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Market Recap: Wednesday, January 27

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Stocks dipped Wednesday as investors digested the Federal Open Market Committee’s January monetary policy decision and latest batch of corporate earnings results. RiverFront Investment Group Head of Global Strategy Doug Sandler and Chief Investment Strategist at CenterSquare Investment Management Scott Crowe joined Yahoo Finance Live to discuss.

Video Transcript

[MUSIC PLAYING]

ADAM SHAPIRO: All right, three minutes to the closing bell. The Dow and S&P 500 erased their 2021 gains on the comments from Fed Chair Jay Powell. Dow, NASDAQ, S&P 500, biggest drop since October of last year. So Doug Sadler, RiverFront Investment Group, head of global strategy, Scott Crowe, chief investment strategist at CenterSquare Investment Management, going to take us through it. Scott, I'm going to start with you. Do we blame Chair Powell, or was the market set up to take some profits anyway?

SCOTT CROWE: Well, the market has done extraordinarily well over the last 12 months. And so, I guess, it's a bit of sell the news. I mean, there's nothing that Powell said that really changes the long-term outlook. I mean, essentially, we're not going to see interest rate increases until 2024 most likely. And the assets that have accumulated, they're not going to start selling those until, the earliest, beginning of next year. So the signal really was continued easy money for the foreseeable future.

SEANA SMITH: Jared Blikre, I want to bring you into the conversation because we have just about 90 seconds left in the trading day. We're looking at losses across the board, with all 11 of the S&P sectors in the red.

JARED BLIKRE: Yes, that is the case, and let's take a look here at the YFi Interactive, where we have the NASDAQ down 2 and 1/2%, slightly off of the lows here. But in the last hour, making those record-- excuse me, not record lows-- making those new session lows as we head into the middle of the week. And also, into those Facebook and Tesla earnings that we're about to get any minute after the bell.

So let's take a look at the NASDAQ 100-- lots of deep red here. And just looking at the biggest winners and losers, the mega caps taking on the chin here. We also have tech stocks like Microchip that's down 8%, jd.com down 7%. So the chip space really taking some losses, too. They have been the stalwarts of the rally since the recovery in March and April of last year. So I think this is telling.

And then just to answer the question perhaps a little bit, is this the big one? Is this the correction that people have seen coming? There has been this froth in the markets. And I go back to the US dollar index, just kind of creeping and peeking above its 50-day moving average that we see here. Last time this happened was in September. And this move caused a 10% correction in equities.

So we take a look at the Dow, we can see the opposite move here. We kind of have this W bottom that eventually took off. But we're right at the 50-day moving average. Not reading too much into this. We were very frothy coming into this part of the week. And here's the closing bell on Wall Street. What an eventful day, guys.

[BELL]

[GAVEL]

SEANA SMITH: Certainly has been a very eventful day for the markets. You're looking at losses across the board with the Dow, the S&P, and the NASDAQ all closing in the red. The Dow off just around 2%. That's down 634 points, S&P off just around 2 and 1/2%. The NASDAQ off its lows of the day, but still the biggest loser here of the three indexes, off just around 2.6% in terms of the sector action here.

All 11 of the S&P sectors are in the red. Communication services, financials, and healthcare among the biggest laggards in today's market. Looking into the Dow and some of the biggest underperformers there, you're looking at Disney, Merck, and Boeing. Those three stocks are the worst performer in the Dow today, with Boeing off almost 4%. We have Merck off just over 4%, as well as Disney.

We want to bring back in Doug Sandler. He's with RiverFront Investment Group. And we also have Scott Crowe, CIO at CenterSquare Investment Management. And Doug, let me just toss it over to you. When you're looking at losses like this, like what we're seeing today, some selling pressure, are you buying now? Or do you think we have more selling ahead?

DOUG SANDLER: You know, I think the market was due for probably a 3% to 5% correction, something we've been waiting for. So I think as we get towards the outer bounds of that, that's something that may become more interesting. But, you know, one day doesn't make a trend, and the trend has been so strong on the other side. I might also add to the fact that I agree with everything your guest said.

But I may add to the fact that some of that short-selling squeeze, ultimately, if you want to create money to buy the stocks back, you do have to sell something. So you may see some of the more overowned sort of hedge fund stocks being sources of cash to fund some of those, you know, short squeezes or margin calls.

ADAM SHAPIRO: Doug, it's Adam. I want you to-- could you go a little bit further on that? Because I want to talk about GameStop. I'm hearing this debate whether it's the fundamentals or the short squeeze at play with even an aspect of the retail investor getting revenge after years and years. What you just said, is the retail investor who's jumping in on this short squeeze about to get burned?

DOUG SANDLER: You know, I don't know that company in particularly. I mean, obviously, it's in the news all the time. I think any time you see a stock move that much, it's going to be basically a supply and demand thing. It's not going to be based on new news.

