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Market Recap: Wednesday, July 21

James Camp, Eagle Asset Management Head of Strategic Income and Keith Lerner, Truist Advisory Services, Inc., Truist Wealth Chief Market Strategist and Managing Director, Portfolio & Market Strategy, joined Yahoo FInance Live to break down the latest market action.

Video Transcript

[MUSIC PLAYING]

ADAM SHAPIRO: All right. Two minutes, roughly, to the closing bell. We want to bring into the stream right now James Camp from Eagle Asset Management, Head of Strategic Income. Also, Keith Lerner, Truist Advisory Services, part of the Chief Market Strategist and Managing Director, Portfolio and Market Strategy there. It's good to have both of you here.

James, I want to ask you a quick question. The 10-year yield, we were talking just in the last hour, below 1.3%. You would think a lot of people are panicked and they're trying to protect some money. But you think that the 10-year, the bond is overbought. Why?

JAMES CAMP: Well, you know, we had a big sell-off to start the year. So some consolidation was likely. But the move down to the 120, frankly, was quite concerning. Either we were going to have an additional lockdown or curtailment of growth, or somebody's offsides and somebody's got it wrong. In our opinion, the inflation story is just gathering steam. We think it is somewhat decidedly more than transitory. And real yields are just too negative to represent any value.

So we're going to watch very closely as the summer folds, rolls along, the Jackson Hole commentary, what comes out of it in terms of taper talk. But more importantly-- and this is not to be too curt about it-- but Labor Day is usually when the bond market wakes up and pays attention again. And they're going to be looking at some big data on the inflation front that we think is going to be problematic for these yields going forward.

ADAM SHAPIRO: We will keep an eye on that inflation data. Want to take just a breather right now, because we have roughly 45 seconds to get to the closing bell. Want to take a look at where we stand. The Dow, the S&P 500, and the NASDAQ still on their recovery from the sell-off earlier this week. Some of the Dow components, though, that are struggling today, you've got Walmart, Apple, and Amgen in a bit of trouble. They're off-- I mean, Walmart's only off half a percent. But you got Apple down almost 4%, Amgen off almost 4%.

Apple, we, of course, learned just the other day that they are susceptible to the spyware. And those of us who fight with our Apple devices trying to restore them don't wonder why they might be falling today. But as we head to the closing bell, you should know that those are the three stocks leading the Dow at the bottom.

[BELL RINGING]

SEANA SMITH: And that does it for today. Again, you're looking at gains across the board. We saw some buying action here into the close, the Dow closing up 285 points. Outperformers in the Dow today, Chevron, Goldman, and Boeing. You can see the S&P closing up just around 8/10 of a percent and the NASDAQ adding 133 points.

In terms of what was working today, energy by far a standout today, with the XLE closing up just over 3%. Financials and materials rounding out the top performers sector wise.

But we want to bring back in James Camp and Keith Lerner to help us further breakdown some of the action that we've seen recently. And Keith, another day of gains following Monday's sell-off here. Certainly, the trades that are working are, as Adam said, some of the hardest hit on Monday. I guess, what does this tell you just in terms of how the market is viewing the developments on the Delta variant and how big of a threat it could potentially be?

KEITH LERNER: Well, first, great to be back with you. Monday was pretty gloomy. I think it was really over the weekend where the public really started to understand the COVID cases rising. But I think after the sell-off, I think as you take a step back, I think what investors have felt a little bit more comfortable with is that you're seeing a bit of a decoupling between new COVID cases and deaths. And this isn't 2020. I mean, we're in a much better position as far as the procedures and medical treatments. Businesses have adjusted. Consumers have adjusted.

And also, with these COVID numbers going up, we think it's more likely that the Fed tapering gets pushed out a little bit as well. And also, I mean, at the end of the day, when the 10-year was at 1.15, unless you're thinking we're going into a recession, the relative attractiveness of equities only increased.

ADAM SHAPIRO: James, I'm curious, because you do believe, as you said, that the bond market will wake up around Labor Day. And we had heard in the notes that Keith sent us that he's expecting the economy to stay on track. So if Keith is correct, James, what is that going to mean for us come September, when people, not only the bond market, but also equity investors are waking up?

