Market Recap: Wednesday, October 13

Thornburg Investment Mgmt. Co-head of Investments Jeff Klingelhofer and Janney Montgomery Scott President, Chief Investment Strategist, and Chief Investment Officer Mark Luschini join the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

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- OK, a minute to the closing bell and helping us make heads and tails of everything that's happened in the trading session Jeff Klingelhofer Thornburg Investment management co-head of investments, also Mark Luschini Janney manager Montgomery Scott president, chief investment strategist, and chief investment officer will be here to help us break it all down.

But let's take a look at where it looks as if we're going to settle. And again, it's going to be in the green although not by much, and look at that, we just went negative on the Dow so I jinxed it. Dow is possibly going to settle negative today, S&P 500 still up about 12 points, and we've got the NASDAQ up about 101 points. We had a guest on earlier this week who still said end of 2022 S&P 500, 5,000.

Couple things to keep in mind right now is the sector action today. And the sectors have been in the green except for financials off by about half a percent. Utilities up over 1%, we've also got consumer discretionary up over half a percent. But right now, here is the closing bell.

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- That wraps up today's trading action as we work out the final trades of the day. The Dow might actually hold on to slight gains if you want to call it that, but basically ending on the flat line. S&P up, excuse me, just around 3/10 of a percent, the NASDAQ was the outperformer today, up over 100 points, that's a the gain of just around 7/10 of a percent.

In terms of the sector action today, Adam mentioned the weakness that we're seeing in financials, some of that driven by the results that we got out from JPMorgan. It was one of the worst performers in the Dow, one of the worst performers in the XLF today. Their better than expected a profit number of failing to really excite investors there, and you're seeing that that's one of the big reasons why financials is one of the underperformers today. But let's bring in Jeff Klingelhofer and Mark Luschini to help us break down the action that we are seeing.

And Mark, let me kick it over to you first. We have third quarter earnings season kicking off today. Results from JP Morgan, when you take a look at what we got just in terms of the numbers and what we could expect over the next couple of days when we hear from some of the other biggest banks, what are you expecting to see?

MARK LUSCHINI: Well, a little more of the same. We're hearing first from the big money center banks. And so they tend to derive a substantial portion of their overall business from capital markets not kind of the traditional lending facilities that we know are what the super regionals down to the small community banks really thrive on.

And so I thought once we kind of teased out the numbers from JPMorgan's report, you saw a couple of things. You saw very strong investment banking revenue because of the preponderance of merger and acquisition activity that's running at unprecedented levels at the moment. You're also seeing some loan loss reserves and that was widely expected although the amount that continues to be released out into profits continues to recede from the levels that we saw a couple of quarters ago.

What was I thought a little disappointing, not so much an indictment of JPMorgan, and hopefully we'll see some improvement on this in the coming months and quarters, and in fact, Jamie Dimon from JPMorgan alluded to this in terms of him saying that he's seeing green shoots in the commercial real estate lending market. As commercial and industrial loan activity while sequentially having improved on a quarter over quarter basis was still negative year over

Year. And I think that's a little bit of a tell on, one, perhaps how flush corporate America is and didn't have a strong demand for lending activity, but also it's something to watch for in terms of all the reports that we've seen from businesses big to small about capital expenditure intentions really rising at a significant pace. Hasn't yet translated into borrowing needs. And so I think that's going to be an important signal as we listen to these reports this quarter and subsequent to in terms of helping to boost overall economic activity on a go forward.

- Jeff, I want to bring you in specifically something in the notes that you had shared with us that caught my attention, because everyone's worried about inflation. But you say the question is if labor truly has greater bargaining power over capital, and I'm hearing that, an hour ago we heard the president talking about paying truck drivers and people, you know, obviously time and a half because they're going to have to work extra hours, help us understand what's really happening with where-- with labor right now and its impact on what we're going to be hearing as more companies start reporting?

JEFF KLINGELHOFER: Sure, and I think that's one of the biggest things that we'll be watching for is exactly those comments. But what we are seeing is an economy that continues to run hot. After numerous rounds of fiscal stimulus, and that will be pulling back, right? Consumers today still have elevated savings and they'll be drawing that down in the months to come.