And the news I've seen on it doesn't seem to be nearly enough to warrant, you know, the move in the stock. So, you know, I think it's just supply and demand. And people see that there are people tied into a stock. And it's, you know-- there's blood in the water. And, you know, everybody sort of gangs up on it. So I'm not surprised, Adam, but--

SCOTT CROWE: Adam, could I--

DOUG SANDLER: [INAUDIBLE] fund their purchases. Mm-hmm.

SCOTT CROWE: Can I jump in here? Because I think, look, I think everything that was just said is correct. Certainly, what you're seeing now is people are looking to, you know, basically cover short positions. They're selling the things that their long would have done well. And I think that's part of today's action.

The GameStop is super interesting because we've never seen a short squeeze like this in the history of stock markets, where you have a decentralized short squeeze driven by leveraging social media. And essentially, what's going on right now is people are going out there, they're finding where a number of the hedge funds are very short, a number of these stocks like GameStop. And they're basically corralling thousands of investors through Reddit to go out there and squeeze them out by buying coal options and then forcing the broker who wrote those coal options to get into the marketplace to basically hedge themselves.

And it's such a sign of the times of COVID. But to your question, how will it end, well, I would just say this. You know, GameStop is an example today is a $300 plus stock. In 2006, pre-GFC, when GameStop had a business-- and by the way, GameStop business is to sell computer games physically in malls. In 2006, that stock was $50. So that stock today is worth six times what it was in 2006 when it had a business.

And I would be very careful as a retail investor because what's going to happen is that the entire investment strategy here is predicated on prices going up. Because that creates more of a short squeeze in a self-fulfilling prophecy. And as soon as prices don't go up, the whole thing unravels. And what might lead to that happening is a lot of these companies are going to come out and issue equity. They're going to arbitrage that mispricing. And that equity issuance will allow a lot of the shorts to cover, and the gain comes to an end.

SEANA SMITH: Well, Scott, do you think, though, that this is a bigger trend? Because we talked about it a lot last year, the return of the retail investor. A lot of people were home. They had more time on their hands. They were jumping in to names that they thought that they could make a quick buck. But we're seeing it again now 10 months later. I mean, is this something that you think we could expect to see at least for the next couple of months, next couple of years? I mean, what is your reading on that?

SCOTT CROWE: It's a permanent shift, Seana. Every part of our lives has been disrupted by technology, so why not Wall Street? And that's exactly what's happening right now. And so, I would-- this is going to have big implications in terms of how hedge funds put on positions. If you short a stock, you can't be seen. If you buy puts, you can be due to filings. It's going to make sure that when hedge funds and others undertake puts in shorts, they have more capital behind it. They're less leveraged into it.

And it's going to even impact a lot of activist investors. Think about an activist investor today, who goes out with a short thesis on a company. And they advertise that to the world with an open letter or a presentation. Before, that was a good idea. Today, that might just be a red flag to a bull with all those social media users in those chat rooms. So I think this is going to change how options are priced due to what they call a gamma squeeze. I think this is a permanent shift in how we think about investing.

ADAM SHAPIRO: Doug, do you agree with that?

DOUG SANDLER: The only thing I might add-- yeah, I believe, you know, if I was a hedge fund manager, I'd be on alert. And I'd probably be covering a lot of my shorts. But I think, you know, there might be some regulatory impact here. I mean, when we had it the opposite way, they put in the uptick rule. And that sort of stopped the stocks dropping off cliffs. You know, I don't know if you can do something similar on the other side, put a downtick rule in.

But, you know, you may see regulators come in, as one of your previous guests said, you know, to try to stem this. Because, you know, the markets aren't casinos. And, you know, the SEC and other regulators, that's one of their roles, is to make sure that investors get a fair shake.

ADAM SHAPIRO: When we talk about a fair shake, before we go to Jared for a final thought on all of this, and literally 30 seconds each, Scott-- and then, Doug, I'll let you finish off-- is the retail investor getting a fair shake?

SCOTT CROWE: I think they're getting a fair shake than they have in a long time because if you look at-- I've been in the business for almost three decades. And if you go back 20 years ago, underperforming managers could get away with it. Today, we have ETFs and passive. So only the managers that exist that are active are outperforming, and retail investors have the choice for a low fee option, someone's basis points to take the ETF.

DOUG SANDLER: Yeah, I would agree with that. I would add to that-- yeah, I would agree. And I would add to that Reg FD that was added, you know, back after the tech bubble, as well as sort of the elimination of the expert networks, which really did give some of the institutional investors an unfair advantage. And, you know, a lot of the field has really been leveled, in my view.

SEANA SMITH: All right, well, Doug, great to have you on the program here today, as well as Scott. We really appreciate you both taking your time here. We'll talk to you once again soon. We have Doug Sandler, RiverFront Investment Group, head of global strategy, and Scott Crowe, chief investment officer at CenterSquare Investment Management.