Market Recap: Wednesday, Oct. 20

Matthew Nest, State Street Global Advisors Global Head of Active Fixed Income, and Michael Vogelzang, CAPTRUST CIO, join Yahoo Finance to break down the day of trading.

Video Transcript

SEANA SMITH: About two minutes to go until the bell. We have Matthew Nest. He's State Street Global Advisor's global head of active fixed income. And Michael Vogelzang, he's the chief investment officer at CAPTRUST. Michael, let me start with you. We have the Dow hitting an all time high today. The S&P not too far off. When we look at the setup into the end of the year, do we have enough to keep this momentum to the upside for that to continue?

MICHAEL VOGELZANG: Sure because there's plenty of money floating around thanks to the Federal Reserve. There's no shortage of demand for stocks, particularly when bonds provide scant competition. So absolutely, some of it's going to depend on how the earnings season comes through. But yeah, no. It wouldn't shock us. We're sort of of the opinion that risks are pretty nicely balanced here in the market. So we're actually taking a few chips off the table. But whoa, boy. It's been a fun second half of the year as the market's done well.

SEANA SMITH: It certainly has been. All right, well let's take a look at where things stand. Because again, another record setting day on Wall Street, Dow hitting a record high earlier today. You can see it up 133 points as we count down the final minute of the trading day. The S&P holding on to gains up just around a third of a percent. The NASDAQ under a bit of pressure. That's been the case for most of the day, off just around a tenth of a percent. We saw the tech sector come under pressure as the yields continue to rise, a 10 year yield hitting the highest that we have seen in about five months. So that putting pressure on some of those big tech names.

In terms of the leaders that we are seeing today, within the Dow UnitedHealth is a top performer, up just around 2 and 1/2, Verizon as well rounding out the top two there. Merck Travelers and Caterpillar. In terms of what is keeping some of today's gains in check, McDonald's NASDAQ off just over 1% as well as Goldman Sachs, Salesforce, Visa, and Walt Disney underperforming.

In terms of the sector action today, Jared was mentioning that defensive set up health care among the leaders along with utilities.

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ADAM SHAPIRO: Somebody's watch is running a little fast. But there's the closing bell. We'll take it. And it's a day where some investors are smiling big. Let's see where the markets are going to settle. As Seana was just saying, the Dow did hit an intraday high. But right now, it's going to be close up about 152 points. S&P 500 up 16 points. NASDAQ however is going to be off seven points. One thing when you look at sector action, we talked about Verizon. Seana pointed out that they were one of the Dow leaders today.

But the sector itself, communication services, was down. And it was down almost half a percent. Let's get back to our guests and talk about what is going on in these markets. And Matthew, I want to bring you in because you are, I think a lot of us would like to hear this and hope you're right, expecting inflation to likely fall off.

When you say fall off, are you talking about the pace of growth and inflation? Or are you talking about actual prices come back to what we are used to?

MATTHEW NEST: Well you've already seen the pace of growth fall off. I mean, peak inflation rates were several months ago. And month over month, statistics show that that has sequentially declined already. I think you're still going to see price increases in several segments of the inflation statistics, most notably shelter. But other prices like airlines and used to new cars are likely to come down. Now the supply issues that we've all been talking about are likely to last for the next quarter or two. So into the summer of next year, we do expect year over year inflation to start to moderate.

SEANA SMITH: Now what do you make of the 10 year move today? Because we had the 10 year yield hitting its highest level that we've seen in a couple of months. Do you think we're going to push back above one seven? I guess how high could we potentially see the yield climb?

MATTHEW NEST: Well the path of least resistance is, of course, for higher rates. I mean, strong growth, high inflationary statistics. We've come off the peak of momentum in terms of both of those, and what we call peak policy accommodation as well. So the key question is when those things start to slow to the point where peak, or policy removal then starts to impact those growth and inflation numbers. That's likely when you're going to see a turn in interest rates and head lower. But for the near term, it's likely higher interest rates as we move forward.

ADAM SHAPIRO: Michael, when you talk about market being dependent earlier on stimulus, and not necessarily corporate profit progress, as we're now in the thick of earnings season, what are we seeing? Because stimulus is well behind us.

MICHAEL VOGELZANG: Yeah, no. That's right. I mean, both the fiscal stimulus and also the monetary stimulus has been driving markets really since the ricochet off the bottom of COVID a year and a half ago almost. And so what we're looking at now is, OK. The sort of easy work is done. The fed is beginning to taper shortly we expect. We don't expect interest rates to rise much from here. But what it means is that market's reasonably valued. It's not cheap by anybody's estimation. And so in order to progress here, in order for us to set some new highs, we're going to have to see stronger earnings growth and continued strong earnings growth.

Clearly as Matt pointed out, we've seen the sort of peak cycle acceleration. But that again is somewhat of a bounce off the bottom. Now it's the hard work of can we continue to create profit growth in our various companies? Can the market and the economies around the globe work through some of the logistical issues? Can we make enough semiconductors to get some cars released so that the price of used cars actually comes down? We think very much like Matt. We have seen peak inflation. We expect a normalization next year.

In fact, we often talk in our investment committee, what are the headlines going to read next summer and next fall in "The Wall Street Journal" or some other media? What are the headlines going to read? And we think it's going to be, hey, how can the economy flirt with deflation? Because we're going to have such a base effect coming off highs of this year.

SEANA SMITH: So Michael, with that in mind then, how are you positioning yourself, I guess not so much over the short term, but when you're taking a longer term outlook, 12, 18, maybe even the next 36 months?

MICHAEL VOGELZANG: Well at CAPTRUST, we're allocators generally. We're long term allocators. And as a result, what we're thinking about is we went overweight equity and risk beta last April in 2020. We've trimmed that now a couple of times. And we're in the middle of bringing that back down to our neutral targets for our various asset allocation type portfolios.

And so we feel again, as I said earlier, the risks are reasonably well balanced here. Before, we thought it was a no brainer to remain overweight to equity. We think that given some of the things we talked about already, we're beginning to see a little bit, we're sort of past peak. And it wouldn't surprise us with some tapering to get a little bit more interest rate headwind here. So we just feel it's wise and sort of well thought through to say, let's wait for the next opportunity.

ADAM SHAPIRO: Matthew, we talked in the 3 o'clock hour with a guest about the 10 year yield, which is now 1.63 and the impact it has on big tech stocks. Other guests have told us, get ready for a real transition if that 10 year should get close to-- the yield get close to three. What do you think of that calling out the actual point where we would get the rotation? And how far away from that might we be?

MATTHEW NEST: Well I don't know where that point is. Obviously, we saw in the last cycle in 2018 as interest rates moved higher, the fed removed accommodation, they started to go bump in the night. And some asset prices got hit on the back of that in 2018. You're likely to see that again in this cycle. But we're a little far away from that. The policy remains at zero, monetary policy makers not removing the punch bowl yet.

But if we look out over the next 12 to 18 months, it's very likely. I doubt interest rates get to 3%. We'll probably peak at a cycle, at a level lower than we did last cycle that was roughly around 3, 3 and 1/4 on the 10 year. So we're not even likely to hit that 3% number. But yes, as policymakers remove accommodation, at some point in the next 12 to 18 months, that will likely hit risk assets. But we're a bit away from that.

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