Corporate earnings are a key bellwether for market direction, says market advisor

Sean O'Hara, President of Pacer ETF Distributors, talks the market outlook during quarterly earnings and following President Biden's announcement to keep the Port of Los Angeles running 24/7.

Video transcript

SEANA SMITH: Let's take a look at where things stand because we have about 45 minutes to go until the closing bell. And you're looking at a mixed picture, although the Dow barely in negative territory. S&P and NASDAQ still holding on to gains. We know that supply chain disruptions is something that investors are watching. And also, the reaction to the Fed minutes is something that's really driving the markets today.

So for more on that, let's bring in Sean O'Hara. He's Pacer ETF Distributors president. And Sean, just first, on the supply chain disruptions, what we just heard from the president, I guess, how worried are investors when they take a look at what's happening? And what is the market anticipating that we'll likely see over the next couple of months?

SEAN O'HARA: Well, thanks for having me, Seana. Well, I think this is the key issue, right? So the inflation fears have been driven, I think probably more by a lack of goods than an oversupply of money, although there has been an enormous amount of money printed. But without the ability to move these goods and services through the economy, I think that's what's putting pressure on prices. And so it'll be interesting to see how quickly they can fix this piece of it.

And then the real longer term view of this will be to try to determine how much of the additional cost of keeping these ports open. Will they-- you know, look, people working the port, for example, be getting time and a half or things like that, which might increase the shippers' cost.

And then, will this have a negative effect on future earnings? I think this quarter's earnings is probably going to be the last easy comparable we have. And then, I think going forward, I think you're going to start to see companies do well this quarter and then start to guide a little bit lower based on rising costs, rising price of energy, and supply chain disruptions, until we can get this worked out.

ADAM SHAPIRO: Sean, it's good to see you. And there are so many questions such as, how do you get the truck drivers, who are confined to the number of hours they can drive? All those issues have to be confronted. But what do you make of companies like Walmart saying they're going to step up to the plate? How do they do that if they have a truck driver who can only drive, say, 12 hours and then has to sit for eight?

SEAN O'HARA: Well, I mean, that's the-- Adam, that's the key thing, right? I mean, so maybe, you know, they're going to have to hire a whole bunch more people, which would be good. I don't know that there's that many CDL drivers out there. My partner has a CDL license, and he got a note from the state of Pennsylvania here recently. They're looking for bus drivers.

So you might be intending to do the good thing here or the right thing here. But if you can't get people in the trucks to drive them to get the goods from one place to the other, then that's going to create a problem. So I'm hopeful that they can-- now that there's so much attention on this and now that we're sort of manifesting so much energy and effort to this, that we can finally get things back to closer to normal and bust this open a little bit, because without that, I think you'd have to start thinking about the overall economy and what its effect is going to be going to the end of this year and then into next year.

SEANA SMITH: And Sean, speaking of the overall economy and what this means, really, for the recovery going forward, we just got the Fed minutes. They were released about an hour ago. And they show that the Fed could begin tapering mid-November to mid-December. Just in terms of some of the risks that the economy is facing, what do you make of that timeline? Does that timeline make sense to you?

SEAN O'HARA: Well, I mean, it's what they've been sort of forecasting. So in that sense, it probably does make sense. I think you'll have to see what the reaction is. I mean, you know, we've all heard this term "taper tantrum." And the stock market has become so dependent on what the Fed is doing and keeping, you know, easy and free money out there that the stock market might react negatively to that.

I think without the Fed stepping in and becoming the buyer of last resort for some of these securities that they're supporting, I think that will drive interest rates up because that will force people to want to get paid more. And so, that's also a risk here. So, you know, they're in a really tough spot, the Fed, in that they've sort of boxed themselves in here. And almost nothing that they do to sort of get themselves out of it could potentially be viewed as a negative for both the stock market and the bond market.

ADAM SHAPIRO: We had a guest on yesterday who said that stock valuations right now were in the, quote, "OK zone." But you've pointed out that equity valuations are historically high. So for those of us who might prefer ETF to individual stocks, what do we do with that information? If things are expensive, wouldn't the ETFs also artificially be expensive, too?

SEAN O'HARA: Yeah, well, I mean, the overall market is expensive. So if you buy an ETF that tracks the overall market like the S&P 500, you know, it's trading at 24 or 25 times earnings, which is historically a very high number. We have some ETFs, for example, that are large cap in nature here at Pacer ETFs, the ticker COWZ. It's 100 stocks. It's 100 stocks picked from a broad index that have the highest free cash flow yield. That portfolio of stocks trades at about 15 times earnings. So if you're concerned about valuations, you can certainly lower your exposure by getting stocks that trade at cheaper valuations.

The downside of that might have been you might actually make less money. But in reality, that ETF's double what the stock market's up this year. So those companies that are generating high free cash flow and have a high free cash flow yield are attractive from a valuation perspective. They grow their earnings faster. They grow their dividends faster. They buy back more stock.

And so, I think it's time for people to be a little more selective. We've had a nice ride by just simply sitting on top of the ocean, if you will, and just riding the market up. Now I think what we need to start thinking about is below that ocean. It may not continue to ride, but there's going to be a lot of activity under the seat, if you will, for people to find good places to invest money where they can have better than market returns.

SEANA SMITH: Sean O'Hara, always great to speak with you, president of Pacer ETF Distributors. Thanks so much for taking the time to join us.