Market Recap: Friday, July 16

Stocks fell on Friday as traders digested a slew of earnings results and a new report on consumer spending that came in stronger-than-expected for June. Lindsey Piegza, Stifel Chief Economist and Jay Hatfield, CEO of Infrastructure Capital Advisors joined Yahoo Finance Live to discuss.

Video transcript

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JARED BLIKRE: Welcome back to Yahoo Finance Live. I'm Jared Blikre. I want to introduce our panelists. Just a few minutes to go to the closing bell. We have Jay Hatfield, CEO of Infrastructure Capital Advisors and portfolio manager of the InfraCap MLP ETF. Also, Lindsey Piegza, Stifel chief economist. But first, I want to check out the Wi-Fi Interactive, because we are sliding more into the red as we finish the final session of the week. This is what we've done during the week, and you see we are at the lows right now. Dow is up about 313 points. S&P 500 and NASDAQ each down about 0.75%, and the Russell 2000, that's down over 1%.

Well, looking inside the NASDAQ 100, we're going to do a lot of red here. We've got Apple down about 1.4%, Amazon down a little bit more. Not a lot of green in the chip space. In fact, if we take a look at what's happening there, Nvidia down 4%. Just talking about Intel, that's down 1.5%. Applied Materials down nearly 4%.

Not looking that much better in the energy market. Let's take a look at-- excuse me. That's banks. Couldn't read my screen. But a lot of red there and a lot of red here. Here's that energy look. Over the last five days, we're seeing Exxon down 6%, Chevron down 5%, Royal Dutch Shell down 6%. So the carnage continues here.

This is a look at the sector action. We're going to go back to today's very defensive structure here. Utilities, health care, and staples the only outperformers along with real estate. And there is your closing bell. Are we going to get it? Yeah.

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- And that does it for the trading day today. Again, all three of the major averages closing in the red, like Jared was just saying. The Dow off just around 300 points-- if we could pull up the board here to look at the final trades of the day-- off 300 points flat. The S&P off 0.7%, and the NASDAQ off 115 points. We have Jay Hatfield and Lindsey Piegza standing by. Jay, let me get right to you, because I just-- big picture here-- how would you sum up the action that we saw not only in the market today, but really, what we've seen over the last five trading weeks?

JAY HATFIELD: Well, we think it actually started in mid-May. And what's happening is the market is pricing in what's likely to be stagflation in 2022. And we think that stagflation is driven by what's likely to be a huge fiscal cliff that could be up to $1.5 trillion. So in other words-- and particularly if there's a corporate tax increase coming out of Congress. And then also now, since mid-May, there's been taper talk.

And so it's very, very likely that the Fed will be at least tapering by the end of the year and into '22 and probably raising rates, because we believe it's not sustainable to increase the monetary base at 25% a year. That could lead to double-digit inflation like we've seen over the last couple of months. So that stagflation has driven Bitcoin down 50% because that's really an indicator of potential inflation, and the Fed is vigilant now. And you've seen a huge rotation out of cyclical stocks. What drove the market higher was a rotation into defensive tech stocks, and now the market's drifting lower. So it all makes sense in the context of stagflation.

JARED BLIKRE: Lindsey, we got some really hot retail sales numbers this morning. Looking at the main headline number, up 0.6%. Even the control group up 1.1%. Jay is using the word "stagflation" here. What are your thoughts about these economic reports that we're getting?

LINDSEY PIEGZA: It was a pretty strong report, surpassing expectations. If we look at what the market was anticipating, it was about a 0.3% to 0.4% decline. So this upward trajectory of spending certainly throwing the market's consensus to the sideline. The thinking there was that as stimulus begins to fade, as these enhanced benefits begin to be pulled back, consumers would also pull back on their spending. But what we're seeing is that consumers are actually more resilient than we anticipated, particularly given the solid wage growth at 3.6%. We saw a savings rate up here 12% translating into over $2 trillion in accumulated wealth. And we also had those first round of enhanced child tax credits. Those were landing in the mailboxes this week. And so there was a lot of additional momentum that's continuing to provide and create a very solid consumer.

And remember, this control group, as you mentioned, excluding autos, gas, building materials, up 1.1% going right into that GDP calculation. Q2 GDP is poised to be much stronger than what we saw even at the start of the year. So right now, growth still is very elevated. The question is, as we turn the corner into the second half of the year, can we maintain that profile if, in fact, we do see some of these federal programs pull back? We'll have to rely on more organic means, meaning job and income growth. And I do think that growth will remain positive, but at a much slower pace than what we saw in the first half, nearer that pace we saw at the end of 2019, early 2020, closer to about a 3% GDP pace.

