Market Recap: Thursday, November 18

Stocks were mixed on Thursday as investors weighed a batch of solid corporate earnings results against lingering inflation concerns. Anna S. Han, Wells Fargo Securities Equity Strategist and Jeff Klingelhofer, Thornburg co-head of Investments joined Yahoo Finance Live to discuss.

Video transcript

ADAM SHAPIRO: All right, we have roughly a minute and 20 seconds until the closing bell. Want to bring in our guests. And their names happen to be Anna Han, Wells Fargo Securities Equity Strategist, and Jeff Klingelhofer, Thornburg co-head of investments. We're going to get to both of you right after we get the closing bell.

But let's see where we're headed at this point. Dow is going to close down, but the S&P 500 and NASDAQ seem to have recovered from what was a selloff yesterday. The S&P 500 could settle up about 15 points, with the NASDAQ up about 70 points.

When we take a look at the Dow, when we watch what's going on there, the laggards today on the Dow include some names that we all know very well. And they would be Cisco Systems, American Express, and Salesforce.com.

When you take a look at the sector action, consumer discretionary is the one thing that's in the green today. That's looking pretty strong. It's up 1 and 1/2 percent. Information technology is up 1%. If you have time and you want a Google Delta Airlines, DAL, or American Airlines, AAL, all the airlines, the big names, LUV, Southwest, JetBlue, they're selling off today,. Partially, perhaps, with the holiday travel season starting tomorrow, there's concerns about a big winter storm that could mess up the travel plans for lots of people. Here's the closing bell.

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SEANA SMITH: So that marks the end of today's trading day. Getting a mixed picture, like Adam was just talking about. The Dow closing off just around 59 points, not trading too far from the flatline, a theme that we have seen over the last couple of trading days. S&P and NASDAQ though, holding onto gains. S&P closing up just around 3/10 of a percent. The NASDAQ was the outperformer of the major averages, up nearly 1/2 of a percent.

We want to bring in Jeff Klingelhofer and Anna Han to help us break down the action. And Anna, of the big stories today and really this week has been the numbers that we've been getting from retailers. Time and time again, it seems like these retailers continue to outperform. Macy's shares closing up just around 20% today. Do you think this momentum that we're seeing from the third quarter, is that going to carry us through as we close out the current quarter?

ANNA HAN: I do think it'll last, at least in the short term. What you're hearing from the retailers is that, even with some margin pressure and a little bit of sequential margin compression, that they are seeing strong demand. And as long as that appetite and that demand remains somewhat inelastic, they can continue to pass along price and continue to grow their earnings.

I think that's the story today in the sector. And that's why you're seeing the group outperform.

ADAM SHAPIRO: Jeff, when you look at inflation, you tend to talk about what could be good inflation. And that would be wages going up, which would go along with what Anna's saying if we're looking at consumer spending being able to maintain. What's going to throw a wrench into what you're hoping is the good inflation?

JEFF KLINGELHOFER: Well, inflation is the two-tailed side. And that's always the challenge. But you're right. I mean, what I believe is that the Fed wants to see inflation. What they told us coming out of two Jackson Holes ago is that they're fine with a make-up strategy. They've been systematically undershooting their inflation objective. And what they want to do is systematically overshoot but only a little bit.

And so really, that's the wrench. If we see higher wages feeding into higher inflation, I think the Fed will see that as good inflation. But too much of a good thing, all of a sudden, can turn into a bad thing, of course. And so we'll be watching that very, very carefully.

As consumers spend down their stimulus, even though they might have higher wages, we think ultimately demand will wane a little bit.

SEANA SMITH: Anna, do you see anything right now that has the Fed maybe second-guessing their current policy and potentially acting quicker than we initially expected?

ANNA HAN: I think they're watching a lot of the economic data we've been seeing, strong retail sales. And you're seeing performance, again, this consumer with a lot of cash on hand, ready to spend it.

But for now, the Fed has been quite clear that taking some of that tapering off-- or starting tapering, taking some of those bond purchases off the table, does not mean that as soon as they're done, they're ready to roll straight into rate hikes. What they need to see is more improvement on the employment front. And that, we're going to have to know when we get there.

Right now, tapering looks to be probably going to end around spring next year. And it looks like the market is already pricing in rate hikes. But the reaction in yields might tell a little bit different story.

ADAM SHAPIRO: Anna, when you talk about the market pricing and rate hikes, how often does the market get it right? Isn't it the market actually gets it wrong? Because some analysts are saying, look, you're not going to see rate hikes until 2023.

ANNA HAN: I think the market has a tendency to-- in a way, they need to hedge themselves. And as the probabilities rise, that doesn't necessarily mean the market is 100% convinced it'll happen. But they're slowly positioning in a way to be prepared for a higher chance of it happening.

So for us, we do expect rate hikes in 2022. But the pace at which they come, I think, will adjust as we get closer to date. And that you're going to see reflected in how the market really treats real yields and the movement on real yields versus breakevens.

