Apple with new products. You know, 5G is something that's going to happen on a global scale. Moving that data around, you know, content, processing it, all those are ways to play these themes long term.

And, you know, we're finding companies when they are misunderstood and dislocate their share price. You know, we are certainly in a more volatile seasonal time. I think patience is needed here. You know, we're certainly not calling a top or a bottom. But we think getting into the end of the quarter and then into earnings season is probably going to give a lot more clarity as to how these companies are performing. And the Delta variant that's given a spike has certainly impacted the operations of a lot of companies in this quarter. So we'll wait and see at this point.

SEANA SMITH: Sameer, you mentioned the Fed meeting that's coming up later this month. We got that CPI number, its smallest gain in just around 7 months. What do you think this tells us, or what does this tell us about inflation, whether or not it's transitory or could it potentially be a little bit, I guess, stickier than we initially expected?

SAMEER SAMANA: You know, we probably won't get the answer to whether transitory or not probably until 2022. That's when the base effects will start to wash out and all the distortions will start to kind of resolve themselves. But I think what the number today tells us is that the Fed probably has a little bit more wiggle room, right. If they don't want to do something of the meeting next week, given the weaker than expected panels number, the inflation number today also take some of that pressure off of them to do something next week.

So that's probably the takeaway. As far as the inflation debate, that's probably a 2022 resolution.

ADAM SHAPIRO: Chris, in about a little over two weeks, we're going to start talking about earnings season again. And given what we saw because of the Delta variant with COVID-19, a lot of investors may interpret what we get in the next earnings reports incorrectly for the long term. Can you help us understand how to take what's coming at us with earnings and why we might want to look at a longer term growth scenario, despite what those earnings are going to tell us?

CHRIS RETZLER: And that's exactly right. As an active manager, I want to take advantage of those misunderstood situations. Because I do think that we're going to see a bit of an air pocket and concern from some of the companies going into year end. Supply chains are still certainly stretched. Semiconductors are a problem across almost every industry. And labor and labor costs continue to be a problem.

But looking at year out, I would think that those problems begin to abate. And that's good for long-term investors. So I think you do want to wait and see what companies will say on these earnings calls. But, you know, the demand is still there. The bigger issue is, can they fulfill that demand? Because there's just not a supply of the components to deliver those products so.

SEANA SMITH: Sameer, from your perspective, I guess, at this point, in the recovery still a lot of uncertainty, of course, earnings season is going to be in focus. But how are you positioning, how are you advising your clients to position their portfolios right now?

SAMEER SAMANA: Sure. Given that level of uncertainty, what we notice is there is a disconnect between kind of where the fundamentals are and where markets are performing. Right now, you see people kind gravitating back towards larger cap growth names in the technology area. And what you notice when you look at kind of the fundamentals, the earnings, especially the earnings revisions, a lot of the positive earnings revisions are coming on the cyclical side, right. They're on the energy side. They're on the materials, industrials and financial side.

So, you know, I think, right now, this smokescreen that Delta is throwing up is causing investors to kind of lose sight of what the world looks like maybe a year from now. And that really is a world where COVID ends up being much more endemic. And where we see opportunities right now are in those cyclical areas. So we like small caps. Small caps actually look a little bit cheaper than large caps, relative to their own history.

We like financials. We like industrials. We like materials. We like energy. So we think all those cyclical areas are where investors should continue to dollar cost average. Because once we get past some of these headlines and some of this uncertainty, which will hopefully be sometime next year, we think those will be the areas that'll outperform.

ADAM SHAPIRO: But you also, Sameer, think that inflation, and whatever is the cause of inflation, whether it be the supply chain constraints or other issues, is going to be with us into 2022. So can we expect-- I know that the last year's earnings growth has been tremendous. But can we expect better than healthy earnings growth as we're looking at '22 and '23?

SAMEER SAMANA: We do think that. You know, again, just given kind of the labor market slow recovery, it's allowing companies a lot of room to maneuver in terms of compensation costs. So we do think that, even next year, that earnings will grow kind of in that 10% range, which would be well ahead of where we expect the broader economy to grow. And that'll be more than enough to drive stock gains, especially if interest rates kind of stay pegged where they have been recently.

ADAM SHAPIRO: All right. Chris Retzler, Needham Small Cap Growth Fund Portfolio Manager, Sameer Samana, Wells Fargo Investment Institute Senior Global Market Strategist. Thank you both.