‘Consumers will tell us the direction of the economy:’ strategist

National Chief Market Strategist Art Hogan joins Yahoo Finance to discuss the better than expected retail sales report, the Feds position on tapering after recent economic data, and the risks that could affect economic recovery.

Video transcript

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- Welcome back to "Yahoo Finance Live." Stocks are on track for a mixed open today after rising yesterday, and investors are still digesting that better than expected retail sales report that we got out earlier this morning, as well as weekly jobless claims. Now, the S&P 500 is still on track to post its first monthly decline in September after seven straight monthly advances, but for more on today's market action, we're bringing into the stream Art Hogan, chief market strategist of National Securities Corporation.

And Art, thank you so much for joining us this morning. First, I want to get your take on the economic data that we got out this morning, as well as recently from that cooler than expected CPI report to retail sales and jobless claims today. And how are you interpreting this data as a sign of where we are right now in terms of the economic recovery?

ART HOGAN: Yeah, that's such a great question. I think that we really got a head fake, and this happens a lot, when we saw the Michigan confidence number earlier this-- a couple of weeks ago. That looked very disappointing. And we always get caught up in this, you know, how do we navigate the survey data versus the hard data. And it's a classic example of consumers actually saying one thing when you ask them a question and doing something else. Clearly, we're going to have a record back-to-school season. It's the first back-to-school shopping season we've had in two years.

And clearly, consumers are in a very good place, right? They've got rock solid balance sheets, historically high levels of savings, historically low levels of credit card debt. So obviously, the consumer is actually going to tell us the direction of the economy. And we got a much better than expected read on that in August. And I that's important. I think that it's important to remember that, when we look at some of the consumer confidence surveys versus what the consumer is doing, it's much more important to look at what they're doing.

- Art, humor me for a second. So a better than expected retail sales report this morning, I think really a surprise to the markets, most in the markets. Potentially, now I think you have to start having the debate, potentially better than expected September jobs report here. And now you're starting to form a picture, well, does the Fed bring forward their tapering program? Do you think they do that, and what impact would that have to the markets?

ART HOGAN: Yeah, Brian, that's a great question. And obviously, we're going to parse every piece of economic data between now and the September meeting of the Fed on the 22nd, and whether they're going to announce taper then or if they push that off because of the weak jobs report we saw in August and wait until November, meaning consensus really says right now that they're going to talk about it again, but announce it in November and put it into place in December. And oh, by the way, this is something, Brian, we've been talking about for five months. So whether it gets announced in September or November really won't affect markets much.

I think we're already there. I think we're at that point where we crossed the rubicon and understand that the Fed is going to taper at some point this year. And I think that that's been baked into the markets very well. So I think that sort of reacting to good news as bad news is probably the wrong way to look at this. I think the market has had plenty of time to disseminate and digest the fact that the Fed is on a path to taper its asset purchases. It likely should, especially in the mortgage-backeds. And that likely starts before the end of the year. Whether that gets announced next week or whether that gets announced in November, I think it's baked into what investors are thinking about.

- Why do you think it's baked in, Art? Where do you see that baked in? Is it the S&P 500? Is it the Russell 2000? Where is it?

ART HOGAN: Well, I would certainly tell you that, in my mind, it's baked in because it's been discussed. It's the worst-kept secret in all of monetary policy history, right? And as compared to when we actually had a tantrum about tapering back in 2013, that was sprung upon us, and it was actually not at a Fed meeting. It actually happened up in Congress, where Ben Bernanke was answering a question to a senator, and said, yeah, we'll likely start tapering our asset purchases. And the market went haywire for a little bit, then recovered very quickly. I think if you look at the pattern of market activity over the course of the last several months, every time it's been brought up, there's been diminishing effects on the fact that the Fed is likely going to taper.

And I think the sequential improvement we've seen in economic data over the last three months proves out the case that they likely are at the right place to do that. So to me, I think it's much more of the activity that we've seen in the secular rotations in markets saying, well, if the Fed starts to taper, what does that do to interest rates. And I think where that will start to express itself in markets will be that, as the yield on the 10-year gradually works its way higher, above the 1.35, 1.4, level, we'll probably see a rotation back into the economically sensitive cyclicals. We've seen fits and starts of that action, but I think that the announcement of the taper will really bring that forward. And I think that's a healthier place to be.

