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Stocks sell off heading into market close, Nasdaq off most

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Cornerstone Wealth Chief Investment Officer Cliff Hodge and SoFi Head of Investment Strategy Liz Young join Yahoo Finance Live discuss Thursday's market action.

Video transcript

- All right. We have less than a minute to the closing bell. And we've launched an acceleration to the downside in the last 20, 15 minutes of this trading session. We're going to talk about what's been going on here after we get the gavel. And we're going to do that with our panel today.

Liz Young is SoFi head of investment strategy. Cliff Hodge is Cornerstone Wealth chief investment officer. But let's, once again, see where we are setting up. And we're going to be talking about inflation fears because that seems to be part of the momentum of what we're witnessing to the downside, the Dow now off more than half a percent, falling more than 216 points. The S&P 500 is off over 1 and 1/2%, down 71 points. And the NASDAQ is going to close down over 2 and 1/2%, down 387 points. Here is the closing bell.

[BELL RINGING]

[MUSIC PLAYING]

- All right. And that is the closing bell this Thursday, January 13. We're seeing tech stocks really be laggards during today's session, the NASDAQ composite seeing selling pressure accelerating in the final half-hour of trading, down about 2 and 1/2% as we speak, the Dow Jones Industrial Average down nearly 200 points, or about half a percentage point, and the S&P 500 down more than 1% itself. And taking a look at the sector action, only utilities, consumer staples, and industrials in positive territory during today's session, whereas on the flip side, we have health care, consumer discretionary, and information technology the laggards.

Well, let's turn back now to our market panel to make sense of today's trading action. And Cliff, I'll start with you here because one of the things that you wrote in your notes to us is that given inflation, the virus, and monetary policy backdrop, the name of the game is now capital preservation. What does that look like in practice for investors trying to navigate this volatility?

CLIFF HODGE: Name of the game is capital preservation. You mentioned some of the key risks that we're watching. And in our estimation, inflation really is going to be the big driver because that's going to influence the Fed. And unfortunately, we have yet to see, you know, any real signs of slowing from an inflationary perspective.

We think what that means for investors is how you think about risk. You want to take your overall risk down. And in equity space, we think that means looking for quality and cash flows-- so companies that are profitable today, not necessarily looking at the strongest growth metrics for the future. We think investors would be wise to avoid many of these high-multiple and high-flying stocks.

- You know, Liz, you've been out ahead regarding this concern over inflation. I'm going to read from one of the notes that you sent your clients where you say that it's not just a flash in the pan in one spot. There are spots all over this animal.

We get readings that upset people. We hear testimony on Capitol Hill that upset people about inflation. What should we, as investors, consider from your perspective? It's here. But is it going to be this elevated for a long time?

LIZ YOUNG: I don't think it's going to be this elevated for a long time. But my point about the spots on the animal is that if we think back about six months, all we were talking about at that point was used cars and maybe semiconductors. And we thought, OK, this is a supply chain issue. As soon as those supply chains ease, some of these forces will come off. Inflation overall will cool.

But what's happened since then is that we had other little hot spots continue to pop up. You've now got an increase in services inflation. We have increases in food inflation. Energy has not come off of its big inflationary levels, either.

So there are a lot of different pieces of this equation that continue to push it higher. And although it may cool off from 7%, inflation going from 7% down to 5% is still high inflation and is still going to pressure consumers, still going to pressure company margins.

So when you look at it from a rate perspective and a market perspective, the pattern that we're seeing today makes sense to me, where you have the Dow down not as much as some of those high-multiple tech stocks, because even though the 10-year yield came down today, real rates-- so that's the part that's taking inflation out-- have stayed pretty steady. And real rates are what are going to rise throughout the year as the Fed hikes rates. And that's going to still pressure technology and high-multiple stocks.

- Liz, I want to follow up on that point because wage inflation has also been a key focus as well. And FactSet was just out with its weekly earnings roundup today. And only about 20 S&P 500 companies have so far reported fourth quarter earnings results. But of these, 60% of them have discussed a negative impact from labor costs or shortages. What companies or sectors do you think may be best positioned to navigate through rising labor costs and maintain margins this year?

LIZ YOUNG: So first of all, all companies are-- well, I shouldn't say all. A lot of companies are coming into 2022 with record-high profit margins. So that's a good position to be in. And if they have to absorb some of those wage pressures, some of those inflationary costs, they have a bigger buffer than usual to absorb it.

