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Investors 'can't really separate' inflation and job market prints: Strategist

Commonwealth Financial Network CIO Brad McMillan and Burns McKinney, NFJ Investment Group Senior Portfolio Manager, join Yahoo Finance Live to discuss new inflation and CPI data, earnings season, and the semiconductor industry.

Video transcript

- Well, here we go. Let's have your closing bell for August 8 on Yahoo Finance Live.

[MUSIC PLAYING]

[BELL CLANGING]

[MUSIC PLAYING]

- And there you have it, the closing bell for this Wednesday. Certainly green across the board. Today, a positivity at least for one day with investor optimism returning, risk-on because of that economic data we got today with the Dow closing up 535 points. Let's break down all the market action today.

We got Brad McMillan, Commonwealth Financial Network CIO and Burns McKinney, NFJ Investment Group Senior Portfolio Manager here to break it all down for us. Brad, let's start with you. I mean, I guess the question here is, this is off of one data print that we got. Certainly, inflation continues to be a big concern. How much of the rally today you think was justified?

BRAD MCMILLAN: I think it is justified, because I think the inflation report tells us a couple of things. First of all, it says that inflation looks to have peaked. We've seen some things actually coming down, and that's going to help across the board. That's going to help growth. That's going to help real wage growth. That's going to help valuations. I mean, this pretty much puts a much firmer foundation under the market right now, and I think that reaction is exactly what we're seeing.

- And, Burns, when you add to that what we saw with the jobs report data coming in strong on Friday, have we reached a turning point when it comes to inflation? Is it too soon to say that?

BURNS MCKINNEY: It does appear that we probably have hit and passed peak inflation. Just basically, the tightest correlation with inflation is the M2 money supply and that peaked about a year ago. There tends to be about a one-year lag. And so probably the next thing investors should be focusing on is not necessarily peak inflation but peak interest rate hikes. Now, there is kind of a consensus brewing that, OK, well, maybe investors are going to be shifting from looking at inflation prints to the jobs data and recession prints.

But you can't really separate those. This is still very relevant because of the fact that, with signs that inflation is peaking, that does at least mean that the Fed will have a few more tools in their toolkit to fight basically any sort of economic weakness going forward. And it does suggest, in fact, that rate hikes may not have to go as high as some would suggest.

- Burns, even as those inflation concerns, the Fed rate hikes continue to loom over the market. We have gotten plenty of earnings numbers here that have been sort of the driving factor behind some of the names that we've seen. As we look to that September meeting, does it really still all come back down to the Fed?

BURNS MCKINNEY: Frankly, it probably does. I think that we've really been operating in, for the last several months, a bit of a binary market, where there's just one focus. And that is, what is the CPI? That's been basically America's greatest concern, and it's important because of the fact that you do run the risk of having a wage price spiral because of the fact that inflation expectations are one of the ingredients for inflation. And so that's going to continue to have the focus.

That said, investors really have been looking a lot more closely at earnings this earnings season, and there have been some concern that earnings estimates would be coming down pretty substantially. But at least looking at the numbers that have come in thus far, it's actually the corporate earnings and even corporate forward guidance has been a lot more resilient than investors have expected.

- And, Brad, obviously this is a consumer-led economy. What is consumer sentiment? And what we're seeing with spending, what is that telling you about how consumers think the economy is doing and how perhaps some of these companies will respond?

BRAD MCMILLAN: Well, you're absolutely right. Consumer confidence is one of the things that drives the economy. We have more people working. They're making more money, but the real wages are going to be going up as inflation pulls down. That's going to help confidence. Well, we've see confidence come down a great deal. But at the same time, we're still at the levels we saw in 2015, 2016.

So there's still a lot of resilience there, and I think we're very likely to see a bounce. And in fact, just as we were just talking about, with earnings are doing better than expected, consumer spending, despite the pullback in confidence, has still been strong. So given the savings that are still there, I think we should see a surprising bouncing consumer spending through the rest of the year.

- Burns, let's talk about some of your stock picks. I'm seeing Texas Instruments there at the top of the list. The semi space has kind of a mixed. I mean, we were talking yesterday about a lot of semiconductors being down on the back of the outlook from Micron as well as Nvidia. And yet, there seems to be some optimism coming through because of the Chips Act passing. I mean, talk me through your base case, specifically on TI.

BURNS MCKINNEY: Well, this is certainly a contrarian play. The chips are very out of favor, and normally such situations offer good opportunities for investors to find good valuations. In the case of Texas Instruments, right now it trades at about a 20% discount to the S&P information technology index. That's a name that usually trades at a premium. And one of the things that we really love about it is they're a cash flow generator. They pay a dividend yield of close to 3% and they raised that by 13% last year, which really speaks to management's confidence in the business. And that dividend yield is fairly well-supported. Free cash flow has grown by double-digit rates for a couple of decades, and so they produce a lot of cash.

And at least relative to a lot of the other chip-makers, what TI does is not really the sexy stuff. We like to think of it as the blocking and tackling of the chip world. They're a leader in analog chips, which basically means these are the chips that collect data from everyday devices and convert it to digital form, which means they do have a couple of secular tailwinds working in their favor. One of which is that you have a way to play the internet of things. And then secondly, I think this is especially relevant in the current geopolitical environment, is that it's a great way to play both energy efficiency and infrastructure spending.

- And, Brad, which companies look most attractive to you and what criteria are you using?

BRAD MCMILLAN: I'm looking at two things. I want to see growth. I want to see companies that are going to benefit from growth going forward as we see growth rebound. I think consumer discretionary, we've seen that today, I think that makes a lot of sense. As you see consumer confidence come back, people are going to go shopping and they're going to have the money to go shopping. So consumer discretionary is definitely a place to be looking.

The other, to pick up the argument just made, is technology. Because even though companies are going to be able to continue to grow, they're not going to be able to hire because we're still seeing labor shortages. And what they're going to have to do there is invest in being more efficient. That's a double play on a labor shortage and growth, so I think both of those sectors are places to be going forward.

- A big thank you to our market panel, Brad McMillan and Burns McKinney there. Thank you for joining us this afternoon.