- Art, as we think about the market right now, what do you think is a concern or concerns that aren't being talked about enough right now? Because we've known for a while now about the Delta variant spread, about decelerating growth in terms of economic activity and corporate profits, and of course with Fed policy changes and the announcement of tapering. So what do you think are still those additional risks not being discussed?

ART HOGAN: Well, I think the biggest concern we have is that we don't have a demand issue, right? And I think that's been pretty evident. I think the demand has been very robust. I think where we get more concerned is around the fact that aggregate supply is slower to respond than we would like. So things like semiconductors not coming back to where we-- the levels that we need them at until sometime late next year, and all sorts of increased costs for containers and the holiday shopping season, and how much that's going to add, and how that kind of sticky inflation might affect profit margins. So I think the next level of concern will be more about how inflation affects margins, and how much of it is going to last for longer than we anticipate.

And that's probably the number one concern we have. Clearly, the Delta variant was the number one concern we had late July and all of August. I think that seems to be peaking and rolling over a bit, which is good news. And a lot of inflation indicators have actually start to calm down. The CPI was actually lighter than expected. But we just don't know how long these logistical bottlenecks persist. And that will obviously slow down satiating demand, right? So we don't have a demand issue, but demand hasn't been destroyed, it's been delayed. And we just don't know how long that gets delayed into into 2022. But we think aggregate supply is gradually coming back in the fourth quarter, and that likely helps to elongate this economic recovery.

- Art, you know, the retail sales report, I suspect, will-- you know, it is surprising, you know, and it may get those forecasters looking for these 10% corrections to happen at some point soon over the next six to eight weeks, and may cause them to revisit their analysis. What stocks do you gravitate towards? What names do you like--

ART HOGAN: Yeah, that's a great question.

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- --moving past Delta, what do you like?

ART HOGAN: Well, I would tell you, if the economy is moving past Delta, several things, right? I think that moving past Delta means you shift again back into some of the economically sensitive cyclicals, so certainly like the financials. And today's retail sales report is going to be good for the payment players, right, when you think about that, and they're all trading at the lower end of their range. I think that when you think about the other economically sensitive cyclicals away from the financials, you want to look at energy.

And obviously, that's had a nice return of late, a very volatile but nice return. You want to think about the industrials, the materials, et cetera. So things that are economically sensitive cycle are going to start to show improvement as we start to see the economy pick up in the wake of a waning Delta-19 case discovery. So I think that's exactly where we're at right now. You'll start to see the yield on the 10-year tick higher. You'll start to see a rotation in the economically sensitive cyclicals. And that likely comes out of what has been a support for a long time, and that's the mega-cap growth names.

- And Art, how are you thinking about fiscal policy and the debates that are happening right now in Washington? Because we just had the House Ways and Means Committee approving a plan that would increase the top corporate tax rate to 26.5% from 21%. Is it still a little bit too early to be positioning for these potential changes, or how are you thinking about that?

ART HOGAN: Yeah, that's such an important question. When we try to navigate what's going to happen to fiscal policy, it's very difficult to preempt what eventually happens, right? I think that we're clearly going to see some increases in taxes across the board, right, but we just don't know the magnitude of that. And the numbers that have been thrown around have already come in significantly. We know that we have a very strong cohort of centrist Democrats that are not going to allow major changes in fiscal policy, right? And they're likely not going to allow major increases in infrastructure spend, right?

So when we think about the headline numbers that we're hearing right now, what actually gets passed or is passable, even with a Democratic majority, is going to be something smaller than what's being discussed right now. So trying to get out in front of that and changing the way you set up your asset allocation or your investment plans is probably a big mistake. And making changes to your asset allocation model has always been a big mistake when it's driven largely by changes in tax code.

- All right. Art Hogan, chief market strategist of National Securities Corporation, it's always great having you on.