Market Recap: Tuesday, Oct. 19

David Nelson, Belpointe Chief Strategist, and Rob Haworth, Sr. U.S. Bank Wealth Mgmt Investment Strategist, help Yahoo Finance break down the day of trading.

Video transcript

- We are just about two minutes away from the closing bell. Helping us digest today's market moves are David Nelson, Belpointe chief strategist. Good to have him back. Rob Haworth is also joining us. Senior investment strategist at US Bank Wealth Management. Good to have you here, gentlemen. Let me start with you, David. Because with so many companies still yet to report, you like to point out to people that be very careful and look at what they're guiding going forward. What's concerning you, especially with-- what is it you pointed out? 63% of S&P companies by market cap are going to report. But many of them had drops within the last six months from their highs, double digit off the top. So what do we make of this?

DAVID NELSON: Well, I think the challenges are real and we're seeing it play out in certain industries. Like Procter Gamel this morning. And it's pretty clear here that investors are going to have to turn to companies with pricing power. And, you know, if you look at the PPI versus the CPI, the PPI has been going up much faster than the CPI. And that tells me that some industries have not been able to pass on some of these large costs and these cost increases to their inventory across the board. And that's playing out in the marketplace. You and I can debate whether or not inflation is transitory, but what isn't up for debate is that Americans are looking at inflation data, that for many is some of the highest they've seen in their lifetimes. And there's an economic cost to that and political cost to that. And it's likely to play out through the next election cycle.

- You know, you talk about inflation, David, and we're going to talk about all of this right after we get to the closing bell. But I like to point out to friends, at the most expensive bodega in New York it's still $6.99 for a half gallon of milk. And that makes your eyes pop out. Let's look where we're going to settle today. Dow right now looking like it's going to close up about 190 points. S&P 500 could close in the green, up about 30 points. And NASDAQ up about 102 points. When you check out the sector action as we head toward that closing bell, important to note that only two sectors right now are flat or essentially negative. Consumer staples flat, consumer discretionary off about half a percent. Here's the closing bell.

- And there's the gavel there from [? Delta ?] as we wrap up the training day. Again, like Adam was saying, you're looking at gains across the board. The Dow actually rallying a little bit into that close there. Closing up 199 points. S&P and NASDAQ also holding on to gains. Adam was just mentioning the sector action. We'll actually take a look at the leaders today. Health care, utilities, energy, technology, communication services among the biggest gainers in today's action. So a bit of a mix there in terms of what we are seeing leadership wise. Let's bring back in David Nelson and Rob Haworth for a little bit more on the recent action that we're seeing. And Rob, let me go to you because we're sitting here today, we're not too far from those all time highs that we hit not too long ago actually. How are you looking at the markets into the end of the year? Is the reason to be optimistic from these levels?

ROB HAWORTH: Yeah, we think there is. So there are certainly a wide range of risks as we look into year end. But we think that the economic narrative remains positive and constructive. We're seeing declines in coronavirus infections. We're seeing economic reopening. And we think that will allow cyclical sectors to really try and catch up as pretty much the economy tries to catch up from what has been supply constraints across a large number of sectors. Which, yes, are leading to inflation, and yes, we see some risk from that. But in general it remains a constructive environment.

- David, when we talk about supply constraints we talk about Asia. And you like to focus on China. And you have some warning for investors who may think they're avoiding exposure to China when they're buying emerging markets. Can you explain to us the red flags-- and no pun intended-- that you think people should pay attention to?

ROB HAWORTH: Well, I think China is certainly an adversary in every sense of the word. And that play out for some time. And actually I think that's a sentiment that echoes across both sides of the political aisle today. I think a lot of companies invested heavily in China to get access to the consumer. And that didn't work out so well. And we're starting to see some of that capital come back. And I think supply chains will eventually come back. I think the decoupling will continue. I think, at this point, Taiwan is likely lost. I don't think the political appetite there is there to defend it. The good news is that we're starting to bring home some of these industries like chip production. But if China gets hit and there's a significant event there, it's going to hit markets across the world. There won't be any way to avoid it.

- Rob, when we take a look at inflation-- we were just talking to a guest last hour just about how worried investors are and potentially should be going forward. I guess from your perspective, how significantly do you see the potential rise-- or not the potential, the fact that we are seeing rising prices in so many various categories-- how significantly do you see that slowing the recovery going forward?

