Sarah House, Wells Fargo Senior Economist and Greg Staples, DWS Group Head of Fixed Income join Yahoo Finance Live to break down the latest market action as the closing bell rings.
- Just about four minutes to go until the closing bell. You're looking at gains across the board, the Dow up just around 50 points off its highs of the day, the S&P also off its highs of the day, breaking above 4500 for the first time, but still on track, it looks like, for a record close, as well as the NASDAQ. So Record days here, banks and reopening plays leading the way.
We want to bring in our panel. We have Sarah House-- she's Wells Fargo's senior economist-- and Greg Staples, DWS group head of Fixed Income Americas. Greg, let's start with some of the action that we're seeing in the bond markets today. I didn't mention that off the top, but the 10-year yield up just around five basis points. What do you make of the move that we're seeing there today?
GREG STAPLES: It's the second straight day that we've seen a rise in yields. I think the two things are going on. One is we're seeing some firmness in commodity prices, a couple of days of positive action in oil. That had been weaker last week. And second of all, surprising, or I guess maybe not surprising, progress that Nancy Pelosi had in getting a key vote through in the House, which perhaps opens up the door to even more fiscal stimulus than the market was thinking.
- Sarah, when we look at these markets, are they going to be moved, do you think, dramatically depending on what Powell says later this week, or are they going to just renew it and move on?
SARAH HOUSE: I think Powell's going to really try not to rock the boat when he gives his speech on Friday. I think, given that we're certainly seeing some crosscurrents in terms of the outlook given the rise of the Delta variant, I think he's going to really punt in terms of giving any guidance of what may come, and they'll discuss it at the September meeting. But we're not expecting him to strongly hint at any potential tapering.
- Greg, one thing that investors have been paying close attention to is inflation, and the first thing in your note was that inflation pressures will be more than transitory, although less than permanent. Unpack that a bit for us, and exactly what you mean by that statement.
GREG STAPLES: Sure. I mean, up till now, you've seen some issues with supply chains, some commodity pinches. And that's worked its way through in the earlier inflation models. We think, going into the back half of the year, it's going to be a little more persistent. We think, for example, as people come back to work in the service areas in September and October, there's going to be a higher equilibrium wage.
In other words, employers are going to have to pay a little bit more to bring workers back in. And that's going to mean wage inflation is going to pick up. And that tends to be a little bit more permanent than the wage-- than the price increases we've seen so far. So we're looking for a continued gradual, still manageable pick-up in inflation the back half of the year and into 2022.
- Sarah, we've only got about 30 seconds, but I'm curious, do you think consumers pulling back because of these COVID variants is going to be a real issue, or are we going to get past this relatively quickly?
SARAH HOUSE: I think we're going to get past it relatively quickly. So we're already seeing the rate of case growth begin to slow, and while there's been some voluntary pullbacks in things like maybe dining out and travel, consumers overall are still in a great financial position, so spending is still going to continue to be strong throughout the coming months.
- All right, let's take a look at where things stand because we have just around 20 seconds to go here. Dow up 49 points, S&P off the highs of the day, but still up just around a quarter of a percent. The NASDAQ in record territory, up 24 points. In terms of some of the outperformers today, financials leading the way. Energy and industrials also among the top performers.
- There's the closing bell. It's ringing loud. And take a look at that. Can we get the gavel, please?
Thank you very much. Go orange, by the way, those of us who are Syracuse alumni. One of our producers [INAUDIBLE]. I remember Josh.
All right, the Dow is going to finish up 37 points today. S&P 500, it hit an intraday high today, it was above 4500, but it pulled back a bit. Still in the green, closing up about 10 points today. Also NASDAQ, it'll be up 22 points today, another intraday high earlier today.
We're keeping an eye on all of this. Want to go back to the panel as we talk about where these markets are going to go. And let me go back to you, Sarah, because if I'm an investor watching all of this right now and I'm trying to make decisions about taking cash that I've been sitting on that's earned nothing because of where interest rates are, what sectors should I seriously considered going forward? Because it seems like I might have missed out on the big tech rises.
SARAH HOUSE: Well, I'll leave the investment allocation to the strategists, but we're just looking at the broader macro economy. So we think that, while the rise of the Delta variant is slowing the transition towards the service sector, we still think that there's a lot of runway left for services spending. So overall services spending is still down 2% in real terms from where it was before COVID, whereas goods spending is more than 10% higher. And so we think we're going to continue to see that shift in spending. And really, that growth in terms of consumer spending will be driven by the services economy in the coming months.
- Sarah, you mentioned the consumer. The consumer sentiment index was at lowest level since 2011. I think that raised some alarm bells for some investors out there. Just in terms of what this means for the economic recovery, did this make you maybe think twice about where we are in this recovery and how strong it could potentially be, or weak potentially, going forward?
