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Market Recap: Wednesday, September 1

In this article:
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Stocks were mixed on Wednesday, with the major equity indexes beginning September trading near all-time highs. Chris Brightman, Research Affiliates Chief Executive Officer & Chief Investment Officer and Aaron Dessen, Payne Capital Management Financial Advisor, joined Yahoo Finance Live to discuss.

Video Transcript

[MUSIC PLAYING]

SEANA SMITH: 90 seconds here until the closing bell on the first day of September. We want to bring in our panel, we have Chris Brightman, he's the CEO and chief investment officer at Research Affiliates. We're also joined by Aaron Dessen, financial advisor with Payne Capital Management. Chris, first to you, I guess, just the fact that we're seeing the NASDAQ again today hitting a new record high, the S&P coming off its seventh straight month of gains. Where do you think we go from here?

CHRIS BRIGHTMAN: Well, in the short run if you look at a chart of the S&P 500 or the NASDAQ for that matter, it's a remarkably consistent upward sloping line. And momentum is persistent, as stock prices have been going up for the past few months, weeks, year, they tend to continue to go up for the next months, weeks, year. Longer-term I think we have a concern about the lofty valuation multiples at which the market's trading and that's likely to create quite a correction. But the timing of that is always difficult. I think in the short run, we would expect continued momentum.

SEANA SMITH: We'll talk a little bit more about that correction in just a few minutes. But we only have a few seconds here until we ring the closing bell. The Dow again in negative territory, off 57 points, S&P and NASDAQ holding on to gains. In terms of the sector action, what's working in today's trading, real estate and utilities are leading the way.

[MUSIC PLAYING]

BRIAN CHEUNG: And that does wrap up the day, again the first day of September. You can see the Dow did end the day negative, really just barely, S&P 500 and the NASDAQ in the green. But let's continue our conversation as we head out of the market bell there.

So I want to direct this question over to Aaron, obviously, the big looming shadow over the market right now is the Federal Reserve. It seems like a lot of what's going to be baked into what they do in that September 22nd meeting has to do with the employment report that we're expecting on Friday morning. What do you expect to see in the August jobs report and how do you think that's going to weigh on Fed policy?

AARON DESSEN: I think we're likely to see continued improvement in the jobs report. I think you know, right now we're hovering around 5.2% unemployment. And just based on the fact that there are more jobs than there are workers. I think that as unemployment benefits run out, kids are getting back to school, parents are having child care, you know, the vaccination rate in the country, hopefully, people have a better sense of their health and getting back out there with everything going on. So I think we're likely to see the jobs number continue to impress.

SEANA SMITH: Chis, if the jobs number does not impress and we do get a weak report on Friday, do you think that will be enough for the Fed to delay its timeline when it comes to tapering?

CHRIS BRIGHTMAN: Well, I'm not sure that the Fed has been crystal clear on exactly what its timeline is. I think they're still going to be data-driven. So yes, the pace of job growth, as well as the progression of inflation is going to determine the timing of both tapering and then maybe a year later, increases in the Fed funds rate.

BRIAN CHEUNG: Aaron, at least for right now what do you see as attractive places to invest right now? We know tech stocks have gone loved at least with the 10-year failing to really break back to those spring levels. So it seems like the value play, especially with financials have not been going so well. So are there specific types of stocks or even within the tech sector, specific picks that you have that you like right now?

AARON DESSEN: Right now, what I like is small caps and cyclicals. If you think about energy, financials, industrials, materials. If you look back to the beginning of the year, we kind of saw that shift in that rotation away from the work from home into the reopening trade. Lately, that has sort of shifted back with the Delta variant and rising cases and concerns but I think, again, if you look at the vaccination rate in the country and the fact that we're seeing a lot of potential peaks in Delta cases in some of the hardest-hit states, if we can sort of get through to the other side of that, I think we're likely to see continued economic growth, continued reopening of the economy and that's really going to benefit those small caps and cyclicals the most. They're also trading at very favorable valuations and good dividend payers at the moment.

SEANA SMITH: Chris, do you agree or how are you positioning your portfolio right now?

CHRIS BRIGHTMAN: I do agree. I think that we've taken a little bit of pause with the Delta variant in what we have referred to as the reflation trade but I don't think it's done. And I would add that in addition to small caps and cyclicals inside the US market, the rest of the world is going to be behind us in the reflation trade, although Europe's been doing quite well.

I think the international, developed ex-US, and emerging markets, both sport very, very attractive valuations relative to the US. And eventually, they're going to benefit from this opening up of the global economy as well. And there's been a lot less appreciation there than in the US.

