Market Recap: Wednesday, November 17

Stocks were mostly lower Wednesday to hover below record levels, as investors digested a set of solid corporate earnings results from more major retailers. Uma Pattarkine, CenterSquare Senior Analyst, Investment Strategy and Chris Konstantinos, RiverFront Investment Group Chief Investment Strategist joined Yahoo Finance Live to discuss.

Video Transcript

SEANA SMITH: Stocks remain under pressure as we wrap up the trading day. We want to bring in Uma Pattarkine, the CenterSquare Senior Analyst of Investment Strategy. And we have Chris Konstantinos, RiverFront Investment Group's Chief Investment Strategist. Chris, I'll go to you first, because we're looking at selling today with the Dow off just over 180 points-- not that big of a move to the downside. But you're actually very positive in the notes that you sent over. You said equity markets, they should rally into the end of the year despite some of those inflation concerns. What's going to be the catalyst? Why are you so positive?

CHRIS KONSTANTINOS: Sure. Well, I think what we're witnessing right now is sort of a classic Santa Claus rally. And what we've found over the years is that sometimes that Santa Claus rally happens earlier than December. I think we're in a little bit of an information vacuum. I agree with you that inflation-- the headline prints on inflation have been alarming. But what's been fascinating is watching the lack of follow-through in the bond market. Believe it or not, as equity analysts, we actually take a lot of our cues from the bond market, whether you're looking at the credit side, or you're looking at treasuries, you're looking at spreads, et cetera.

And you're not seeing a whole lot of stress right now in credit, and you're definitely not seeing the types of moves in treasuries, for instance, that we would expect to see when you're getting headline inflation this high. What that suggests to me is that the bond market is still viewing, much like the Fed, that even though these inflation prints are really high, it's still likely to be relatively short-lived as we look out into 2022.

SEANA SMITH: All right. Uma, we are going to get to you in just a minute, but we want to check in on where things are trading as we wrap up the final minute of the trading day. You can see the Dow now off over 200 points, some selling here in the final couple of minutes. S&P off just around 2/10 of a percent, and the NASDAQ off 53 points.

In terms of some of the laggards in today's action, Visa, Goldman, Merck, Walgreens, and Travelers the worst performers within the Dow today. When you take a look at some of the sector action, what was bucking the downward trend where some of those consumer discretionary names, investors still finding reason to buy those. Health care, real estate, and utilities also in the green today.



ADAM SHAPIRO: Yep. Bell. These markets are going to wrap up, and we believe we're going to be down on the Dow 210 points when things settle, S&P 500 is going to be off 12 points, NASDAQ is going to be off 52 points. Let's get back to the panel to talk about what's [AUDIO OUT] the kind of volatility yesterday. We were up, today we're down. And, Uma, a lot of people are pointing to inflation. You expect that at least the supply chain bottlenecks that are causing inflation, at least their contribution to inflation, to ease up, but it's going to take all of next year. What is that saying to an investor?

UMA PATTARKINE: Sure. You know, Adam, thanks for having me here. And that's a great question. We are tracking the supply chain. And effectively, it seems a little bit broken, right? But we are starting to see a little bit of that pressure starting to come off.

It seems like the cargo ships are waiting off of the ports in Southern California, coming down a little bit in number-- maybe 84, I think, was the latest update we got, which is not great quite yet, right? But still making progress compared to the hundred-plus ships we had waiting a few days ago.

And what that's really telling us is that we are going to start to see some of that supply chain bottleneck, some of those pressures from the input cost perspective come down a little bit. It is going to take a while for that to really flow through for the entirety of the supply chain, mainly because we are talking about a global supply chain at this point. But the other thing to really be mindful of is the fact that we are seeing those labor pressures really come through.

And those wages tend to be a little bit stickier. So even though we should see supply chain issues kind of pull back, helping that inflation kind of come off a little bit here, that wage pressure will still continue to be part of the elevated cost structure for companies going forward.

Speaking of some of the pressures that we are seeing, Chris, retailers-- a number of retailers warning about their margins, the fact that they are getting squeezed because of some of those supply chain issues that Chris was just talking about. Are these worries? Do you think they're going to become more prevalent, at least over the coming weeks?

CHRIS KONSTANTINOS: Yeah, I'm really glad you brought up wages. And I think Chris makes some excellent points here about wages. This is actually one of the things that we like to slice and dice here at Riverfront pretty significantly. The Atlanta Fed has some great wage growth data.

