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Market strategist: ‘There’s a lot of horsepower in the economy’

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Mark Luschini, President and Chief Investment Strategist of Janney Montgomery Scott, and Dave Mazza, Managing Director and Head of Product at Direxion, join Yahoo Finance Live to discuss the outlook for the market.

Video transcript

[MUSIC PLAYING]

ADAM SHAPIRO: OK, about a minute 15 until the closing bell. The people who are going to help us understand what we've witnessed today are Mark Luschini, Janney Montgomery Scott's president, chief investment strategist, and chief investment officer. We've also got Dave Mazza from-- Direxion's managing director and head of product. Dave, let me just talk real quick with you. Used to be you could buy on the dips and confidently expect things to go up. But this year-- and I realize we're only three weeks into January-- boy, get out the Pepto-Bismol. Do you see an end in sight to this kind of, you know, volatility and then fall?

DAVE MAZZA: Well, it certainly, to your point, feels a lot different than the last few years, where buying the dip was the mentality. And that dip could have been 50 basis points or 1/2%. Now we have a proper 10% correction in the NASDAQ. Today started off on a much stronger note. And certainly, the close here is not very inspiring. So I think investors do need to be more cautious. It's certainly an opportunity for traders here. But we know valuations, for certain area of the market, still remain higher. And if earnings come in stronger, that's going to help. But other than that, it's going to be challenging.

ADAM SHAPIRO: All right. We've got a closing bell as we are racing down. And here it is.

[BELL RINGING]

[MUSIC PLAYING]

EMILY MCCORMICK: And that is the closing bell this Thursday, January 20. As we can see, another ugly day in the equity markets here. The S&P 500, Dow, and NASDAQ had been in positive territory earlier today. As we can see, closing in sharply negative territory as we get today's settlement. The NASDAQ down another about 1.3% after closing in a correction yesterday-- so down about 10% from a recent record high.

The Dow Jones Industrial Average down more than 300 points, or nearly 1%. And the S&P 500 down more than 1%, as well, with the consumer discretionary, materials, and information technology sectors leading the way lower on that index.

Well, let's kick it back over to our panel. And Mark, I want to ask you a little bit about the market action that we've been seeing recently, as well, and where you think we may be going, because we have been seeing pretty strong economic growth. But just looking at some of the data that we got out today, an unexpected spike in new jobless claims. We're seeing inflation at multi-decade highs. Is economic activity going to underpin further stock market appreciation this year or is this something that investors can't count on?

MARK LUSCHINI: Well, certainly, first of all, all good points. The Atlanta Federal Reserve GDP Now tracker was punching up a number about 6.8% up until the revisions due to retail sales and industrial production last week, which brought it down to 5.1%, which is still very strong inertia. And mind you, yes, we've had a couple of mixed readings coming out of the government with regard to Empire State, a couple things you mentioned.

Today's Philly Fed survey, on the other hand, kind of contradicted some of the weakness in the Empire State survey, giving reason to believe that economic momentum is still quite healthy. And we, therefore, expect it to remain well above trend over the balance of 2022, particularly emboldened by job gains, which we expect to continue to see, and importantly wage growth, which is occurring at a pretty rapid pace.

Once again, quoting that same Atlanta Federal Reserve, their wage tracker showing 4.5% annualized growth for people who have been in their jobs at least a year. We haven't seen a pace like that going back to 2002. So I think there's a lot of horsepower in the economy. The consumer's well-endowed to continue to propel economic growth forward, which is going to put that underpinning, the stock prices, that while off to a weak start and will likely be volatile because of the pivoting monetary policy setting, some geopolitical issues that lurk out there, I still think it's going to be a good year for stock prices overall.

ADAM SHAPIRO: Mark, just want to follow up on that. So as an average investor who doesn't have the insight that you and Dave have, Mark, what should I look for as that pivot? Is it after the March meeting, when everyone expects the first increase of 25 basis points? Or is it going to be some other metric that I should be paying attention to?

MARK LUSCHINI: Well, certainly, I would be looking for what we actually hear the Fed say and as opposed to necessarily what they do. And we should have some preemptive commentary around that as soon as next week, when the Fed meets and probably begins to talk about, in more clearer terms, what it's likely to do with regard to the unwind of its bond-buying regime, if not necessarily foreshadow when that first rate hike is likely to occur.

But I think one should really be focused on inflation because that's going to be the driver to Fed policy. If we see peak inflation here over the next couple of months, such that these readings we've gotten here of recent-- the CPI at headline 7%, which is the highest since 1982-- begins to recede somewhat, that's going to allow the Fed more runway to act less aggressively than what the market's currently pricing in.

And that should help, once again, to boost equity prices that right now are trying to digest higher interest rates-- not so much where they reside today at 185 on the 10-year, rounding speaking-- but how abruptly we got here from the beginning of the year, where it was 1.5%.