JAMES CAMP: To the extent that we can take income opportunities in the equity space, we are doing that. And we're doing that in a large overweight, because of the overvaluation of the bond market. The things that we're looking at that are non-transitory, we're about to roll up owner equivalent rent into the data series of CPI. And we think that's going to come in very hot over the next couple of months. There's some inertia behind that that if we get a 6% year-over-year print on owner's equivalent rent, we are in the mid to upper 3s on CPI. Again, a 125, 130 10-year does not foot with that.

We're seeing some relaxing in commodity prices, but they're still elevated. And we're seeing these supply chain disruptions. We're seeing the longest gap between an order and a delivery in history. And most importantly to us, when we're on our earnings calls, we're hearing pricing and we're hearing cost and we're hearing companies moving the needle for the first time in over a decade on pricing. To us, that is suggestive of a reflating economy, good for risk assets, good for equities. But the bond market is going to have to get itself reset here in the next couple of quarters, in our opinion.

SEANA SMITH: So Keith, with all that in mind, I guess just in terms of some of the opportunity then going forward, how would you suggest investors position themselves, especially over the next couple of months?

KEITH LERNER: Well, what we've seen more recently over the last month or three months is a big move back into the mega cap tech stocks. We actually think that's not the right move for the second half. We think that money will rotate back into some of these cyclical areas that we've seen a bounce here more recently. Because we think, you know, earlier this year it became such a consensus today about going to the cyclicals, they got over love, and we've seen a reset. We, just before this rally, these areas became the most oversold we've seen since earlier this year. And if the 10-year Treasury does gradually move up, if the economy moves forward, and even if it's off that peak economic level but it's still above trend, we still think that's positive.

You look at something like the financials, still a big discount to the overall market. And then small caps. What's interesting about small caps, the relative valuations of small caps are now even cheaper than they were last November, before they had that big move up, and earning trends are firm. So we still think there's a lot of opportunity. It's likely to be a bit sloppy over the next few weeks, and even the next few months. But we would still be positioned more on the value side.

ADAM SHAPIRO: Keith, I'm not asking you to pick a retail stock, but I'm curious. I saw a report that back-to-school spending is going to be ginormous. I'm making that word up. But enormous, as lots of kids finally get back to school after the pandemic. Would it be time to perhaps take a step back from tech and maybe look at some old fashioned retail? I realize that's not a popular move for a lot of people. But there's a huge spending spree about to come.

KEITH LERNER: I think it makes sense. When you look at like, say, the consumer discretionary sector, we're actually underweight because it has a lot of growth areas within that. But on some of these subcategories, these re-opening plays that have been hit, we do think there's an opportunity. Our more favored areas, though, are still more like the financials, energy, industrials as a whole. But those other areas that you mentioned should also do well as this reopening play continues.

SEANA SMITH: James, what do you think? Where are you seeing the most opportunity?

JAMES CAMP: I think, to the income investor, they almost have to decouple their eyes from the S&P. Because 20% of the S&P is tech that doesn't pay dividends. If we're looking for the solution that equity income can provide, I agree with Keith, particularly on the financials. We moved out of, say, the preferred sleeve in the capital structure financials to start the year, went into the common sleeve on the steepening trade. And that has performed beautifully.

I think dividends are strong. I think they're going to be continuing to grow. And as this interplay between debt, equity, and different parts of the capital structure continues, with record corporate issuance, record indebtedness, most times for the benefit of equity holders, we have to tell our individual investors, our retail investors that are not style boxed, be flexible within capital structures of great companies and look to the solution and the drawdown and the income earned, not necessarily a benchmark to evaluate your strategy.

ADAM SHAPIRO: I want to get you back, too, by the way, around Labor Day, as the bond markets wake up, because I think it'd be great to be looking at that.

James Camp, Eagle Asset Management, Head of Strategic Income, thank you. Keith Lerner, Truist Advisory Services, always welcome here, both of you. Thank you for your insight.