- Lindsey, help us make sense, more broadly speaking, about what we've been seeing not only this week, but more recently. But this we got those inflation readings. We saw, obviously, a pretty large uptick in the producer price number and also the CPI number. We're seeing yields under pressure, and that continues to be the case throughout almost the entire week. I guess, why do you think we're seeing this? And is this a cause of concern at all?

LINDSEY PIEGZA: Well, I think at this point, the market is still buying into the Fed's inflation dismissal rhetoric. The Fed has done a very good job jawboning market activity, suggesting that even though we have seen this continued upward pressure on prices, they're not reflective of a structural adjustment in the economy, but they're reflective of transitory or temporary factors as the economy recalibrates in this post-pandemic environment.

Now, that doesn't mean that it's not painful for the average consumer going out, filling up their car with higher-priced gasoline, buying groceries that are a much higher price now. But from a monetary policy standpoint, the Fed is saying it doesn't make sense to adjust policy right now. The Fed chairman telling us they're going to continue to remain very accommodative until we see substantial further progress, which he was very vague on when or how we could meet that threshold. So I actually see the Fed remaining on the sideline well through the end of the year, making taper a potential 2022 event, but the first rate increase not likely until 2023 or beyond.

JARED BLIKRE: Jay, I want to follow up on a comment you made a couple of minutes ago about Bitcoin. As you said, it's gotten sliced in half here. What is that signaling to you about the Fed or the current economic situation that we're facing?

JAY HATFIELD: Well, the key piece of data that supports the Bitcoin decline is inflation expectations have dropped by 30 basis points since mid-May, which is almost exactly the drop in Treasury yields. So we see it differently than Lindsey in that we don't think people are buying the transitory at all. And in fact, we think that that's mostly coming from the chair, who's more politically focused and not an economist.

If you listen to Bullard and some of the weightier economists on the Fed, they are very concerned about the fact that they're increasing the monetary base at 25% a year. They see inflation really accelerating. And so we think that the market is actually pricing in the tightening now so that they're not really bullish about the transitory view but actually are expecting a tightening. And since Bitcoin can't really be used as a currency-- it's arguably not allowed by the Constitution and also wildly impractical-- it's really a pure inflation gauge. And so we would see that as being also an indicator that inflationary expectations have really gotten smashed since the taper talk started.

- Lindsey, let me hear your thoughts on what we heard from Treasury Secretary Janet Yellen yesterday, because she was asked about whether or not she's seeing any overheating in the housing market. She said she was a little bit worried just in terms of the price action that we're seeing in housing and what that could mean for affordability. But from your perspective and some of the trends that you've been watching within this sector, are you worried at all about any overheating that's occurring in housing?

LINDSEY PIEGZA: I think anyone looking at the housing market right now has to be at least somewhat concerned, as we have seen incredible price run-ups not just in the urban centers but in the surrounding suburban areas as well. But when we look at the motivation driving this demand, it doesn't seem to be an investment-driven scenario. Where we saw in '07, '08, a lot of this was second homes, this was investment purchases, now what we're seeing is a structural shift in demand where families, individuals are moving to different locations. They're moving outside of these first-tier cities or these very populated urban centers.

So we see, again, this structural shift. Some of this is the millennials finally dipping their toe into the housing market. They had been hesitant to make home purchases even after life trigger events such as getting married or having their first child. We also see this new work-from-home scenario allowing individuals to move outside of that immediate radius from where they work. We also see a lot of people fleeing safety concerns or moving to more politically desirable areas, be that on the left or the right.

So there's a lot of structural issues that are changing preferences, changing demand, which I do think is going to be sustained for quite some time. Now, we do see prices also elevated on the new home side. This is more of a supply chain disruption scenario. And I do expect that just like broad inflation, as we begin to see the economy recalibrate and supply equal that demand, we will start to see some of those supply pressures come back down. But again, from a demand standpoint, not a lot of concern there, as it still looks to me like a structural adjustment in preferences.

JARED BLIKRE: Yeah, a structural adjustment. Thank you for your time here, Jay Hatfield, CEO of Infrastructure Capital Advisors and portfolio manager of InfraCap MLP ETF and also Lindsey Piegza, Stiefel chief economist.