SARAH HOUSE: Well, the Michigan sentiment survey is very weighted towards what's happening on the price front and inflation. So we think that that was probably skewed towards some of the high inflation prints we've seen recently. If you look at consumer confidence, it's the highest that it has been since the pandemic started. That's weighted more towards the labor market, and I think that speaks to the underlying strength that we still have in the economy, given that the labor market continues to pick up, and also has-- also has scope for a lot of improvement, given where job openings and labor demand is.
- Greg, we're watching the yield on the 10-year go up today. I know that you think it could actually wind up around 1.5% by September. You think we'll see that 2% people were warning us about by the end of the year? And what would that mean for equity markets? Would it really be much of anything?
GREG STAPLES: Two things. One is I think that the action in the rates market has been driven by outlook for fiscal stimulus. The high that we saw earlier in March and April was when we were seeing the second stimulus package pretty much blow through Congress without any impediment. And I think the concern then was that two and three would come through strongly, as well.
To get to the kind of levels that I'm talking about, 1 and 3/4 by-- 1 and 1/2 by September, 1 and 3/4 to 2 at year-end, it would really mean great progress in that second Families Act reconciliation stimulus bill, the $3.5 trillion one. Probably not going to happen, but if that happens, yeah, we're talking potentially about 1 and 3/4 to 2% by year-end.
Implications for the marketplace, listen, if you're in the 1.5% range in the 10-year and real rates stay close to minus 1%, I think the market's going to be OK. But at some stage of the game, it's going to pinch valuations. It's going to pinch P/E. Some of those high-flying tech stocks are going have a hard time high flying, if you're looking at a 10-year above 2%.
- Greg, you also mentioned the geopolitical risks in your note, because the market's still at all-time highs, yet we might be underestimating some of those geopolitical risks and how big of a headwind it could potentially be for the market. Explain that to us a little bit, and just in terms of how investors maybe should be positioned as a result.
GREG STAPLES: Well, China is obviously subdued on there. Seems to be a bit of a change there in an attitude towards free market and the accumulation of wealth. That's going to play out over time. And the one that I think the market-- I mean, sure, much is underestimating, but we're worried about a little bit-- it's extremely low probability, but would be high impact. It's a very volatile situation in Kabul right now.
We worry about randomly, you know, some hot-headed American gets in an altercation with the Taliban with a rifle, bad things happen, it's on social media. It could be a one-off strange event, but that could clearly spiral into a larger geopolitical issue that could really rattle the markets. Hoping it doesn't happen, but it's really on the table right now until we can get most of those people out of there.
- Sarah, we're focusing on things that are in the immediate future, but in September, we have a battle over raising the debt ceiling, and we also have the expiration of the extended unemployment benefits. Are you factoring in or can you help us understand what to expect as we factor all of that in?
SARAH HOUSE: Sure. So the expiration of the additional unemployment insurance factors into our expectations that consumer spending will continue to grow more slowly over the back half of the year. But I think it has been lost along many market watchers, is that we still don't have a budget for the next year. So there's discussions about doing a continuing resolution, which we think is most likely to fund the government past the end of the fiscal year at the end of September, but complicating that is the debt ceiling.
So right now, the Treasury is working under extraordinary measures, but we've seen Republicans in the Senate say that they won't come out and support an increase in the debt ceiling. Democrats are saying that they're not going to pass it with the reconciliation deal. So we could very well see a standoff, and the odds of a government shutdown have been rising.
- Sarah, what do you make of, when you take a look at the labor market-- we were talking about jobs a little bit earlier-- when you see the fact that there's still significant labor shortage out there, yet a number of jobs-- a number of people, millions of Americans are unemployed? I guess how long do you think it's going to take in order for us to get back to those pre-pandemic levels?
SARAH HOUSE: Well, I think in terms of just recovering the total jobs lost in the economy, we're looking at late 2022, early 2023, so significantly slower than what we've seen in terms of the recovery in output. But labor-- but employment does tend to lag, and this is still, overall, a pretty fast recovery in the jobs outlook. We think that we'll see some notable improvement on the supply front here in the coming months. So yes, you do have some renewed concerns about COVID with the rise of the Delta variant, but it seems like schools are very much determined to reopen. That should help some parents get back to work.
Overall, health concerns are still lower than what they were last winter, given that we do have these very effective tools in terms of the vaccinations to help combat the virus. And also, just given that expiration of the unemployment insurance, we think that's an extra push to bringing some people back to work. So we think the labor market outlook still remains pretty strong here for the next few months.
- All right, Sarah House, Wells Fargo senior economist, thanks so much for taking the time, and Greg Staples, DWS group head of Fixed Income Americas. Thank you both. We'll speak with you again.