Market Recap: Thursday, September 16

Wall Street fell on Thursday after getting a fleeting boost from a stronger-than-expected report on retail sales that suggested consumer spending held up despite concerns over the Delta variant. John Lynch, Comerica Wealth Management CIO and Mark Luschini, Janney Montgomery Scott Chief Investment Strategist joined Yahoo Finance Live to discuss.

Video transcript

SEANA SMITH: Got a minute to go here until the closing bell. We have full coverage for you. Mark Luschini's a Janney Montgomery Scott, chief investment strategist. John Lynch, Comerica Asset Management's chief investment officer to help us break down the action that we're seeing today.

But again, less than a minute to go until the closing bell. And the Dow back in negative territory, off 62 points, although the one bright spot is it's off the lows of the day. The S&P also in negative territory-- off nearly 2/10 of a percent. The NASDAQ is holding on to gains.

In terms of the sector action today, what's not working-- materials, energy, and industrials. Those three sectors are the laggards in today's action. The winners-- consumer, discretionary, and real estate. Retail has also been a big story today helping to keep some of those losses that we're looking at in check. Target, Abercrombie, Nordstrom among the winners today.

[BELL RINGING]

[CHEERS AND APPLAUSE]

That does it for today's action as we hit the gavel there. Again, we're looking at a mixed picture with the Dow closing well off. [INAUDIBLE] still in negative territory. S&P off just around 6 points. The NASDAQ up about a tenth of a percent. We have Mark Luschini and John Lynch standing by to help us break down the action that we're seeing.

Mark, let me go to you first. I guess what's your big takeaway from the whipsaw action that we saw in this final hour of trading? Then also just the selling that we've seen over the last couple of week?

MARK LUSCHINI: Well, I think today's close is indicative of the resiliency of this market. It almost seems like nothing-- it's kind of a Teflon market. Nothing can keep it down, and every time you start any kind of pullback that you alluded to, which kind of began the sideways action over the last couple of weeks that may have deteriorated or metastasized into something a little bit more sinister in nature, the market pulls out of it-- pulls up on the yoke. And we end up putting in a couple of very strong days like we had yesterday.

And today even while we were down quite a bit at one point, we rally into the close. And I think it's really this tug of war at the moment that's underway, which is to say there's still good news on the economy. In fact, in the last two days, we've got some good regional Fed survey reports and today's retail sales number.

But at the same time, it's in the context of this overall deceleration of growth here we've seen so far in the third quarter, worries about the Delta variant. And, of course, we are facing prospects and discussions around now, taxes to fund fiscal stimulus programs and, as well, a potential debt ceiling debacle again being replayed in front of us here in the next month or so.

So there's a lot of things that are creating crosscurrents for investors at the moment, which is sort of creating this environment in which day over day, you flip flop between cyclicals and defensives with no real pattern being elicited by either.

SEANA SMITH: And John, I guess what do you make of the recent action? Is it more of a season-- is it just a seasonal slump? Or do you think it's something a little bit more critical or more concerning?

JOHN LYNCH: Well, good afternoon, Seana. I think the market right now to Mark's point, you know, we've had a lot of back and forth. And I think it's reflective of a market that's been up 20%. A lot has already been priced in. We're entering the quiet period for third quarter earnings. Even if our third quarter earnings are up 30%, they'll be a third of what earnings did in the second quarter.

So investors have a lot to process with that. I do suspect to Mark's point about how this market-proving resilience. If you're thinking about real rates still being negative, M2 growing or money supply growing twice the rate of GDP, that is a bid for equities in spite of some of the uncertainty.

We've seen subtle breakdown, if you will, in about a seventh of the market right now. 15% of the market is down about 20% from their 2021 highs. So we've seen a advance decline line not being reflective of an S&P. That's within 1% of a record. So the market's trying to digest a few things at this point. But ultimately, we believe that cyclicality will gain traction.

SEANA SMITH: Mark, you mentioned the cyclical versus the defensive debate. I guess going into the final few months of the year and then of course into 2021, how would you advise investors be positioned?