SEANA SMITH: And Jeff, as we speak right now, we're waiting for the House. They could potentially go on the Build Back Better plan today. Of course, that will bring more spending into the economy. Do you see this-- I guess, what are the implications if this were to get approved? And then of course, it would have to go through the Senate, signed by the president. But if we do see more spending, is that going to boost prices even further?

JEFF KLINGELHOFER: I think it will. I mean, I think ultimately, what we're seeing is a supply/demand imbalance, right, and where demand is relatively high because of the stimulus that we've seen. There's still pent up savings. If we continue to push on that, push even further, absolutely, I think it'll push up inflation.

And I think really, inflation is not becoming a Fed concern. Inflation is becoming a political concern. And going into 2022 and the election cycle, I think that's something investors are going to have to watch incredibly, incredibly carefully.

But I think Biden himself is very concerned. We're seeing that with the rhetoric between China and other countries, releasing, potentially, strategic oil reserves, trying to bring it back down inflation while continuing to push on the broad Democratic agenda. So it is absolutely a concern for markets.

ADAM SHAPIRO: Jeff, do you think it's enough of a concern for President Biden that he might change things up at the Fed next week, and we would get somebody who might be willing to clamp down on inflation?

JEFF KLINGELHOFER: Well, I'd like to say it is. But I think ultimately, the challenge is between the two folks that really are in the front running seat. The current Fed Chair, Jerome Powell, is probably the front-runner in terms of at least the market's perception of willingness to fight inflation. So I think if anything, your question might be tilting the other way.

If inflation wasn't a concern, I think there's a much higher likelihood that we would see a different Fed chair. But at this point, because inflation is a political concern, I think Biden might be smart enough not to spook markets and stick with status quo.

SEANA SMITH: Anna, what are you favoring in this environment? What looks the most attractive to you right now?

ANNA HAN: For us, I'm liking high-quality when it comes to small caps. But in the large-cap space, I prefer banks. I think that real yields will wake up to the fundamentals that, as we start tapering, as you get this expectation that we are getting later in the economic recovery cycle, that you're going to see banks perk up. And banks actually have been performing quite well this year, outperforming the benchmark and, actually, tech group in a whole.

So going forward, I still like the valuation. I still like that risk profile. And I think the group has more to run. I would recommend banks here.

ADAM SHAPIRO: Jeff, you're looking at shorter-duration fixed income. Why even dabble there unless it's high-yield?

JEFF KLINGELHOFER: Well, really, what we're looking at is to make sure that we best represent our clients' interests. And most people on fixed income, for both the income component, but also they're looking for that balance to their portfolios. So getting that balance right is front and center on our minds. And we think focusing on two places, shorter-duration fixed income and asset-backed securities that benefit from the strong consumer that we're both talking about here.

ADAM SHAPIRO: We're going to take a quick break, because we've got Jared Blikre. He's got Workday earnings. Jared, what are they telling us?

JARED BLIKRE: That's right. Workday down about 7%, 8% in after-hours trading. And I believe it's week guidance. The main headline numbers coming in better than expected. Adjusted EPS for the third quarter was $1.10 versus estimates of $0.87. So that's a $0.23 beat. Revenue coming in a little bit stronger than estimates, 1.33 billion. Estimate was for 1.31 billion. And by the way, that's up 20% year over year.

Subscription revenue beating a little bit, 1.17 billion. Estimate was for 1.16 billion. Professional services, small beat as well, 155.7 million, up 13% year over year. Estimate was for lower by about 4 million to 151.7 million.

And then adjusted operating margin, that's 25%. And the estimate was for only 21%. So nice beat there. Now, they did raise their fourth quarter full-year subscription revenue to 4.53 to 4.54 billion, but that is lower-- excuse me, that is greater than the estimate of 4.51 billion but not by much. They're seeing fourth quarter subscription revenue of 1.22 billion to 1.22 billion. Estimate was for 1.21 billion.

So bottom line, really not cranking out the growth the numbers that maybe the Street was expecting, but relatively in line here, small beats as well.

ADAM SHAPIRO: Jared, thank you. We got to wrap this up. I'm going to give Anna the last question here. And you talked about a melt-up year end, price target of 4,825 for the S&P 500. Do you feel confident about that, even with the fight that's brewing in December over the debt ceiling and the volatility that comes with that?

ANNA HAN: I do. I think that those are macro factors we're watching very closely. But that is something that we believe will get resolved, at least in the near term, to help push equities higher. And really, the driver for us in equities higher here is the froth we're seeing in equity investors, that reaching for the upside, whether it's being expressed in leveraged products like upside call options or in single stock names.

Whatever it is, we're seeing multiple signs that there's froth. And that, to us in the near term, means more momentum higher. But it also means, come 2022, that destabilizing may be a concern. And that's when we grow a little more bearish and look for multiple contraction.

ADAM SHAPIRO: I'm hoping we have both of you back well before 2022. We still have about six, seven weeks for this year. Anna Han is Wells Fargo Securities Equity Strategist. Jeff Klingelhofer is Thornburg co-head of investments. Thank you both for your--