Hal Reynolds, Los Angeles Capital Chief Investment Officer and Brian Vendig, MJP Wealth Advisors President, break down the day of trading.

Video Transcript

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- We're getting potential records for the S&P and NASDAQ as we count down the final minute of trading. We have Hal Reynolds, chief investment officer at Los Angeles Capital, and Brian Vendid, president of MJP Wealth Advisors.

Let's take a look at where things stand because the Dow, S&P, and NASDAQ all moving to the upside, we're actually seeing some buying action in the final couple of minutes of trading. The Dow now up just around 240 points, S&P up nearly 1%, the NASDAQ has been the outperformer for the entire trading day, now trading up nearly one and 1/2 percent gains. And Apple and Amazon coming ahead of the company's earnings results here after the bell, both of those stocks up just over 2%.

Ford is another standout today, solid earnings raising its guidance, hitting levels that we haven't seen from that stock in quite some time. Nearly half of the S&P 500 companies have reported earnings so far, the large majority beating expectations.

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And that does it for today's trading day. Again, gains across the board, Dow, S&P, and NASDAQ all to the upside. Dow closing up 239 points in today's gains, coming despite the fact that we got that disappointing GDP report out before the bell this morning.

Third quarter growth coming in at 2%, missing the Street's expectations of 2.8%. Let's talk about what we're seeing and what we could expect to see going forward with Hal Reynolds and Brian Vendig. And Hal, I'll toss it over to you first, wrap up the day for us. What's your big takeaway from today's gains?

HAL REYNOLDS: Well, there's no doubt October is shaping up to be quite a month and, of course, it's a month that many investors fear. But looks like growth stocks will be up 8% this month, leading the global equity market, so another great month for growth.

- Brian, what do you think? Is there reason to believe that we could still continue this upward momentum here into the end of the year?

BRIAN VENDIG: Sure, thanks Seana. I think there's a couple of macroeconomic factors that are still in place domestically as well as around the world. I mean, first of all, the consumer domestically is healthy and we've seen that spending still exceeds supply right now as we move through the balance of the year.

And of course, we just have heard from almost 50% of companies report domestically on the S&P 500 and there's more good news coming out than bad, as previously expected. And so companies are working through these supply chain inefficiencies but I think from a global perspective, we know that inventories need to be rebuilt the same point in time making sure that we're keeping a close eye on inflation.

So from a cyclical perspective, I would say that companies that are focused on growing their earnings as the economy is growing, is definitely in play. And being that we see a little bit of a pullback in interest rates, I think have also helped grow stocks in the short term.

- Hal, we haven't seen a little bit of a pullback in interest rates but what do you think we could expect going into the end year? Have we seen yields peak?

HAL REYNOLDS: You know it's interesting, I think equity investors, quite frankly, aren't concerned about inflation. And I know we've been hearing the term transitory now for two or three quarters but I think the market's beginning to sort of accept it, and that's certainly, I agree, that is helping growth stocks.

But the truth of the matter is the Fed at some point will return to its long term battle of fighting in deflation and I think the general consensus is that's going to happen before year end '22, so we're going to see that. There's no doubt we've got the supply chain constraints today but there's not much the Fed can do about that, time will heal that. And so I think that's right, I think the market continues not to be too concerned about inflation.

- Brian, the supply chain constraints that Hal was just referencing, I guess, how are you incorporating that or are you adjusting your strategy at all as a result of some of the delays in the supply chain crisis that we are seeing heading into the holiday season?

BRIAN VENDIG: Yeah, absolutely. I mean, I think in the short term, it's definitely going to take more time for the supply chains to heal and that's a key word that we're been hearing this month in earnings outlooks and talks from leaders in publicly traded companies. So I think from a holiday season perspective, it definitely puts a lot more pressure on the retail sector.

However, longer term, if you think about basic material companies, industrial companies, these are the backbones of our global economy and I would say there's an opportunity there, that there's more business to have as we move forward and supply chain heals.

But I will say that inflation is the most important thing to keep an eye on over the next 14 months, that does impact profitability, it does impact the assessment of Fed policies.

So as much as we might have all accept that inflation year over year is higher due to the knock on effect of coming out of the pandemic and these inefficiencies in supply chain, we can't just accept that we've fully comprehended it since things change on an ongoing basis. So keep one point in mind. The labor market is taking longer to heal, that's a huge driver to inflation, however, we've seen food, energy, automobile prices being elevated.

Now, I think persistent with the comments or consistent, I should say, with the Fed's comments of inflation being persistent, we expect those to come off by the time we reach the second half of next year. So I think the market has accepted will be above the 2% target but not be permanently at 5% moving forward.

- Hal, where are you putting money to work at this point? Because there's still a lot of uncertainty out there.

HAL REYNOLDS: Well there is, there's no doubt about it. There's a wide range of outcomes over the next year, including with COVID but we continue to like the long term secular growth story. We remain overweighted in the largest growth companies in the world, obviously the situation in China has changed dramatically in the last six months, six to nine months, but we continue to like the mega cap growth stocks in the US.

We're actually pulling back a little bit on the cyclicals and actually increasing our allocation to defensives a bit. Given where we are in the market cycle, given the speed of the recovery, given the forward multiples, they're still North of 20, given the fact we've got peak earnings, you cannot ignore the defensive stocks.

But in terms of the growth versus cyclicals or growth versus traditional value, we think most of the gains, at least in the US, not in Europe, but most of the gains on the value side of the equation in the US, we think are behind us. I agree that the economic recovery will continue but we actually see earnings moving faster on the growth side in prices than we do on the value side.

- Brian, what's been your big takeaway with earnings so far? Because we have about half of the S&P 500 has reported a majority by far, are beating the Street's expectations. Is that something that's sustainable?

BRIAN VENDIG: I think for certain sectors of the economy, absolutely, because based on where society is moved, that demand is going to continue to follow. So I do agree with the comments that looking at technology stocks that have predictable earnings, the ability to maintain margin and actually don't get caught up too much in the supply chain inefficiencies and inflation discussion, is a good place to be.

But I also think at the same point in time, there are a lot of sectors that were left behind in 2020 that are still responding to this recovery this year that we think will happen and still continue into next year. I mean, for example, financials, which is a great hedge for interest rates and inflation and also improving loan growth, is something that an investor should keep in mind and also real estate.

As a great hedge for inflation moving forward and also thinking about rent increases and demand, like I said, for certain type of real estate that supports the supply chain, life and health sciences and apartments. And finally, when we think about the growth versus value debate, I think it's fair to say that no one can necessarily predict accurately what's going to happen over the next month or in the next three months. So I think both sides fairly balanced makes a lot of sense as we move into next year.

- Brian Vendig of MJP Wealth Advisors, Hal Reynolds of Los Angeles Capital, thank you to you both for joining.