MARK LUSCHINI: Well, currently, we've been kind of playing small ball, which is to say we've taken a very neutral approach and have really very limited biases on either side of the sector weights is they're represented in the broad market is being defined as the S&P 500 in anticipation of some conviction that may come by way of some signs that give it as evidence which way this market may be breaking.

One of the things that we're looking for-- and we're biased to think this is what we're likely to see-- is that one, we see a rebound in some of the economic data, not so much that they're going to reaccelerate to levels we saw in the first half of this year. It's just that if you look at an index like the Citigroup surprise numbers that have been beaten down to the point where we pretty much flushed out expectations at this point, numbers that are coming in comparatively good relative to those lowered expectations-- well, I think help to serve as a boost, a catalyst to re-energize investors into some sectors or the market at large.

And the second thing, of course, is to see that we continue to see a lower rate of change in case count associated with the Delta variant that will lead investors to once again reassert that reopening narrative that was so strong and robust in the first half of this year. And I think the combination of those two is likely, once again, to put a bid under those cyclical sectors, namely industrials, materials, energy, and financials, perhaps at the expense of their defensive growth counterparts, of which, of course, I'm referring to technology and health care, primarily speaking.

So right now, we're playing kind of small ball not making our biases particularly pronounced. But we believe the tide will turn and are likely poised, therefore, to advocate for more of a cyclical approach that we may embrace here in the coming weeks, if not quarter or two.

SEANA SMITH: John, we heard from President Biden just earlier this afternoon. And he was pushing his economic agenda citing the reasons that we need the infrastructure package. Also, of course, the $3 and 1/2 trillion budget reconciliation bill. What's your assessment just in terms of what this means for the market? Or how is the market viewing the potential for more fiscal policy?

JOHN LYNCH: Well, I think fiscal policy and certainly monetary policy-- they've both been massive tailwinds over the last 18 months certainly since the pandemic started. I think right now and potentially this is why we're seeing this, you know, beyond just a seasonal struggle, if you will, in September.

What had been massive tailwinds, investors could be quest-- I think investors are questioning to what degree things become headwinds. $3.5 trillion is a big number. And you throw that in with the $6 trillion that we've seen in the three previous pandemic-related recovery packages supportive for the markets. Yet, now that you're seeing $2 trillion in taxes, it's conceivable that if we go to 26 and 1/2%, that that could wipe out anywhere from 8 to up to 10% of earnings forecast for the S&P 500 next year.

So to the degree investors are pricing in $200 in operating earnings this year and 220 next year, if you wipe out 8% of that, I don't think this market is priced currently for flat earnings growth next year. And I think that's going to be the biggest issue of the fiscal announcement. As to what degree the corporate tax rate, it's S&P earnings.

Now, for companies to be successful, obviously you want sales growth benefit from pricing pressure. But you have to maintain margins to some extent. So to the degree the best run companies-- and I think that's where it's going to come down to more of an active market going forward as opposed to more passive strategies that have been successful most recently.

SEANA SMITH: Mark, what do you think? Do you agree?

MARK LUSCHINI: Yeah, in large, we do. I think that is going to be a concern because, you know, again, investors at the moment are struggling with this notion that GDP growth for Q2 subsequent to the revision we just had last week showed 6.6% at an annualized pace.

Today, yet, both the Atlanta Fed and New York Fed Nowcasts are showing high frequency data indicative of a pace of growth less than 4%. And if that glide path continues to show a downward bias coupled with those prospects of higher taxes, which applied against those earnings prospects that are double digits on the year over year basis, that warrants a diminution of market multiples.

And with a market trading at 21 times, roughly speaking, those forward earnings estimates, it doesn't justify a valuation other than one that's more compressed to reflect a slower pace of those earnings growth projections both at which is being trimmed by the higher tax rates as well as that which is not likely to be engendered by a slower pace of economic activity than was otherwise anticipated.

SEANA SMITH: Mark Luschini, Janney Montgomery Scott's chief investment strategist. Our thanks to you. And, of course, our thanks to John Lynch, Comerica Asset Management's chief investment officer.