'Slower than average' economic growth expected to persist into 2022: WealthSource President

Patrick Brewer, CFA, CPA and President of WealthSource, joins Yahoo Finance Live to discuss the latest GDP data, earnings season, and the bond market.

Video transcript

JARED BLIKRE: And we want to keep talking about the markets and we're going to bring into the stream Patrick Brewer, CFA, CPA, and president of WealthSource-- excuse me. So Patrick, thank you for joining us today. Just want to begin with some of the economic numbers we got before the bell. We got GDP coming in at 2% for the third quarter. A little bit of a disappointment. The Street was expecting a 2.6%. What do you make of the latest numbers here?

PATRICK BREWER: Well, I think we've got a lot of challenges in the economy right now. We've got persistent inflation, we've got supply chain disruptions, we've got slower than average wage growth. We've just got a lot of things that are compounding-- a confluence of issues that are creating slower than average growth in the economy. I would expect that to persist into 2022.

We've obviously seen a run-up up over the past 12 months or so since COVID started. We've seen amazing earnings come out across pretty much every industry in the S&P 500, so I would expect more reports similar to the one that we see today as it relates to GDP into 2022.

JARED BLIKRE: Got it. And you mentioned earnings, so I got to ask you what's your take on earnings season so far? Above average beats but some of the stocks not rewarded as much as you might think.

PATRICK BREWER: Yeah, I think at this point the markets priced in the fact that we're going to have a really strong earnings season. I think 80% or so the companies have beat what the forecast was for the third quarter. Companies are expected to grow their profits by about 37.6% just in the third quarter alone. I think the market is largely priced this in.

The question is, in 2022, can this persist with all the things that I just said a minute ago? Higher than average wage costs, supply chain issues, the looming, persistent inflation. Things of that nature could really throw us off course and cause company's performance to suffer.

JARED BLIKRE: Well, and sticking with earnings, we got some big names after the bell today. Amazon, Apple, and that's on the heels of Alphabet and Microsoft really just killing it yesterday in terms of stock performance. What are you expecting for some of these names after the bell?

PATRICK BREWER: I would expect them to do well. I mean, if we think about what's happened with the pandemic, it's essentially been a reallocation of consumer demand and just the way that people do business from small and mid-sized companies to larger companies, so it's shifted preferences from consumers, from businesses to operate more digitally, and companies in the technology sector have benefited from that and I would expect them to continue to benefit from that for at least the next couple of quarters.

I think we could start to see a normalization in the returns for companies like Apple and Amazon. If you look at forward-looking P/Es, they're pretty high so now might be a time to start thinking about trimming some of those holdings.

JARED BLIKRE: Now I want to shift our attention to the bond market where we've seen a lot of activity over the last couple of days. Huge move down in longer term yields yesterday and today we're getting the reverse-- a little bit of a snapback. But also pointing out the yield curve is flattening and concerns that investors might be thinking that the Fed would tighten after, or shortly after, their expected taper ends next year, but maybe it's just due to month and pension fund rebalancing, and that's what Dr. Marco Kolanovic is saying at JPMorgan. What's your take of the bond market right now? Are people just reading into the market too much or is there something actually there?

PATRICK BREWER: I would say that people are probably reading into it a little bit too much. I wouldn't expect any major shifts in the Fed's policy, at least until sometime next year or so. I would agree that it's probably just a blip on the radar. There are some areas in the bond market that are more attractive than others. You know, for example, if you look at fallen angels, company's debt securities that have, let's say, been moved to junk or high yield getting repriced to investment grade given everything that's happened with COVID, so I think there's opportunities in the bond market. But as far as the yield curve flattening and having issues around that, I would say that that's largely a blip in the radar.

JARED BLIKRE: Well, we've got about a minute left. I'm going to leave the floor open. Any stock sector industry thing that you want to just talk about here, have any views on?

PATRICK BREWER: Yeah, I think, you know, us as being holistic wealth managers, what we tend to do is look for areas of the market that produce higher expected returns at lower risk levels. So one area that we're focusing on right now is health care and energy sectors, just looking at those with the prospects of inflation being a little bit more persistent than we all maybe had hoped.

We're looking at those fallen angels, debt securities that were high yield that are getting repriced to investment grade. We think there's some opportunities there. Looking at trimming technology. As I mentioned, forward-looking P/Es or a little bit high. And then also TIPS-- Treasury Inflation Protected Securities. If unexpected inflation outpaces expected inflation, having TIPS in your portfolio to hedge against that risk is something that the average investor might want to consider.