Lenore Hawkins, Tematica Research Chief Macro Strategist, joins Yahoo Finance to discuss various aspects of the current markets and ways to invest.

Video Transcript

- We want to stick with the markets here, keep talking about earnings. And we're gonna bring in Lenore Hawkins. She is the Tematica Research Chief Macro Strategist. Lenore, thanks for joining us here today.

You were just listening to Emily go through some of the earnings reports for today, and there is some big winners and some big losers. I'm wondering-- big picture, I'm reading through some of your notes on earnings season saying that coming into this week, basically 90% of the S&P 500, they reported their quarterly results. 82% of them beating on EPS, 68% of them beating on revenue. Better than average historically, but are we seeing it reflected in the stock prices here?

LENORE HAWKINS: Well, I think we've got a market that is just incredible. No matter what, it's going up. And that shouldn't be much of a surprise given how much money has been pushed into the system over the past decade, and then, particularly, when the pandemic hit. There's just a lot of money chasing, not a whole lot of alternatives.

I think what is interesting is what we're seeing today in the market is quite a reversal from what we saw yesterday after the CPA data came in. You were just talking about how today the defensives aren't doing so well. Yesterday, the defensives outperformed on the news that CPI was much, much hotter. And you mentioned how the Russell 2000 is doing really well. And yesterday it got hit really hard. So that goes to show you, you really can't look at the market in any one day and say, OK, this is the reaction to concerns of higher inflation.

- Yes, not any one day. Let's take a trend that we've been watching in the bond market over the last few weeks, which has elevated volatility. We've seen breaks to the upside in yields and to the downside, sometimes very violent, depends on the day in the headline.

What is the market pricing in here? Is it just general uncertainty or are they trying to figure out what the Fed's endgame is? What is the bond market saying?

LENORE HAWKINS: Well, he nailed it. It is a big question because when you look historically and try to understand what's going on in the bond market, that's not that useful because today we have a Treasury and a Federal Reserve that are tighter than ever. We have fiscal and monetary policy that are tighter than ever. And the bond market is trying to figure out what all this means.

Now, we did see yesterday, particularly the shorter term bonds, those yields really went up. But if we, like-- the two year yield went up to 51 basis point. That's the highest we've seen, but only since March of 2020.

The 10-year right now is just under 1.6%, and oh, that's a big deal because it jumped up. Well, to put that in context, that's, literally, half of where it was in November of 2018. And back in November of 2018 no one was panicking over inflation.

When we talk about inflation, it's really tough because it's such a big word and it means a lot of different things depending on the context. When we talk about inflation and they compare it back to the '70s and the '80s, that was a very different situation. What you had there was the baby boomers moving into their biggest spending and biggest earning phase of life.

So you, kind of, had a demand shock, and at the same time, you had an energy shock. So you had the supply of energy just crashing. Makes the price go up in energy that they've put into everything, and you had demand get a huge shock with the biggest generation moving into, we're spending the most, we're earning the most, so there was a demand shock.

Right now, what we're looking at is really more supply than demand. Let's think about this just logically. Right now, the labor force participation rate is really suppressed compared to what it was even just pre-pandemic, and we all know that labor force participation rate has been dropping substantially since its peak of 2000. If today we had as many people in the workforce as we would have had, had the pandemic not hit, we'd have about 5 million more jobs.

So does it really make sense that the economy is just getting too hot because we have 5 million people less working? Does that really mean there's that much demand and not much spending going on? What's happening is still those supply chain shocks.

You've got container ships and empty containers where you need full ones to unload, and you've got full ones where you need empty ones. That's putting all the prices. And on top of that, you've got those energy prices, which again, energy is the input into everything. So while we still have that supply chain a complete mess, we're gonna have prices still be pushing higher.

- So where does an investor put their money then, in this environment rife with uncertainties as to the Fed path, as to the supply chain challenges? We've seen stocks hitting record highs, so we know some of them are making there. But how do you delve down and pick out the winners?

LENORE HAWKINS: So one of the things to think about is just forget this word "inflation." What we do know is that we're seeing cost pushed forces coming higher. That means commodity prices going up, we're likely to continue to see wage hikes. In fact, over the last four quarters we've seen about a 50% increase in references to problems with energy prices and problems with wages and supply chains. That's 50% more than we saw pre-pandemic.

So when you think about that, investors really need to be careful with those sectors that are most vulnerable. What that means is those that have high energy intensity relative to sales, those that have high employee to sales intensity, and those that have inventory to sales ratio that makes them very vulnerable to supply chain disruptions.

One of the things that this pandemic did was really confuse the narrative, the prevailing narrative on what was a really good supply chain. We had the suggested time-type supply chain where you didn't really want to have a bunch of inventory, you wanted to have products show up, basically, just the second you sell them. That was great cash management that kept your margins really solid. That works until the supply chains get all messed up.

So those industries that had gotten really good, really, really efficient at having a very skinny supply chain, they're getting hit. So what that means is the higher risk sectors are gonna be those such as materials, industrials, and some of the consumer discretionary. Your lower risk sectors are things like energy, financials, and the communication sector.