EMILY MCCORMICK: Dave, I'm wondering, what advice would you have to investors as they look at what's happening in the NASDAQ Composite and many of these tech and growth shares? Is this the time to be selling, as we see this continued volatility? Or should long-term investors, especially, be considering holding through some of this churn?

DAVE MAZZA: Well, it all goes to an investor's time horizon true point. If you have a very long time horizon and if you still believe in many of the secular themes that have been occurring-- cloud computing, the 5G rollout, gene editing-- now may actually be a better time to step into those spaces. Now if you've been owning that, you've certainly suffered. Some of these names who are well off their highs, 50% corrections, which is very, very difficult and challenging to do.

In the near term, there is certainly momentum-- has moved from the growth areas of the market to things like energy, things like financials, which are more cyclical and tend to do better in a broad-based economy. But Mark raises a great point. The real focus here is going to be on inflation. And the Federal Reserve has a small pocket here to act before they potentially get even more politicized than it seems like they have been, with the midterm elections coming.

So that March meeting is definitely going to be a hot button issue for investors and traders. And I would say, look to be more diversified than maybe you have been in the previous years. And be maybe more cautious just with that buy the dip mentality we were talking about before the close.

EMILY MCCORMICK: All right. We want to put this conversation on pause really quickly and head over to Yahoo Finance's Jared Blikre, standing by with breaking news on Netflix's earnings. And Jared, that stock is down. What's the cause?

JARED BLIKRE: Yes. The outlook for subscriber adds-- pretty weak here. I'm looking for the first quarter now. This is the current quarter projection. They're saying that they're going to add 2 and 1/2 million subscribers. The estimate was for many times that, 6.26 million. So that is the headline number that we're looking at after that big headline missed. The stock right now-- you're looking at a chart on the Y Fi interactive of Netflix stock. You're not seeing the aftermarket's reaction here, but it is right down to 450. And that is that round number that has been in play before. So some pretty significant declines here for Netflix.

Let me go over some of the other numbers here. Fourth-quarter revenue came in exactly in line-- 7.71 billion. Fourth-quarter EPS coming in at $1.33, handily beating the estimate from the street of $0.81. But again, that streaming paid net change number of 2 and 1/2 million projected for the first quarter, really a big disappointment.

Also seeing-- let's see-- we have fourth-quarter global streaming paid net additions for the fourth quarter. Those come in at 8.28 million. And I believe the estimate was for a bit lower than 8.13 million. So managed to beat on the fourth-quarter numbers, but just not on the projection. Also looking at total US and Canada streaming paid memberships of 75.2 million. And then you go to the paid memberships for the first quarter. And again, that's coming in at 224.3 million.

Also, "Squid Games" got some news here. They decided to comment about that. They had 1.65 billion hours viewed in four weeks. That is an incredible amount. I think I'm included in that total, as well. And they're also seeing a positive free cash flow for the full year 2022 and beyond. But it's really that headline subscriber number and the projection for it that really missed expectations here. Again, the stock down about 10% in afterhours trading to the lowest levels we've seen since about mid-2020, guys.

EMILY MCCORMICK: All right. Yahoo Finance's Jared Blikre, thank you so much. Mark, what's your take when you hear some of these results out from Netflix? And I know that these just dropped moments ago. But putting this in context, we had Netflix's subscriber outlook just missing expectations. Peloton reportedly halting production on its products due to lower demand, based on a CNBC report earlier today. What do you think these things are saying about some of these growth and stay-at-home plays that had been so successful earlier on during the pandemic?

MARK LUSCHINI: Well, for me, it is in fact these infamous stay at home plays that you made reference to that had been bid up the valuations that get to the point where they're priced for perfection. And anything that is released about the company's investment results or its prospects that don't meet or exceed very elevated expectations leads to gigantic disappointment in the form of a share price decline-- in this case, by orders of magnitude-- that put them deeply into correction, if not outright bear market territory.

I mean, Peloton you mentioned is down 84%, last I looked a couple hours ago, from its peak. Netflix, as the other reporter had mentioned, down 10% just today iun afterhours trading. This is indicative of companies that, again, have valuations that have been bid up by investors who, on disappointment, decide to sell first and ask questions later, and therefore, leave huge carnage in their wake relative to declines as valuations compress to better reflect prospects under more normalized economic climate.

It's not necessarily an indictment of Netflix. I don't think they're going to see substantial subscriber, if you will, attrition, even as they've raised prices. But at the same time, the buy-up, the uptake in terms of their product isn't as effective in an environment in which people are wanting to get out and travel and leisure and entertain themselves in ways differently than they did when we were locked in our homes.

ADAM SHAPIRO: We have to say thank you to both of you. Mark Luschini is Janney Montgomery Scott's president, chief investment strategist and chief investment officer. Dave Mazza is Direxion's managing director and head of product. All the best to both of you.

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