Markets closed mostly lower on Thursday, ending a mixed trading session that followed record-low initial jobless claims. Luke Tilley, Wilmington Trust Chief Economist and Christopher Vecchio, DailyFX.com Senior Strategist joined Yahoo Finance Live to discuss.
- Check markets right now, we have roughly 30 seconds to the closing bell. You can see that the Dow has given up some of the gains it had earlier today. It's only trading up about 10 points. You got the S&P 500, it's accelerated a bit to the downside. Now losing about almost 3/4 of a percent off 32 points. And you've got the NASDAQ off over 1 and 1/2, it's lost 266 points. We are going to bring that closing bell right now.
- All right and that is the closing bell on the New York Stock Exchange this Thursday, December 9. And we are going to see a lower close on the S&P 500 and the NASDAQ. The NASDAQ definitely leading the way lower today, down about 1.7%. The S&P 500 down about 0.7% after of course, a three-day rally that we saw earlier this week. The Dow trading just around the flat line here as we close out the trading day.
Taking a look at the sector action, the S&P 500 seeing the health care, consumer staples, and utilities outperforming on the day, whereas we do have consumer discretionary, real estate, and information technology as the laggards. Well, we want to talk much more about the market action now with our panelists here.
Luke Tilley is Wilmington Trust chief economist. And Christopher Vecchio is DailyFX.com senior strategist. And Christopher, want to start off with you here. As we take a look at the markets, of course, quite a bit of choppiness during today's session, but a strong rally earlier this week. What do you make of this sort of price action? And do you think the worst is now behind us in terms of fears of the Omicron variant?
CHRISOPHER VECCHIO: Well, I definitely think the fears about Omicron are overblown given the preliminary data that we've seen come out of South Africa. We do have a similar situation actually to what unfolded in the 1918 Spanish flu, where transmissibility increased for the virus but in turn, lethality decreased. So will we be seeing lockdowns here on the federal level in the United States even on state levels? Probably not. And as a result, economic activity shouldn't be that significantly impacted.
Today's jobs data, the jobless claims figures that came out, pandemic lows, some of the lowest claimed figures we've seen in 50 years. But the big catalyst for today's price action in market was that 30-year bond auction, tailed by about 3.2 basis points ahead of that inflation data due tomorrow. It's possible that we see at a print, north of 7% which will cue up a very interesting Fed meeting next week. Of course, the Fed has been dropping hints that we could be seeing an accelerated rate of tapering at the start of 2022.
- Christopher, thank you. You've helped set up the question I want to throw to Luke, which has to do with inflation, that reading, whether we get a seven read on this tomorrow or not. As you've pointed out, the expectation is inflation does come down next year. But that doesn't mean prices come down. So as investors, what should we extrapolate from the fact that inflation is here, and probably going to be above the 2% target the Fed likes for at least another year, and its impact on earnings at the companies we invest in?
LUKE TILLEY: Yeah, that's the most important thing. It's not just the year-over-year, which is going to be so much impacted by the base effects in a weak November that we're going to be losing from last year. But really, what is the sequential gain? Are we still seeing pressure on a month-over-month basis? And importantly, how widespread is that pressure? And we think that inflation is still going to be pretty broad when we see tomorrow's report. And it is going to push inflation possibly up over that 7% year-over-year terms.
But what we're looking for is a deceleration as we go forward over the course of 2022. As you said, that doesn't mean prices are going to go down. Just the question, are they going to go up as much in 2022 as 2021 without the kind of fiscal stimulus we've had this year? And we also think we don't think that that's going to happen because there won't be as much of a push on the demand side. And then on the supply side, we're looking for the labor market to improve, more people returning to work, and of course, the delivery in the ports to improve. So we think lower inflation.
Now, that does still augur we think for positives for equities, both large cap and small cap. We think that that does mean some improving price increases. And another important thing here is that companies are becoming more and more productive over time. They're dealing with labor challenges, but they're learning how to make more with less, all of the investment in tech. And that really helps profitability and helps the markets.
- Christopher, do you think the Fed is going to throw the market any curveballs next week? And where do you think those could come in? Could it be in a tapering announcement? Or do you think it might come in the updated dot plot or summary of economic projections?