So we're in a decent position from that side of the equation. But now we're seeing-- again, this is another hot spot. We're seeing that wage inflation bake into corporate earnings and guidance. And that's something that, if it doesn't cool off over time or if we don't have other parts of the inflationary picture that cool off so companies can offset it-- then it's going to start to pressure margins.

Now, obviously, you think about things like technology as a sector that actually can benefit from some of that because a lot of their jobs can be put into tech rather than having to pay people. And that's, overall, over the long term, thought of as a deflationary pressure. But in this environment, I don't know that that deflationary pressure is going to be enough to offset the wage pressures that we're seeing in this super tight labor market.

- Cliff, when you talk about consumer balance sheets offering plenty of capacity for additional borrowing, as well, how do we, as investors, play that? We're talking about credit card borrowing. Where do we look?

CLIFF HODGE: Yeah. We like financials. We think that sector offers a nice exposure to higher nominal economic growth and an upside to interest rate. Valuations remain cheap as well.

So you mentioned credit card companies. Some of the payment companies, as well, we think look interesting. But again, you really want to focus on companies that have current cash flows and high returns on capital metrics. A return on equity is a great rule of thumb as investors are valuating some of the individual stocks. So credit card payments and then even some of the capital market names look pretty interesting here as well.

- Cliff, as we think a little bit further down the line in 2022, the midterm elections are one other factor that you mentioned could be weighing on equities, at least in the first and into the second half of the year. How do you see volatility playing out around that event?

CLIFF HODGE: It's certainly going to add uncertainty. So we looked at returns going back to 1931. If you look at returns during the midterm election years on average, it's roughly 6% compared to about 9% for the S&P 500 for all other years. And in fact, you know, the positive returns, which we have all really come to expect over the last couple of years, don't happen until you get closer to the midterms, until you get a resolution of a bit of that uncertainty.

So, you know, we're not in the camp that, you know, recession or anything like that is on the table in 2022. But certainly, higher volatility-- we could see some sideways action and some chop, more of a grind rather than the low-volatility, high-return environment that investors have become accustomed to.

- Liz, as we wrap this up, help us get some understanding of timing from the Fed perspective. Will they, at the end of the March meeting-- could we literally have liftoff at that meeting or would we be set up for lift off at the next meeting?

LIZ YOUNG: Well, the market expects at this point that we're going to have liftoff at the March meeting. I think it's possible. But here's the thing. The Fed had been signaling very clearly for a long time that they wanted there to be space between the end of tapering and the beginning of rate hikes.

If the tapering program stays at this speed, that March meeting doesn't allow much time between the end of one program and the beginning of the next. So it's possible that some of the narrative changes in the next couple of months. And I'd be listening very closely to that. But I also think that Jerome Powell is going to be very careful to do this periodically and to do this in a very well-signaled fashion. He doesn't seem to like surprises. And he likes to signal the market very clearly ahead of time of what they're thinking of doing. So I think we're going to hear a lot more information out of them in the next 30 to 45 days. And then we can set a better expectation.

There are some firms that are now expecting there to be four rate hikes this year. I'm not quite ready to say that we're going to get that far. I think that we need to wait and see what happens and how the market responds to a couple of rate hikes and the end of tapering first.

- Liz Young, SoFi head of investment strategy, Cliff Hodge, Cornerstone Wealth chief investment officer, thank you both for joining us today on Yahoo Finance Live. Jared-- I can't talk right now. Jared Blikre, I'm tore up over the markets.

JARED BLIKRE: I know. I'm going to continue the conversation on the Federal Reserve. And I posted the-- I tweeted this earlier. I think it sums up the Fed's dual mandate problem quite succinctly. So let's go to the WIFI Interactive. And here, this is from earlier today.

Here we have CPI running at 7%. This is the highest since June 1982. Unemployment rate-- 3.9%. This is a pandemic low. That's good. But continuing jobless claims-- this is good, too, in theory, 1 and 1/2 million lowest since June 1973.

Initial jobless claims-- and by the way, I got that wrong. It's actually-- I'm sorry. I did get that right. It is '73. Initial jobless claims-- 230,000, which, by the way, are trending up. And this is because of Omicron. What is a dangerous man to do, the dangerous man being Jerome Powell? Here's a picture from posterity. There he is with Steve Mnuchin from the prior administration.

But I'd say we've been here before. You dial it back a decade or so to 2010, a year after QE, the Federal Reserve in its minutes were already talking about-- not the minutes, the transcripts-- were already talking about winding down the balance sheet. That wouldn't happen for five or six years-- so just a little bit of historical perspective here, guys.

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