Market Recap: Thursday, July 15

Stocks dipped on Thursday as investors digested a host of mixed corporate earnings results. Jim Masturzo, Research Affiliates partner and CIO of Multi-Asset Strategies and Josh Wein, Hennessy Funds Portfolio Manager joined Yahoo Finance Live to discuss.

Video transcript

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- There's just around two and a half minutes until the closing bell. We want to bring in Jim Masturzo. He is a Research Affiliates partner and chief investment officer of Multi-Asset Strategies. We're also joined by Josh Wein, Hennessy Funds portfolio manager. Jim, first to you because we have the S&P and the NAS falling today, yet we got a slew of better than expected earnings results once again. I guess how would you sum up some of the action that we're seeing in the market today?

JIM MASTURZO: Thanks. Nice to-- nice to be here with you all. You know, I think the markets over the last few months, and today included, have been just trading a little bit of an unknown. You know, we tend to be-- remain positive on the outlook for risk assets. You know, strong PMI numbers in the US, and Europe, as well, reopenings. And even with the COVID-- you know, the delta variant, hospitalizations and death rates haven't taken off. So we remain positive, but you know, there are warning signs, and I think the market is taking those into account.

- Very quickly, just want to follow up. Josh, do you think that the discussion about inflation is overblown, and especially with its impact on equities?

JOSH WEIN: I think-- I think a little bit. I think that we-- I think it's overblown because we still have some questions that are going to get answered, maybe in the next few months. And so, you know, we have a labor shortage in many industries. So in September, you know, the expiration of some unemployment benefits, kids returning to school, things of that nature, once that happens, we will get a better sense of where we stand on the labor front and the supply front, and how that translates into inflation. So I think, you know, I look at the bond market, bond market's saying that inflation's likely not a huge issue. You know, Fed Chair Powell kind of saying we have to wait. So I agree. It makes sense.

- All right, let's take a look at where things stand, because we just over 20 seconds to go until the bell. We're still looking at a mixed picture. The Dow holding on to gains up, just over 50 points. Honeywell, United Health, and Home Depot the outperformers there. S&P and NASDAQ both in the red, the NASDAQ the underperformer today. Sector action, energy technology, and communication services are the worst performers today. In terms of what is working today, utilities and consumer staples, those two are the outperformers.

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- All right, we have a closing bell. And let's see where these markets most likely are going to settle. The Dow is going to be in positive territory. It'll settle up about 54 points. S&P 500 is going to be off about 14 points, and the NASDAQ's going to be down about 101 points.

One thing to keep in mind, though, when we go into earnings season-- we're going to get a lot of it-- we're going to be talking a little bit later on about Netflix. They're going to report next week. And streaming, you can't ignore that. But I want to bring Josh back in, because when we look at the earnings we've already seen, we had a guest on just yesterday pointed out that analysts underestimated what we actually learned from the companies, and they missed it. There was beats by about 87% of companies last quarter. That was something that is not expected to be seen this quarter, or will it? Will we once again be on that kind of dramatic beat schedule, do you think?

JOSH WEIN: Yeah, I think it's a great point because I-- you know, we've been talking about that, that the P/Es a few months ago were-- looked elevated, and it was hard to tell, you know, how much estimates were going to get raised, you know, looking at a forward P/E. I think we're still in that-- you know, the compare to a year ago would reflect, you know, a pretty dire state of the world. So I think that we could see another quarter of beats until we get back to a Q4 where the comparison is-- is a little tougher. You know, things started to, you know, open up again Q4 of '20. And so, you know, right now, I think we're, you know, living these nice beats and raises. It'll come back to Earth, I would suspect, in Q4, and certainly Q1.

- Jim, I guess, how should investors be positioned right now? We're heading into the second half of the year. We've seen a bit of a resurgence in some of those tech names that had been underperforming since the start of the year. But where are you seeing the most value and, I guess, the most opportunity at this point?

JIM MASTURZO: Yeah, so as much as we can talk about sort of US sectors, you know, we really remain focused outside the US, in particular, excuse me, emerging markets, both on the debt and the equity side. You know, emerging markets have had a run since Q4 of last year. Valuations look more fairly valued than excessively cheap, where they were a year ago at this time.

But still, when you compare that to the overall valuation level, the CAPE ratio, as an example, in the US side, emerging markets are a steal in that comparison. On the debt side, you know, you're getting 300 to 400 basis points of spread versus US corporates at, you know, 85. So there's just a lot of opportunities that we continue to look at outside the borders of the US.

- But even-- I'm glad you brought up the corporate debt, because even at that kind of spread, Jim, isn't it still-- I mean, the unknowns of a foreign company, unless it's well-established, issuing new debt, is that a risk that a lot of us in the United States are willing to take on?

JIM MASTURZO: Well, when you get into, you know, to foreign corporate debt, absolutely there are other risks that you have to take on. But even on the sovereign side, there are a lot of opportunities, both on the local and the hard currency, you know, foreign debt.

- Josh, I'll pose a similar question to you. I guess where are you seeing the most opportunity right now in terms of investments?

JOSH WEIN: Sure, yeah, I would definitely point out the mid-cap space. So valuation, very similar to the S&P, where there's about a 5% earnings yield. Mid-caps are off quite a bit this month, so perhaps a nice setup for-- for a rally as we gain more clarity around the state of the world. So in our Hennessy Cornerstone Mid Cap 30 Fund, you know, consumer names such as Mattel and homebuilders like Meritage, you know, incredibly attractive valuations. You know, 16 times on Mattel, about six or seven times on Meritage.

And the final point on mid-caps, I think-- and we're not calling for a buyout of either name at all, but a lot of cash on the balance sheet of S&P 500 companies, about $7 trillion. And about 1.6 trillion of dry powder in the hands of private equity names. So there could be a bit of an M&A story, an earnings story, a valuation story.

- Jim, when you talk about a potential bumpy road ahead in the fourth quarter, what is it that you're seeing right now that might create those potholes going forward a quarter from now?

JIM MASTURZO: Right. You know, things like, you know, small caps. And I think you were talking to one of your earlier guests about small caps, which have basically sort of traded sideways to give it up a little bit over the last five months after a nice run. The lack of breadth in the S&P, although the market keeps hitting new highs, it's hitting new highs, obviously, with fewer names hitting those new highs. The dollar has continued to trudge higher. Although it's been a kind of a slow path, it is continuing to trudge higher. And really, you know, on the rates side, it's really interesting.

You know, what are rates really telling us after hitting a peak at the end of March, now giving back, you know, 40 basis points, you know, in the call it one and a quarter to 1.75 range? Might be much ado about nothing, but if we break those ranges, you know, on the upside or the downside now, we think that might be a confirming signal that, you know, things are either going well and on a trajectory that everyone seems to be expecting and talking about, or there are more warning signs that we need to be worried about. So, you know, maybe the story is, look, although we think things will continue to improve and continue for risk assets, I'm not sure that road is going to be as smooth as many people are talking about or expecting.

- Jim Masturzo and Josh Wein, thanks so much for taking the time to join us here today. Great getting both of your perspect--