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Market Recap: Tuesday, April 20

Stocks fell Tuesday, with the three major indexes looking for dip for a second straight session. The Dow and S&P 500 each slid further below their recent all-time highs. Cyclical travel and leisure stocks including airlines and cruise lines slid, while Big Tech stocks dipped even as the benchmark 10-year Treasury yield edged lower. CEO of New Constructs David Trainer and The Conference Board Chief Policy Economist & Former OMB Chief Economist under Clinton, Joseph Minarik, joined Yahoo Finance Live to discuss.

Video transcript

- David Trainer, CEO of New Constructs, as well as Joseph Minarik, a good friend of the program, Conference Board chief policy economist and former OMB chief economist under President Clinton, going to take us to the closing bell. We got to get to Jared Blikre first, though. Jared?

JARED BLIKRE: Yeah, let's go straight to the charts. We're seeing stocks kind of in the bottom third of their day's range, but off their lows. The NASDAQ had been down about 1.1%, 1.2%. A bit less here. And we can see the Dow is off about 3/4 of a percent, or 240 points.

Just want to check in on the bond market, which settled about an hour ago. We do have the 10-year [INAUDIBLE] yield down about four basis points, the 30-year yield down four basis points, as well. And now we're going to get a look at the VIX, because we check this out, almost hit 20. Got to watch out if it hits 20 there, guys, but hasn't done it just quite yet.

So let's take a look at some of the individual names moving. And the megacaps have been under pressure, the Apple down over 1%. But it had been down 2% at these lows during our last market check. And that's on its presentation day, Dan Howley just talking about the new iPad. And whatever can help me find my keys, I'm all for it. Amazon's off 1%, Facebook slightly in the green here. So is Tesla. Let's take a look at Tesla stock, because over the last five days, it's been trying to find a bottom here. Had that dip yesterday, still holding around 700 or thereabouts. And here is your closing bell on Wall Street. And we have utilities, utilities in the lead for the day.

- And that does it for today's trading day. Again, all three of the major averages in the red, like Jared was just saying, the Dow closing off 257 points, S&P off just over a half of a percent. You can see the NASDAQ, the biggest decliner today of the three major averages, closing off nearly 1%. Sector-wise, energy, financials, and consumer discretionary leading those declines. Let's bring in David Trainer and Joseph Minarik standing by here to help us break down today's action, and of course what this means for the economic recovery.

David, first to you. Just the selling that we saw today, Dow off another 250 plus points today, we saw some of the selling action yesterday. Yes, we're not too far from those all-time highs, but what do you think is behind some of the negative action that we're seeing today?

DAVID TRAINER: Yeah, I don't know how negative it is. Just because we haven't hit a new high for the 10th time in a row, I don't know if we need to get too worried about that. Look, I think there's a ton of fiscal stimulus, and the general economic recovery is going to continue to lead to earnings beats. We've seen plenty of companies blowing the numbers out of the water. That's a backdrop that I think is going to keep this frothy market-- and we're talking about regular stocks, meme stocks, and crypto stocks and currency-- I think it's hard to bet against any of that right now. I don't see a correction in the near-term. I think a correction will happen at some point, but the general backdrop is so market-friendly, and intended to be so market-friendly, it's hard to sort of pick any one event that would pop the bubble.

- Joseph, when we listen to what David said, and we added to what a guest told us yesterday that we should stop looking at inflation the old way, and start thinking about there's going to be a labor shortage as this market and as this economy does hit high speed, that's really coming at us fast. Is that going to derail what we're witnessing in this market?

JOSEPH MINARIK: We still have headroom with respect to the labor force, but the point is there. It is well within the realm of possibility that we'll be looking at a 4% unemployment rate at sometime in the not too distant future. Now, the numbers, of course, reflect an average across the economy. A lot of the people who are out of work are still coming from those key service sectors that were hit hard in the pandemic. Those are generally workers who were at comparatively low wages, not with the kinds of marketable skills that the value segment of industry is looking for.

So we will have a tight labor market in aggregate. It will be loose at the service sector end of the scale. It will be very tight in technology and in other high-value areas. So eventually, we will be looking again at pressure on wages. And the fact that yields have risen over the last few months is, I think, an indication that we're beginning to see that peeking its head over the horizon.

- David, you mentioned the strong earnings results. I want to get your thoughts on some of the financials that we-- some of the big names in the financial sector that we saw to start earnings season last week. Morgan Stanley, Goldman Sachs, Bank of America, JPMorgan, the list goes on, all came out with pretty solid results. From your view, which of those names are most attractive right now?

DAVID TRAINER: We like JPMorgan, Goldman Sachs by far the most, Morgan Stanley probably next. And then you really get into some mediocre businesses. And we're talking about returns on invested capital. That's how we prioritize, that and valuation. Look, we see the high-quality banks to stocks almost like gold used to be to asset allocation. These are super low risk, high profit, low beta stocks that are an awesome alternative to the risky, frothy stuff we're seeing in other parts of the stock market. It's almost like a hedge against stocks to be in JPMorgan and Goldman Sachs. Their valuations are really depressed compared to their profits, and they're really well-positioned to grow in the future.

