Market Recap: Thursday, September 23

Stocks extended gains Thursday, as investors cheered the Federal Reserve's latest signals on monetary policy. David Nelson, Belpointe Chief Strategist and Lindsey Piegza, Stifel Chief Economist joined Yahoo Finance Live to discuss.

Video transcript

ADAM SHAPIRO: Just under three minutes to the closing bell, and helping us get there today are David Nelson, Bell Point Chief Strategist, and Lindsey Piegza, Stifel Chief Economist. Good to have both of you here.

And, Lindsey, I wanted to ask you first-- the Chinese soft landing that's being orchestrated with this Evergrande situation-- as an economist, those of us who are old enough to remember the last attempted soft landing, the Great Financial Collapse of 2008, and I'm not an economist, but you are-- a PhD-- should we be worried? Can the Chinese engineer a soft landing? Or is this going to spread?

LINDSEY PIEGZA: Well, I think there's a big concern about the global recovery at this stage. Now, obviously, the Evergrande is a separate situation for China. But yesterday as we saw in the Fed statement, the Fed is still very much making monetary policy based on not just the recovery here in the domestic economy, but they're also keeping an eye on international developments as well.

And as we know just broadly speaking, the developing world is one, two, or even three steps behind the recovery in terms of the US or even some of our developed counterparts. So this is a very big concern, I would say, broadly speaking for the global recovery-- something that policymakers are very much keeping an eye on at this point.

ADAM SHAPIRO: And we are counting on those policymakers to get it right. David Bell Point, I know you have something to say about that-- David Nelson, rather-- forgive me. So we will get to that in just a second, we've got to check markets right now because we're still high.

We're off the session highs, but the Dow is heading for a close that looks like it could be up 500 points. The S&P 500 could be up 52 points, and the NASDAQ up as much as 154 points. Some of the leaders on the Dow today-- we talked about this earlier-- Salesforce up over 7% with American Express and both JPMorgan Chase up about 3%, 3.5%.

Then Caterpillar, that infrastructure bill news, perhaps, it's up almost 3%. Sectors that are gaining action today, you've got the energy sector once again leading. It is up over 3%. Energy, if you go back 52 weeks, that sector is up 52%-- the only sector that beats that, financials over the last 52 weeks, up 55%.

We're going to get the closing bell comments from David and Lindsey right now, because here it is.

[BELL RINGING]

SEANA SMITH: And that wraps up today's rally that we're looking at on Wall Street-- Dow, S&P, and NASDAQ all closing in the green. The Dow closing up just over 500 points as we shake out the final trades of the day. That's a gain of just around 1.5%. The NASDAQ and S&P both closing up just over 1% as well-- the small caps-- the Russell 2000 small cap index here outperforming, closing up nearly 2% today.

But let's bring back in David Nelson and Lindsey Piegza to help us understand what's better-- what's, I guess, going on in the market today. And, David, talking about today's gain-- so a 500-point rally, we saw jump yesterday of over 300 points-- what's your big takeaway from the gains that we've seen over the past two days?

DAVID NELSON: You know, I guess we retook the high ground. And to Lindsey's point on the Federal Reserve, I think the Fed largely took back control of the narrative here in that they had just enough tough love that they have investors back on several levels. They're going to probably announce a taper sometime in November. That taper will go until next year.

And I think there's a lot of rhetoric out there that supports the theory that they won't raise rates until after that taper. We're going to need that tough love, because inflation expectations are starting to show up in earnings right now. We saw that this week with FedEx. I'm going to read from their statement.

$450 million cost impact tied to wage increases. That's likely to play out over the next month or so when we start to get earnings reports. It's a problem. And they're trying to paint the picture that this is a transitory event, that it's likely to come back. And for today, at least, the markets are taking them at their word.

ADAM SHAPIRO: David, I'm embarrassed that I botched your introduction earlier. I know you well enough to know you're a pilot, so you see things from a different standpoint than all of us. So let's pick up with what's going on with earnings, because there's still no alternative to equities, despite the earnings we're going to get in October for this quarter.

DAVID NELSON: When you look at it, you know, despite the fact that valuations are where they are, you know, it all starts with the risk-free rate. And until there's a competitive asset class out there, and right now at 1.4% or 1.41% for 10-year, that's not a competitive asset class at this point.

Free cash flow in the S&P 500 is well above that, and that's why stocks are still the better place to go for earnings. We've hit peak growth back in June-- we understand that. Estimate revisions for GDP this quarter have been coming in for the last several weeks. Each quarter thereafter is going to be lower than the next.

So the question isn't whether we're slowing down, but what are we slowing down to? If it's a sustainable 3%, you know, in the out years, then stocks are likely OK. But if we're going back to 2% or below where we lived for a lot of the last decade, stocks are too rich.