CHRISOPHER VECCHIO: I do think there is a chance for a curveball next week insofar as the Fed has been queuing up with this possibility that we're going to see an accelerated rate of tapering to potentially $30 billion per month. I think the Fed wants to jawbone this inflation a little bit lower here over the coming months. They may hint that March could be a live meeting, vis-a-vis the fact that tapering would end by March. But a rate hike probably comes onto the horizon vis-a-vis the dot plots sometime in June.
It looks like that we could also be seeing a potential second hike for 2022-- excuse me-- come into play by December. And so I really think that the market needs to take a step back. If you've been paying attention to what Powell said in the November Fed meeting, if you take a look at what he said in his nomination speech, what Lael Brainard said in her nomination speech a few weeks ago, inflation is at the forefront of their mind.
They also are cognizant of the fact that raising interest rates will not unclog the ports, it will not lead to any fixed capital investment increase to fix the infrastructure problems, if you will, that have been curating these supply chain problems. And so this is a tight walk here. They really have to be careful about potentially tipping markets over by appearing too hawkish at the onset. So I do think we're going to see strong forecasts on inflation, strong forecasts for growth. But ultimately, by the end of 2022, particularly 2023, those forecasts for inflation should be getting closer to the trend.
- Luke, when we talk about the potential for interest rate increases, we've had other guests on who've pointed out that equities can still go higher. And in particular, there's this whole correlation between rising interest rates and what happens to big tech. And yet, as an investor, what would you advise people who on one hand are concerned about perhaps moving lift-off next year earlier. We just heard Chris say maybe even in June that we could begin looking at lift-off. What should an investor do to position? I mean, should you totally ignore big tech? Are there sectors that would gain? Would financials be a place to start looking?
LUKE TILLEY: Yeah. At the highest level, we definitely think that the first rate hike could come earlier. And we liken the letting off of with the decrease in purchases as letting off of the accelerator, and the hiking of interest rates as pressing on the brake. And we really don't think that it's as important when they decide to start pressing on that brake as much as it is how hard do they press on the brake. And we think that it's going to be a fairly gradual hiking process once it starts.
And that's really important because if it is a slow, gradual process, we think that the economy can withstand it. And then it also means, we think, strong equity performance. And we are overweight to both large cap and small cap and international for next year. There are definitely going to be some sectoral differences as the economy moves forward. Yes, we think that financials would do better, and it hinges a little bit on those rate hikes, and then tech is more affected by those interest rates.
But the broader performance of the economy is really going to be the key determinant here, and if we have a so-called soft landing. And really importantly, if the virus becomes more under control, then that means more broad-based improvement as opposed to sort of the skewed performance that we've had for so much of the past 18 months.
- Chris, I want to pick up on something that Luke just alluded to about financials. I mean, I'm looking at Wells Fargo right now, and it closed up today. And I would imagine that the other big banks stand to do pretty well when, you know-- what I'm getting at here, and I'm looking at my other computer, is now the buying opportunity for financials given what we know is going to come? Eventually, those rates are going to have to go up.
CHRISOPHER VECCHIO: Well, this is a tough situation for some financials in part, because we've seen the yield curve flat. And so net interest margin has been going down for some of these banks. And as inflation remains so high, a lot of the loans that they put out are fixed rate. So for consumers, it's a great time to get a mortgage. You're basically inflating away the cost of paying for your home.
But for banks, it's a little bit of a trickier situation. It's been a tricky situation for the past month as we've seen rates ratchet higher and inflation run up. So I do think that it is a good time to wait and see on the financials. I think there are better opportunities out there across sectors, particularly sectors like real estate itself. Real estates tend to do well during these inflationary periods, and I'm actually with Luke on a lot of this here.
I do think that if you're talking about inflation, historically speaking, equities have been one of the better hedges against inflation going back to the post World War II era. So a general broad basket of stocks that proved to be sensitive, that are able to capture those price pressures, be able to maintain their margins, those are the companies that will do well over the coming months.
- All right. We want to thank both of you, Christopher Vecchio, DailyFX.com senior strategist, and also Luke Tilly, Wilmington Trust chief economist. It's good to have both of you.