Stocks retreat after Powell remarks on inflation, tapering

Matt Miskin, John Hancock Investment Management Co-Chief Investment Strategist joins the Yahoo Finance Live panel with the latest market action.

Video Transcript

- I want to back up and look at the broader market implications as earnings season here rolls on though. Of course, as I said, the NASDAQ reaching a session low here, off by about 1% right now, of course, as that snap spillover effect takes down a bit of some of those tech names. But it does raise questions about how they might perform when they report earnings, as well as this rotation that might be coming back here in terms of value names moving forward in 2022.

For more on that, I want to bring on Matt Miskin, John Hancock Investment Management co-chief investment strategist joins us right now. And Matt, maybe, we do start there. Maybe we talk about risks as investors should be seeing. And there was clearly some reward here in 2021 for taking some risks on the tech stocks and some high fliers. But what do you see in terms of that may be changing as we look ahead to 2022.

So this quarter should be pretty strong, all things considered as it relates to earnings growth. Analyst community still looking for 20% to 30% earnings growth. I know, you know, you talk about some of the names that are already reported that are causing some pressure. But you've got some big companies next week that have pretty wide moats, you know, dominating the industry. And I think there's going to be other drivers that are going to be more important than what you're seeing thus far.

But from here and into next quarter, it's really the last hurrah of great earnings growth. After that, earnings growth is set to really decelerate. And in the first and second quarter of next year, analysts are counting on kind of low single digit to mid-single digit earnings growth. So it's going to be much harder earnings growth period into next year.

You've got to find companies that actually have good margins, good return on equity, good balance sheets, organic earnings drivers into next year. We're looking at the quality factor. Technology is a big part of that as a good place to be heading into next year. And that's where we would start positioning now.

- Yeah, can you elaborate on that a bit more, Matt? When you talk about deceleration of earnings, what's a big driver here? What's your concern?

MATT MISKIN: You know, so this year, I mean, we've had a lot of stimulus. We've had $10 trillion of stimulus at the end of last year into the beginning of this year. Next year, we're not going to likely get that. We're not going to get, you know, stimulus checks like we did this year. And the growth profile is going to be much more driven from the underlying economy. And there's going to be more structural forces that come in. We might get a tighter Fed, we might get higher taxes.

There's other things that could pull down growth. And that top line drivers is going to be harder to rely on. And so you're going to have to fight within an industry to get earnings growth. It's not-- you know, it's going to be coming down to the top performers within every industry. And it's going to be about market share. Who's going to get market share? And so you've got to find those names within every industry. You can't just rely on the beta of the market. So we're doing the bottom up work, looking for the fundamental support and better earnings on an organic basis going into next year.

- Yeah, let's weigh that risk reward here then too. Because, you know, obviously, the leadership has changed a little bit. Energy is still kind of one that a lot of people watch though. The risks there might be a little bit higher, just given kind of what we're seeing play out in the push pull kind of battle around commodities and demand as we still work through this pandemic. So I mean, when you look at risk reward here, what's maybe the best opportunity out there for investors to take a look at as you kind of grapple with maybe the unwinding of some of those supply chain issues?

MATT MISKIN: Yeah, we would lighten up on cyclicality into next year. And the commodity complex has been on fire. You know, oil has been going up nearly every single day. It looks overbought to us. But this short term supply chain or supply demand imbalance, the supply issues are likely driving it up. But demand is going to be harder to rely on as a driver into next year.

And so when we're thinking about the risk reward, the highest risk right now is getting rewarded the most. Some of the most volatile parts of the market, you know, I'm even going to put in cryptocurrency into that bucket, is getting rewarded with better performance. And, you know, next year, sentiment might not be that rewarding for those higher risk markets.

As global growth decelerates, you got to find those companies that are a bit higher quality. They might not be as high risk because the balance sheets are so good. So balance sheet analysis, for example, is going to be increasingly important. So we're relying on tech, communication services, health care as three pillars of the quality side. We do have some cyclicals in industrials, high quality cyclicals in there. But that quality factor is going to be really important as global growth slows down.

- You mentioned crypto. And no question, it's been a banner week with the debut of these two Bitcoin futures, ETFs. But you just pointed to the fact that you think we're kind of reaching overbought conditions. What's your exposure to the space right now? And where are you putting your money behind?

MATT MISKIN: Yeah, we have minimal exposure. And really, it's the technology companies that have ancillary businesses, some of the semiconductor companies that have some exposure there. But in terms of outright exposure, we don't actually find it to be as compelling. We think it is overbought. We don't see the fundamental catalyst to some of it.

You know, the currency space-- if this is a currency, you know, in the currency world, it often is a zero sum game. You know, as one currency appreciates, the other depreciates, but then it comes back and forth over time. It's looking more like a part of the market that is trying to have everyone benefit from it in this longer term appreciation story. I think we need to manage the risks accordingly.

There's been a lot of hype in the last week on this. There's been a lot of new investors that come in. And all we're saying is make sure you're managing risk accordingly. Make sure you're right sizing that in a portfolio so that you have the risk level that you want to have for where you're at. And so, you know, I get it, there's a lot of good things that have happened this week. But also sometimes, that's where an inflection point can arrive. You've got to be careful.