And if you look at where wages are really growing where the delta has really changed, it's really been on the low end of earners. And if you look at the lowest quintile, let's say, of earners, that's really been where the outsized growth is. And to your point, that's certainly going to hit the retail market pretty hard, I think.

We saw it in some of the earnings of prominent retailers, big box retailers, et cetera today, where they had huge revenue, beats on earnings, but you know, their gross margins were a little bit worse than expected. So I think that is going to be with us for some time.

But then if you look outside of the retailing space, I'll take technology, for instance, which is, at the end of the day, a much bigger percentage size of the S&P 500 than retail is. You look at that, and you know, we think that actually, you know, you're going to continue to see margin expansion for some of the software and it services companies where you don't have the same level of wage pressures necessarily, where the top line is growing even faster not only because of pandemic-led effects, but also just simply because they're in a secular growth trend for their goods and services.

So at the aggregate level, I don't think that wages are going to be enough to knock this bull market off in '22. But I do think that retailers are going-- this is really going to separate the excellent operators from the mediocre ones, because the retailers that are really, really good at finding out other-- finding other efficiencies in their supply chain to offset these wage gains are going to continue to have a tailwind in the form of revenue growth. The ones that aren't, I think, frankly, are going to struggle heading out into next year.

ADAM SHAPIRO: Chris, I just wanted to-- help us understand one thing you pointed out that as people are taking on more debt, that's going to help-- help is not the right word-- it's going to motivate people go get a job to help pay off that debt. And yet we just saw the revision in the labor numbers that the labor force is actually growing better than we had thought.

So isn't that already happening? And yet debt levels are going up. Is the consumer going to be able to keep spending, regardless of inflation?

CHRIS KONSTANTINOS: I think there's actually a lot of tailwinds for the US consumer right now. And you brought up a couple of them. The savings rate did get to be extraordinarily high during the pandemic. And now they're starting to work that off. The debt levels are starting to go up, as you say.

But as we look out into '22, actually, you know, we see more tailwinds than headwinds for the US consumer. Carrying costs for the debt that they're taking on is extraordinarily low relative to history. You know, it's not a situation like we had during the Global Financial Crisis, where high debt levels meant high carrying costs and then calamity ensued. So we don't necessarily have a concerning view on consumer spending in 2022.

SEANA SMITH: Uma, in terms of where you're seeing opportunity, there seems to be a bit of a risk-off trade that happened today at least-- utilities was among one of the outperformers, real estate also ending in the green today. How are you advising clients to be positioned as we head into the end of the year?

UMA PATTARKINE: Yes, Seana, great question. And as we talk to our clients, the things that we're focused on-- and this has been brought up a couple of times already in this conversation-- we're looking at the areas where we see demand tailwinds that are not only just kind of recovering from COVID, but long-term past that, we're looking at companies that have pricing power and companies that have the ability to really maintain those margins in an environment where they might see some pressures from the cost perspective.

One of those examples for us is residential real estate, right? We're seeing rents across the board up 10%, 15%. And at that same time, you're able to get some of that inflationary hedge from a real estate perspective as well. And so those are the types of areas that we're focusing on for our clients is areas with great secular demand, great pricing power, and strong margins.

ADAM SHAPIRO: Can you help us, though, Uma, a little bit further than just the end of the year? Because you're talking about fixed income remaining in a range of 1.5% and 1.75%-- and I assume we're just talking about the 10-year here. But when we get into the first quarter of next year or even halfway through next year, there's going to be pressure, isn't there, for yields to go up on treasuries?

UMA PATTARKINE: You know, the yield question is kind of global in nature. We're seeing central banks kind of across the world really separating what they're doing from that rate policy perspective. And at this moment, we still see banks being very, very accommodative.

So it seems like we might be kind of in this lower rate for a longer type of environment. And so you bring up a great point in terms of where we go, right? At this point, investors really need to be looking at yields, where they can get it elsewhere in the market if they're not planning on getting it through fixed income in the near future until we see that movement in that global rate market. And again, I think real estate really provides a great place for investors to find that dividend yield when you're not able to get it through the fixed income market currently.

SEANA SMITH: Uma, always great to get your perspective. Uma Pattarkine, CenterSquare Senior Analyst of Investment Strategy, and also Chris Konstantinos, RiverFront Investment Global Chief Investment Strategist.