SEANA SMITH: Lindsey, let's talk about the jobs sector, because we heard Jay Powell mention it yesterday-- he was pretty positive on it. He was saying that employment is expected to see more rapid gains here as the US does get the virus under control.

Gary Cohn was on with us last hour, and he was talking about the fact that employers cannot find the workers that they need-- that this is a huge issue here for the economy going forward and how we need to do better, I guess, in addressing this issue. How much do you see the labor shortage holding the economic recovery back?

LINDSEY PIEGZA: Oh, I think it's a huge issue. Right now, as you point out, labor demand is far outpacing labor supply. Now, going forward, it does seem that as schools reopen, as the vaccination rates rise, as different fiscal policies, including enhanced unemployment benefits, have now ended, there's a number of factors that should now entice these millions of workers that have been in a position of unemployment back into the labor market.

However, it's not going to be a very fast or a flip the switch scenario, because over the course of the past year, many Americans have been able to accumulate at least somewhat of a wealth cushion that can carry them forward for some time now, even in the absence of some of these more generous benefits programs, meaning that businesses could still struggle for several months, maybe even to the first of the year before these individuals sidelined decide to move back into the labor market.

So right now, this is very much putting a big impediment on businesses, which are not only facing supply chain constraints, but they're struggling to fill over 10 million job vacancies in the labor market right now. So again, we do hope that a lot of these barriers will be mitigated going forward. But it's going to take quite some time to get to that point.

ADAM SHAPIRO: Lindsey, help us understand, though, reconcile the fact that if real wages are growing at a pace slower than actual inflation, those savings won't last that long. Those people have to get back into the labor market, don't they?

LINDSEY PIEGZA: They do. They eventually have to. But again, from what we're hearing, at least peripheral or anecdotal stories, does suggest that individuals are going to write out the savings that they have accumulated, many in hopes that there will be another round federal package or another round of enhanced benefits initiated in order to help those that are still in a position of unemployment. Also, remember, with 10 million job vacancies and roughly 8 million Americans claiming a position of unemployment, very few are concerned that it's going to take a while to find a job.

So it's not as if these workers are concerned that they're going to have to look for two or three months before finding a position of-- such a divide with such a heavy demand for labor at this point. Workers are not very concerned that the search process will be extended by any means.

SEANA SMITH: David, when it comes to the market, I guess, what is the market most concerned about at this point when it comes to the recovery? Is it what's going on with the Fed? Is it what's going on with the jobs market-- I guess more specifically, the worker shortage that we're experiencing? Or is it the negotiations down in DC-- the fact that we're facing a debt limit, the fact that we're going to get a vote on infrastructure, possibly that $3.5 spending bill?

DAVID NELSON: How about all of the above? You know, you mentioned all the points that market practitioners like myself are concerned about. If I had to put a bullet on it, certainly China for me right now is number one with a bullet for a lot of levels.

They are an adversary in every sense of the word. To some of the points that she made-- that Lindsey made earlier-- they're going to challenge the administration on foreign policy, certainly economically. And given their incursions around the air defense zone of Taiwan, we may be forced to do something even militarily. Second to that is interest rates.

That's really what we have to watch. The last time interest rates and fixed income became a competitive asset class is in 2018. When rates got high enough, suddenly you couldn't get out of stocks fast enough because suddenly institutions like insurance companies had somewhere else to go to fund future liabilities. That isn't the case right now, and that's largely what holds up the markets today-- the massive liquidity we have and the uber low interest rates that we have. That changes, market dynamics change as well.

ADAM SHAPIRO: David, you do this for a living every day, and you're strategizing for people who are counting on you. But there are those of us who are passive investors who get very nervous. The good times are over. We see a day like we watched today in the markets and just think, how can this keep going? So how do you advise a nervous client like me to stay the course, given some of the things you just said about, you know, interest rates start going up, it's done.

DAVID NELSON: I guess maybe the best advice is that if you try to play every wiggle of the market, you're probably going to time yourself right out of it. Some good news-- you know, this has been largely an earnings-driven year. And despite, you know, some of the negatives we just talked about, PE ratios going forward right now are lower than they were at the start of the year.

So valuations have actually come in at this point. It's really what we're looking at towards next year, some of these challenges that we've got to come through. What I don't want to see is what Lindsay just mentioned is we have another round of, you know, a stimulus package to keep people from working, then everything is off the table. We're going to have to rethink this.

ADAM SHAPIRO: I'm going to include both of you in the write up I'm doing about our Gary Cohn interview, because you talked about that labor issue that is so key to what he is concerned about, and we appreciate the insight from both of you. David Nelson, Bell Point's Chief Strategist, as well as Lindsey Piegza, Stifel Chief Economist-- good to have both of you here, and we look forward to you both coming back and my not butchering either of your names.