Stocks mostly flat after S&P 500's best day since July

Matt Lockridge, Westwood Quality Value Fund Portfolio Manager joins the Yahoo Finance Live panel to discuss the latest market action.

Video transcript

ZACK GUZMAN: I want to turn over into how best investors are digesting this. And the best way to play kind of the updates we're getting not just from the Fed, but companies moving forward with earnings still being impacted by the pandemic. And for more on that, happy to welcome in Matt Lockridge, Westwood Quality Value Fund Portfolio Manager, joins us now. And Matt, Happy Friday. Let's start off there. Happy Friday. I mean--

MATT LOCKRIDGE: Happy Friday.

ZACK GUZMAN: --just Brian and run through everything there, in terms of what people got this week from the Fed and the latest thinking, tapering pretty well choreographed. But I'm looking at what's happened with Nike today and thinking about the fact that we are still seeing companies deal with supply chain issues, labor shortages.

There is still the weight of the pandemic on us now. When you step back and look at the volatility we saw this week, what should investors know about maybe playing the market moving forward?

MATT LOCKRIDGE: Sure. Well, thank you for having me, first of all. It has been a very volatile week. I think, you know, some, as you mentioned earlier, after reviewing what the Fed had to say, thought they were a bit more hawkish to us.

They really just gave more clarity and specifics on the next few months and quarters. Jerome Powell talked about the next jobs report coming up and that unless it's really bad, they're going to plan on tapering starting in November. And that tapering will last likely through the mid-- middle part of 2022.

And so we can expect the first interest rate increase at the end of '22 or early '23. That all, to us, fit general consensus expectations. And I think as investors look forward, how do you prepare for that?

Essentially, much of the monetary stimulus that's been in the market will slow and then exit. So as we get into this tight-- tightening phase, you're going to want to focus on those companies that have higher returns on invested capital, that can weather that increase in their cost of capital.

And you also want companies, in our opinion, that are exhibiting positive earnings revisions. Over the last couple of years, we've really had more macro-- a more macro-driven market. That, to us, is ending.

And you can really look at individual securities. And you want to focus on those companies that are growing and that are beating expectations so that earnings revisions are moving up.

ZACK GUZMAN: Yeah, I guess that's the big question now, too, as we kind of see this global picture-- and again, I'll use the example of Nike. Because that's the one we're seeing move today. The global picture of supply chain issues in other countries that are kind of lagging behind on vaccinations versus what's going on here in the US.

There are some people who even earlier on in the pandemic were saying really lean into the small caps. Because you might not have as large an impact when it comes to the global economy here. But what would be your suggestion?

I mean, are there sectors you like moving forward if we are indeed coming out of the worst of the pandemic, that maybe people should be taking a second look at?

MATT LOCKRIDGE: Yeah, it is interesting. I mean, the supply chain disruption is real. We're really hearing that across all sectors. You mentioned Nike. Even FedEx talked about the labor shortages.

So these bottlenecks, or shortages, it's not just in semiconductors. But it's really in various parts of the supply chain. And so you want to be mindful of that.

And obviously the larger companies when you think of, for example, in the consumer space retailers that can manage these shortages the best, they're generally going to be the larger companies. You know, the Walmarts of the world that, as suppliers, are going through inventory allocation.

They're going to give it to their biggest customers, the customers that they know can show the best sell-through. And so generally the larger cap end the space should be able to manage some of these supply chain disruptions the best.

ZACK GUZMAN: And we'll see if that's the case, of course, as we have earnings season to look forward to. We've kind of gone through the session of not much to talk about in the summer, waiting for the updates from the Fed. Now we got them.

We'll see what lies ahead. But Matt-- Matt Lockridge, Westwood Quality Value Fund Portfolio Manager, appreciate you taking the time. We started with Happy Friday. We'll end with have a great weekend, man. Good to see you.