Bank of America, Citigroup, we look at these firms as more second tier. Same with Wells Fargo. Those businesses are struggling. They're big, they've got a lot of scale, but they really struggle when it comes to innovation, and they don't have the same kind of quality of culture, risk management that we see in the top-tier banks. And that's sort of how we see those guys break out.

- David, Joseph, hold on. Netflix earnings are out. The stock is tanking. It's down 10% after hours. Jared, what's going on?

JARED BLIKRE: Yeah, it's all about those subs. And we knew the comparisons from one year ago were going to be tough, but check out these numbers here. First quarter, paid streaming net change came in at 3.98 million. Sounds like a lot, but the estimates were for about 50% higher, 6.29 million. So that's a huge miss right there. And then their outlook pretty dismal for the next quarter. Second quarter streaming, they're seeing those subs coming in at plus 1 million. The estimate was for 4.44 million. So proving to be a little bit more difficult than they thought in terms of getting those subs, keeping those sub numbers up.

Here's something that might get the attention of shareholders, at least in a bullish way. They are on track for 2021 free cash flow to be about breakeven. That is a huge advance. Somewhat expected, but there was a lot of-- there was some uncertainty about that if they were going to be able to pay for their programming, which, by the way, they haven't done much over the last year. I'm not seeing a lot of commentary on that. Probably going to be more in the call. But you know, investors are definitely going to want to focus on the timetable for Netflix to get back in the production mode, because people need their programs.

Here's another number. First quarter EPS came at $3.75. That is a beat. Revenue was a little bit light, 7.16 billion. The street was expecting just a tad more. You could almost call it in line. But nevertheless, those sub numbers really getting attention here. If we can go to the WiFi interactive, I'll pull up a few charts. And you can see it's down 10%, 11% right now.

And here is the price action over today. And we're going to go back year-to-date, just kind of check out what's happening. Really been going sideways. Most of the gains came in the early part of COVID last year. You can still see up 25%. But since July or so of last year, really been trading sideways. Probably going to test the bottom end of this range before long, so watch out for 480. Don't really want to see that go. Bottom line, it's all about the subs, and they just weren't able to get as many. Plus, a little bit of a weak outlook, guys.

- I want to let everybody know we're going to be speaking with the head of research at Manhattan Venture Partners about the Netflix earnings, but I want to get back to what's going on in the broader market and discuss this with our panel. Joseph, when we talk about this huge infrastructure that could be coming, whether they scale it down or not, how does the president get this through Congress without support from the Republicans? His majority is literally the whim of the senator from West Virginia.

JOSEPH MINARIK: Well, want to keep in mind the senator from West Virginia is not alone. He's got a senator from Arizona or two who are also similarly inclined. So he's got a real sales job to do. It is not going to be the easiest thing in the things. One of the things-- I'm a genetic budget warrior, and one of the things that worries me is if, to get a package through that he says is paid for over a 15-year horizon, if, to get that through, he throws the [INAUDIBLE] over the side, he gives away much or all of the corporate tax increase and then cuts down on the infrastructure side of the program, that might make it look smaller, but it will make the cost of the program over those 15 years bigger.

So he really has to decide what he wants and prioritize it and negotiate it with those members of Congress. And keep in mind, there's another trillion and a half of spending and tax cuts waiting just offstage to be announced in what he calls his American Families Plan. And we haven't even seen that yet. That is proposed to be paid for with tax increases on high-income individuals, which probably will not be any more popular than the tax increases on corporations. So this is a really difficult sell for the president to make.

- David, going back to what we're seeing play out in Netflix right now, some of these growth stocks have been under a tremendous amount of pressure recently. I mean, Netflix, since the start of the year, the stock hasn't done that much. When you look at the sub numbers, comparing it year over year, yes, that's an extremely tough comparison, but from your view, some of those work from home plays that worked a year ago, are you still finding reason to buy any of those names?

DAVID TRAINER: No. We think a lot of those are terribly overvalued. Netflix is-- they're in a damned if you do, damned if you don't situation. Investors are now demanding cash flow. They burned through tens of billions of dollars kind of building the platform. And now that the competition has arrived, the question is, can you be profitable? And I think the answer is we can't be profitable and grow, because growing requires investing in new content, as we said a few minutes ago. They've got to spend billions to get the new content and to keep people coming over. And they can't do that while also being profitable.

So I think people are going to start to see that the jig is up on Netflix. It's just not nearly a profitable enough enterprise to compete with the likes of the movie studios, and in particular Disney, which has multiple ways to monetize content. Netflix has one way-- streaming over the internet. And by the way, that's not a big competitive advantage, considering that we've got, I don't know, a dozen, 25 different streaming alternatives these days.

So I think the jig might be up on Netflix. And I think the same is going to be true from a lot of these work from home themes. And look, we see money kind of flows in a manic way these days, right? Tons of money went into work from home, now tons of money going into crypto. Right? And it's going to move around pretty quickly. And I think once you become unpopular, it can be pretty painful if the fundamentals aren't there to support the valuation.

- David, you couldn't see the big smile I had when you were talking about work from home stocks, some of them being overvalued. But that's because it's so refreshing to hear sense in a market that sometimes defies sensibility. David Trainer is CEO of New Constructs. Thank you for being here. Joe Minarik, always good to see you. Thank you for joining us, as well. Joe is the Conference Board's chief policy economist and former OMB chief economist under President Clint--