ROB HAWORTH: Yeah, we do think that inflation remains above average well into year end. And I think the key question around that is what actually happens to labor force participation? If we continue to have very tight labor markets and people are staying away from jobs, I think then it's a question of what damage is done to potential economic growth because we're going to have such a constrained labor market. If people start to come back and now that we're past the back to school season, kids are back in school, we're past some of the pandemic unemployment relief programs-- if people actually come back to work and come off the sidelines, that'll probably be more constructive for the recovery than if they stay on the sidelines. And then interestingly, that kind of relieves some of the inflation pressure as we move into next year.

- Well, let me jump in here, sorry. We have some Netflix earnings out. It looks like they're crossing the wires right now. Inez, what do you have?

- Yes, [? Shana. ?] Earnings per share for Netflix beat expectations with that coming in at $3.19. Its revenue met what The Street was expecting. Revenue coming in at 7.48 billion. Its streaming in net subscribers, better growth than expected. That was certainly a beat. Adding 4.38 million subscribers in the third quarter. The Street was expecting an addition of 3.7 million. And for the fourth quarter, seeing its subscribers growing by 8.5 million. That beat what The Street is expecting as well. So beat across all metrics, really.

- OK Inez, let's take this back to our panel and talk about where we're headed with the streaming wars. David, one way to look at this is we're all becoming even worse couch potatoes perhaps than we were before the pandemic. People were trying to write off Netflix because they would have to spend so much money to compete against Disney Plus and the other streamers. And yet Squid Game, which I've not seen, it's a little too violent for me, but Squid Game's cheap and it's a blockbuster. It seems to me they're going to maintain their lead.

DAVID NELSON: Yeah, this is a name I missed. I've been completely wrong on this name, I've avoided it for some time. And I've actually moved downstream. And really one of my larger holdings is Viacom, obviously a legacy company. But even there, I think the Paramount film library is probably one of the best on the planet. So I think for Viacom, you're getting something at less than 10 times earnings, a legacy asset, probably fairly valued. But you're getting a call option for free on the streaming assets. Netflix proves that streaming content is extremely valuable. I'll have to try to find an entry point for it.

- Rob, how are you looking at these results? Just in terms of what this tells us about the health of the consumer and the willingness for people to spend right now?

ROB HAWORTH: Well, yeah. I think there's ample savings on the sidelines. And the interesting thing to us is as we look into that horizon post-pandemic, I think one of the questions in our mind is did the pandemic change consumer tastes? And results like this indicate that yes, we need to think about these secular growth stories a lot harder as we look at the longer term. That there is persistent demand here and a change in taste that may have a lasting impact as we think about the longer term and exposure. So we'd start looking for the long term at these sorts of secular growth names.

- Rob, when we talk about inflation, I realize Netflix, it's probably one of the last things people would cut from the budget. Because they're at home, they're going to want that. But as prices go up, you've pointed out how the Fed reacts to inflation could really upset the apple cart. What are you most worried about? That the Fed may overdo it or undo it?

ROB HAWORTH: Yeah. It looks like the Fed is on the right path at this point with a planned tapering announcement. It appears in November, maybe implementation in November. And rate increases late 2022, maybe early 2023 if all is warranted. I think if the Fed gets extra hawkish, that would be a challenge to an economy that probably can't handle interest rates getting too high, even as we watch rates struggle to get back to the highs they saw earlier this year. And even if they're too dovish, that's still a pretty constructive story as long as wage growth is happening and we're not reducing jobs. So it's something we're watching, it's something we're paying attention to. But it's not clear yet that they're on the steps of any sort of policy mistake just yet.

- And David, as we wrap this up, I guess if you were to identify two or three attractive opportunities right now, where are you putting money to work?

DAVID NELSON: Well, certainly in the financial sector. And I think what we've seen in the earnings season this time around is encouraging. And I think the yield curve is going to continue to steepen and we're going to see net interest margins improve. And they have improved. And it's showing up in almost every earnings statement. I think, to my earlier comment, you're going to have to move to companies that do have pricing power. So health care is going to be a a strong area. Technology is almost always strong. But even more so now because you're going to need companies with pricing power. So I think you're going to have to look at your portfolio, prune what isn't working. I think things like consumer staples and even some consumer discretionary are going to be challenged.

- All right, David Nelson is Belpointe's chief strategist. And Rob Haworth, senior investment strategist at US Bank Wealth Management. Thank you both.