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Retailers: ‘We’ve got no more supply chain excuses to hear on earnings calls,’ strategist says

Johan Grahn, Allianz Investment Management Head of ETF Strategy, and Ryan Belanger, Claro Advisors Founder & Managing Principal, sit down with Yahoo Finance Live to talk about the state of retailers ahead of the holiday season, how markets are interpreting Fed chatter, and takeaways from the latest earnings season.

Video Transcript


- That wraps up this week's trading action. Taking a look at the gains that we were able to eke out today-- NASDAQ looks like barely ending in positive territory. S&P adding to some of its gains in the final half an hour of trading, closing up just around a half of a percent. Same case for the Dow, closing up just about 200 points for the day.

For more on this, I want to bring in Johan Grahn, head of ETF strategy at Allianz Investment Management. And we had Brian Belanger-- Brian, great to have you here-- founder and managing principal of Claro Advisors. Ryan, let me start with you. Just in terms of the trading action that we saw today, some buying into the close, certainly coming off a very, very strong October. How do you think this sets us up for the final month of the year?

RYAN BELANGER: Yeah. Great to be with you. I think it's going to be interesting to watch. I'm not convinced of the latest rally that we've experienced. I kind of liken it to the summer rally. I think there's still a lot of structural issues that we've got to solve here in this market.

And for me, I'm wondering if the consumer is going to show up in December. Plenty of inventory out there for all the retailers. There's not backlogs of ships sitting out there in the Los Angeles ports anymore. So will the consumer show up? That's the big question. That's what everyone wants to know. And we got to wait and find out.

- And Johan, what are some of the stickier parts in this inflation story that you're keeping an eye on?

JOHAN GRAHN: Well, the Fed is for sure one of them. And I think that goes without saying at this point. I know we saw the CPI print come in. And it was quite dramatic of the rally coming on the back off of that. But I would also say that the retail investor side for the broader economy, you quickly saw a bunch of chatter from the Fed coming on the back of that rally.

You had Bullard, you had Kashkari, you had Susan Collins all coming out to bang that hawkish drum. So that, overall, will keep putting that wet blanket on any potential upswing anytime soon here.

- Ryan, in terms of the recent action that we have seen, how this sets us up going forward, a lot of question just about the strength of the consumer, how resilient the consumer will likely be over the next couple of months, any signs just in terms of what we heard from retailers this week, that that part of the economic picture is starting to deteriorate?

RYAN BELANGER: Well, I think they're nervous. I mean, they've got plenty of inventory, like I just alluded to. The shelves are full. And that wasn't the case. We've got no more supply chain excuses to here on earnings calls. The supply chain has basically been worked out. So I think they're a little bit nervous if they've maybe got too much inventory. What type of markdowns are they going to have to have?

They're starting talking about steep discounts coming in as we approach the holiday season. So I think they've got to be somewhat nervous. But if you look at the bank data on credit card spending and what we're hearing from JP Morgan, the consumer is still pretty healthy. They're not totally flush like they were with COVID and the stimulus checks. But balances are pretty good.

And I think that's probably making the retailers feel pretty good going into this holiday season. I'm not convinced. I don't know. I know they have a lot of inventory to sell.

- And, Johan, we know that 90% of the S&P has already reported earnings. As you digest the earnings season, what sort of picture is that giving you as to what we can expect in the next quarter?

JOHAN GRAHN: Well, the next quarter is going to be I think much more interesting than the current one. You have the continuous price pressure from inflation coming. And, yes, the supply chains have opened up a little bit, to Brian's point, and less of an excuse, but you still have wage inflation coming through.

So in terms of corporate earnings, I think you can expect to see that they are not really going to keep up, and for sure not be keeping up in broad terms as it relates to inflation, which is really the key if you want to see some upward momentum in the equity market. So I think it's going to be a much more interesting quarter to be watching.

- And, Johan, looking even further out beyond the current quarter into 2023, do you think some of those estimates need to be revised lower here in the coming month or so?

JOHAN GRAHN: That would be the assessment as it relates to where the Fed is going to take things. So, again, there's a lot of conversation around that particular topic. But I happen to believe that come December they're going to keep in tune with the market probability of a 50 basis point hike. I think the hawks have come out to make it really sure that we all understand that the Fed is very serious about where they're going to take this.

But what they're doing, really, here is buying time. And by buying time, I mean they're buying time for the economy to start leading the way and setting the path for them to make potentially a policy shift down the road. But that will take months. And that was unlikely to be here already in the next quarter.

- And for a lot of analysts who are wondering if the Fed is going too far too fast to catch up with what's happening in the real economy, Ryan, some estimates people think we're already in a recession, some predicting one in the first half of next year. How do you position your portfolio when you have so many different data points coming at you?

RYAN BELANGER: Yeah. The current market is definitely trading on the Fed and some of this data. The leading economic indicator number came out this morning. And we got six straight months of decline as opposed to six straight months of climbing, the six months between last year and April. So we are either in a recession right now-- I probably don't think so yet.

But it might be moot. I mean, it could be the case where we're talking ourselves into a recession here. It's going to happen. But is it going to be a significant recession like the 2008-2009? Or could it be somewhat more muted? And I think that's, obviously, what the Fed is hoping for, this soft landing, which I think could be kind of a myth, especially from where they're starting at. I mean, they've got a lot of competition here for investment dollars with where the 10 year is.

So I think it's going to be a challenge for investors. I think you've got to stay high quality. Keep with your convictions. Really know what you own in your portfolios. Gone are the days where you just buy a couple of stocks and some crypto and call it a day. I mean, you've got to do your homework now and know what you own in your portfolio.

- And certainly with crypto at the moment, especially. Johan, anything that you see in terms of attractive opportunities right now?

JOHAN GRAHN: Well, it's a tricky part that we're in right now. And we do these surveys at Allianz. And it's kind of supporting the theme of the investor, the consumer, the American, frankly, being very nervous about the current situation. You have a picture now where you see 7 in 10 Americans they say that it's important to have some of their retirement savings in a financial product that can protect them from market loss.

And then at the same time, you see over half of Americans stopping or reducing or holding back on retirement savings. So what that tells us is that you have a situation right now that people are hoping-- and this is back to the retail question from before perhaps. They're hoping that things will get better over time, that the Fed will start changing their tune because they're spending money now that they really were supposed to have for later. So dealing with today's problems right now financially can be a disaster for the oncoming retirements that everybody's looking for.

But in terms of how you invest money in this environment, very, very difficult because you have to, as always, you have to make the right decision going into a trade and also out and into the next one. To avoid those things, you can invest in structured products. And that's something you can easily do by options trading. And I know you've covered that topic to some degree as well. A lot of heavy trading in options contracts right now. And you can structure that on your own or through an ETF, for example.

- Hope certainly a risky strategy indeed, especially in this environment. A big thank you to Johan Grahn and Ryan Belanger for joining us this afternoon.