And so really while we are absolutely seeing higher wages trickle into the economy, and especially amongst the lower wage employees, the key to watch will be as the economy continues to heal as vaccinations continue to increase and businesses open whether that trend continues, right? There are a lot of folks that have exited the labor market and we'll be looking to come back, and ultimately we've been a decades long shift where the power of Labor has shifted to capital. It is to be expected that it will shift back but we don't expect it to shift back in a dramatic fashion. So we'll be watching those wage numbers exceptionally carefully. They really are the key to trying to figure out where the Fed goes and whether this inflation is transitory in nature. But at this point we think it'll moderate in the months and quarters to come.

- And Joe, speaking of what the Fed's next move will be, we got the FOMC minutes just around 2 o'clock today and it really signaled what we were expecting from the Fed and that's the fact that the tapering could begin in the middle of next month to the middle of December. Just in terms of the supply chain issues that we're facing, also some of those labor concerns that you were just talking about, any worry that maybe the Fed would be acting too soon if we do start tapering next month?

JEFF KLINGELHOFER: You know, there's always that concern but again we just look at GDP numbers, we look at the inflation numbers coming in and we think about the extraordinary stimulus that continues to be poured into the economy today. And so one of the big challenges for the Fed, of course, they don't want to be embarrassed in the months to come, but where we are today. I think the market needs to draw a very distinct line between tapering in the months to come and ultimately rate rises in the years to come.

And those are two very different things, especially as we look forward for Treasury issuance into 2022 and the reality that the Federal Reserve will continue reinvesting the proceeds from maturing securities, a lot of that support is likely to continue. Just as that Treasury issuance comes down lower than what we've seen in the previous years, there really isn't that much difference. And so the argument to start tapering today I think is exceptionally high and the accommodation in the years to come will remain high as well.

- Mark, I would imagine the position you have as a strategist and a CIO, it doesn't get any easier when we're trying to, one, weigh what these reports are going to tell us, but then when you look at all of the uncertainty and Washington and the need for job growth that you've put out. How do you keep your clients and what can you share with us, those of us who are investors who are not your clients, as to whether it's stay the course or what signals do we look for that maybe it's time to either buy or sell?

MARK LUSCHINI: Great question. And there is a tremendous amount of crosscurrents at the moment. That is to say there always is a large number, but it's I think exceedingly unusual at the moment because of what we're dealing with in terms of the Fed policy and the transition that this regime from Uber accommodation to less accommodative. Obviously fiscal policy is a huge issue that continues to lurk out there, geopolitics and so on.

So I think a couple of things I'd like to focus on. One, for most of our investors anyway that have a long term time horizon, I go back to the Golden rule of investing, which is that bear markets, those declines from peak to trough at 20% or more and over an extended duration are exceedingly rare outside of recessions.

And therefore unless you're are forecasting in the investable horizon, call it the next 18 months to 24 months or so, a recession, which to us seems exceedingly remote at this juncture, then now is not the time, regardless of the fact that we sort of moved downward or more sideways than directionally certainly in a positive fashion the last month and a half or so, now's not the time to turn more cautious. In fact use any kind of declines from here in a corrective modality as an opportunity to add to your stock portfolio rather than derail your equity exposure.

I think the other thing, though, is that the key to an economic expansion is job creation. And the last couple of months have clearly been disappointing against where expectations were going into both of the Bureau of Labor statistics reports. But what we fully expect to see is that given the fact we have 10.4 million job openings today and schools are reopened, child care centers are reopen, the Delta wave is certainly roll over and is receding rather dramatically. And in addition to that, we've had the expiration of all the pandemic assistance program benefits as recent as Labor Day, that should lead to some inertia back into the labor force, which is going to hopefully sustain this economic expansion through both not only job growth but also wage growth.

And I think that's going to go a long way toward once again rebuilding the narrative around re-acceleration of economic activity in the fourth quarter this year and in the first half of next year, and shelve any concerns around a recession that would once again have somebody today turning more cautious anticipation of things worsening rather than necessarily staying stasis, if not improving.

- Mark Luschini is Janney Montgomery Scott's president, chief investment strategist and chief investment officer. And Jeff Klingelhofer Thornburg Investment Management's co-head of investments. We appreciate both of you sharing your insight. I know a lot of people listen to how you guide them and we've helped some of them today.