Market Recap: Wednesday, July 21

James Camp, Eagle Asset Management Head of Strategic Income and Keith Lerner, Truist Advisory Services, Inc., Truist Wealth Chief Market Strategist and Managing Director, Portfolio & Market Strategy, came to Yahoo FInance Live to break down the latest market activity.
Video transcript
ADAM SHAPIRO: All right. About two minutes to the final bell. We now want to bring James Camp from Eagle Asset Management, Head of Strategic Income, into the stream. Also Keith Lerner, Truist Advisory Services, part of the Chief Market Strategist and Managing Director, Portfolio and Market Strategy there. Nice to have you both here.
James, I want to ask you a quick question. We were just talking about the 10-year return last hour, below 1.3%. You'd think a lot of people would panic and try to protect some money. But you think the 10 year bond is overbought. Why?
JAMES CAMP: Well, you know, we had a big sell-off earlier in the year. So a consolidation was likely. But the switch to the 120 was frankly rather worrying. Either we would have an extra lockdown or a restriction on growth, or someone is sidelined and someone is wrong. In our opinion, the inflation story is only just picking up speed. We think it's something decidedly more than ephemeral. And real returns are just too negative to represent value.
So we're going to watch very closely how the summer folds up, rolls over, the Jackson Hole comment, what comes out of it in terms of taper talk. But more importantly - and this shouldn't be too short - Labor Day is usually when the bond market wakes up and starts paying attention again. And they're going to look at some big data on the inflation front that we think will be problematic for those returns going forward.
ADAM SHAPIRO: We'll keep an eye on this inflation data. Now just want to take a breather, because we have about 45 seconds until the final bell. Do you want to take a look at where we are. The Dow, S&P 500 and NASDAQ are still recovering from the sell-off earlier this week. However, some of the Dow components that are in trouble today are having Walmart, Apple and Amgen in trouble. You're gone-- I mean, Walmart is only half a percent gone. But you've lost Apple by almost 4% and Amgen by almost 4%.
Apple, of course we only recently learned that you were susceptible to the spyware. And those of us struggling with our Apple devices trying to restore them don't wonder why they might fall today. But by the time we get to the closing bell, you should know that these are the three stocks that are topping the Dow at the bottom.
SEANA SMITH: And that's enough for today. Again, you are looking at profits across the board. We saw some buying action here until the end, the Dow closing 285 points. Outperformers in the Dow today, Chevron, Goldman and Boeing. You can see the S&P close about 8/10 percent and the NASDAQ add 133 points.
In terms of what works today, energy today is by far outstanding, with the XLE closing just over 3%. Financial and commodity stocks round off the top performers sector.
But we want to bring back James Camp and Keith Lerner to help us break down some of the actions we saw recently. And Keith, another day of profits after the Monday sale here. Certainly, as Adam said, the trades that work will be the hardest hit on Monday. I guess what does that tell you in terms of how the market sees developments in the Delta variant and how big the threat could be?
KEITH LERNER: Well, first of all it's nice to be with you again. Monday was pretty dark. I think it was really on the weekend that the public really began to understand the rise in COVID cases. But I think after the sell-off, I think that if you took a step back, investors became a little more comfortable that you were seeing some decoupling between new COVID cases and deaths. And that's not 2020. I mean, we're in a much better position when it comes to procedures and medical treatments. Companies have adapted. Consumers have adapted.
And also, as those COVID numbers rise, we think it's more likely that the Fed's throttling will also be postponed a bit. And I mean, at the end of the day when the 10-year price was at 1.15, the relative attractiveness of stocks only increased unless you think we were heading into a recession.
ADAM SHAPIRO: James, I'm curious because you believe, as you said, that the bond market will wake up around Labor Day. And we'd heard in the notes Keith sent us that he expected the economy to stay on track. So if Keith is right, James, what will that mean for us in September when not only bond markets but stock investors wake up too?
JAMES CAMP: As far as we can take advantage of equity income opportunities, we will. And we do that with a large overweight due to the overvaluation of the bond market. The things we are looking at are not temporary, we are in the process of adding owner-equivalent rent to the CPI data set. And we think this is going to be very hot in the next few months. There is a certain inertia behind this: if we get a year-on-year pressure of 6% on the owner's equivalent rent, we are in the middle to upper third on the CPI. Here, too, a 125, 130 10-year-old cannot cope with it.
We are seeing some relaxation in commodity prices, but they are still elevated. And we see these interruptions in the supply chain. We see the longest gap in history between an order and a delivery. And what matters most to us, when we're at our earnings talks, we hear prices and costs, and we hear that for the first time in over a decade, companies are moving the needle in pricing. To us, that suggests a reflationary economy, good for risk assets, good for stocks. But in our opinion the bond market will have to reposition itself here in the next few quarters.
SEANA SMITH: So, Keith, given all of this, I think just in terms of some of the future opportunities, how would you suggest that investors position themselves over the next several months in particular?
KEITH LERNER: Well what we've seen in the past month or three months is a big move back into mega-cap tech stocks. We actually think that is not the right move for the second half. We expect money to return to some of those cyclical areas that we have seen rallying here recently. Because we think, you know, earlier in the year there was a consensus today to go to the cyclics, they got over love and we saw a reset. We, just before this rally, these areas were the most oversold we have seen since the beginning of this year. And if the 10 year treasury is gradually going up as the economy moves forward, and even if it's below that high but still above trend, we still think that's positive.
Consider something like financial stocks, still a big discount to the overall market. And then small caps. The interesting thing about small caps is that the relative valuations of small caps are even cheaper now than they were last November before they saw that big bounce, and earnings trends are firm. So we still believe that there are many options. It's likely to get a little sloppy over the next few weeks and even months. But we would be positioned even more on the value side.
ADAM SHAPIRO: Keith, I'm not asking you to pick a retail stock, but I'm curious. I saw a report that the expenses for back to school will be gigantic. I make up this word. But enormous, since many children are finally going back to school after the pandemic. Would it be time to maybe step back from technology and maybe check out some old fashioned retail store? I realize that this is not a popular move for many people. But there is a risk of a huge buying frenzy.
KEITH LERNER: I think it makes sense. For example, if you look at the consumer discretionary sector, we are actually underweight as it has many growth areas in it. But in some of those subcategories, those reopening games that have been hit, we believe there is a chance. However, our preferred areas are still more financial, energy and industrials as a whole. But the other areas that you mentioned should also perform well as this re-opening game continues.
SEANA SMITH: James, what do you think? Where do you see the most opportunities?
JAMES CAMP: I think for the income investor you almost have to detach your eyes from the S&P. Because 20% of the S&P is technology that doesn't pay dividends. If we're looking for the solution stock income can provide, I agree with Keith, especially when it comes to financial stocks. At the beginning of the year, for example, we pulled out of the preferred sleeve of capital structure financial stocks and entered the common sleeve in steeper trading. And that has worked wonderfully.
I think the dividends are strong. I think they will keep growing. And since this interplay between debt, equity and various parts of the capital structure continues, with record corporate issuance, record debt, mostly for the benefit of shareholders, we have to tell our individual investors, our small investors who have no style, to be flexible within the capital structure large companies and pay attention to the solution and the drawdown and revenue generated, which are not necessarily a yardstick for evaluating your strategy.
ADAM SHAPIRO: I want to get you back around Labor Day too, when the bond markets wake up, because I think this would be great to see.
James Camp, Eagle Asset Management, Head of Strategic Income, thank you very much. Keith Lerner, Truist Advisory Services, always welcome you both. Thank you for your insight.

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