BRIAN CHEUNG: Chris, can we unpack the reflation trade from an inflation trade because we did see a pretty high print on personal consumption expenditures on Friday but there is some concern that-- or maybe not concern is the right word, but there's some talk about how if you look at some of these leading indicators like consumer confidence, maybe that's going to be the peak on inflation. So is now still the time to have an inflation hedging portfolio strategy or has the ship really sailed on that?

CHRIS BRIGHTMAN: I really like the way you asked that question, the difference between a reflationary trade and an inflationary concern or trade. If you look at high-frequency observations of the correlation between changes in inflation and stock prices they're very positive. And that's because when inflation wiggles around in a reasonable band, call it 1.5% to 3% or maybe even a little above that, most of the changes we see in the measured inflation are not really about the kind of inflation that destroys the wealth over the long run of investors.

I'm sure we're losing about 2% a year. And we all understand that. That's why there's an expected inflation premium built into capital market securities prices but that's mostly about wiggles in the real economy. So when you see inflation go up a little bit over the short run, that's probably good for stock prices because it indicates that you're having an improving economy.

On the other hand, the kind of inflation that really investors want to protect themselves from is a sustained and large increase, talk about going up to or above 5% and sustaining that rate of inflation for a year, hey this is not crazy, we're already running at 5% inflation year over year in the US. That's the kind of thing that you really want to protect yourself. That will take the correlation between stocks and bonds from positive to negative, the correlation between changes in inflation and stock prices to be negative. And that's the kind of thing that investors ought to protect themselves from.

And now is a wonderful opportunity to do so because it's cheap, the break-even inflation over the next 10 years is only a tad above 2%. So while the risk may be a tail risk. And I think that's right, I think the central tendency is likely that inflation remains reasonably well-behaved but given the policy that we've seen, given the extraordinary amount of issuance of debt that's purchased almost entirely by the Fed, if that were to continue for a while, we could have a definite inflation problem. And that probability, even though it's not above 50% is rising. And so now is the time to build in a little bit of inflation protection in the portfolios. And so what does that mean? That means buying resources, buying real estate, buying commodities, maybe even financing that with long-term, very low-cost fixed-rate debt.

SEANA SMITH: All right, we need to get over to Jared Blikre because we have some breaking news, Okta is out with its earnings results. Jared, what can you tell us because the stock's under a bit of pressure here?

JARED BLIKRE: I got to tell you, the numbers are looking good but the stock is down 6%, 7% in after-hours trading as you can see on your screen. Let me give you the second-quarter results, adjusted loss per share came in at $0.11, that is much narrower than the estimated loss, the Street's estimated loss per share of $0.35, revenue coming in at $315.5 million, estimate was for lower by $20 million, $295.5 million, subscription revenue of $303.1 million, adjusted operating margin negative 8%.

That statistic right there, that fact right there might be accounting for some of the decline that we're seeing. Adjusted gross margin 77%, estimate was for slightly higher, 77.1%. But this is a stock that has been a high-flyer historically through the COVID but not this year. The COVID recovery was very kind of the stock but not right now, it's been chopping sideways.

If we go to the YFi Interactive, I do have a chart here, and we can see over the last two years, this is the COVID recovery and now simply chopping around. But I'll tell you another thing here, I see a potential for a breakout. We still do have a slight uptrend here but we are consolidating and this consolidation could continue, probably going to not get that catalyst off of this earnings but we now have a range to look at.

I finally want to close with a 2022 year forecast, they're seeing revenue at $1.24 billion to $1.25 billion, previously they saw $1.22 billion. Estimate was for $1.22 billion so they raised that, they beat the estimates but not by a large amount. They're seeing adjusted loss per share of $0.77 to $0.77, the estimate is for $1.11. So beating on all these statistics but some of them not by enough. And then when you look at the operating margin and adjusted gross margin, those figures disappointed slightly.

SEANA SMITH: All right, Jared Blikre, thanks so much. Aaron, let me go to you, just in terms of the reaction that we've seen to some of these earnings reports, Okta is one example, a company that actually reported pretty strong numbers, yet we're seeing the stock under pressure following those results. Why do you think that is and why do you think the expectations here from the Street are just so high this time around?

AARON DESSEN: That's a great question. I mean, I think looking forward, everybody's looking past COVID going from the reopening to-- I'm sorry, going from the work from home to the reopening trade and looking at the future growth but I think as Chris mentioned, sentiment is pretty bearish and pretty low right now. So I think that there is a lot of fear and you see with Peloton, for example, I think last week reported profit misses and the stock dropped something like 9%. So I think that there's a lot of fear out there but really people are looking forward to the reopening trade and with some of these stocks with loftier valuations or maybe that traded better with the lockdown, they're going to have-- they're going to need to really exceed expectations above and beyond to really make those stock prices move.

SEANA SMITH: Aaron Dessen of Payne Capital Management and Chris Brightman of Research Affiliates. Thanks to you both for joining us today.