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Why investors are showing 'a bit more caution' as states reopen

Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi speak with TD Ameritrade Chief Market Strategist JJ Kinahan about the Colonial Pipeline outage, recent economic data, and market outlook as the world begins to reopen.

Video Transcript

JULIE HYMAN: But now we want to dig more into what this means for the market. JJ Kinahan is with us now. He's TD Ameritrade Chief Market Strategist. And we're going to talk about TD's sentiment report in just a moment, JJ. But first-- and I want to remind you to unmute yourself if you haven't already. But first, I do want to ask you how closely you're watching this pipeline situation, and, of course, commodities more generally, which we've been seeing going higher, and what kind of action you're seeing around that on the platform.

JJ KINAHAN: You know, obviously, you have to be watching all commodities right now. This is, as Myles said, a situation that certainly has blown up, if you will, over the weekend. You know, I look at West Texas crude this morning, and I don't see quite the reaction I thought I might where people are really panicked about it by any stretch of the imagination.

We still have quite a ways to go until we're up at those all-time highs that we saw-- or not-- 52-week highs, I should say, that we saw back early last month when it traded up to $67.98, because right now it's closer to the $65 level. So we have some room yet to not panic there. But what it does do is give me a bigger concern, because we saw-- you know, we've seen corn rally a lot. We've seen soybeans rally a lot. So let's relay that to what we then saw on earnings.

Earnings, you've had Coca-Cola, Procter & Gamble, JetBlue, which would relate more directly to the price of oil, talk about the fact that they are going to have to raise prices, because the underlying commodity prices are going higher. So those who are the inflation wonks and looking for inflation to happen, you have three major companies there talking about it. Seems hard to believe that this pressure won't continue, particularly if we have some kind of a slowdown.

You just talked about it, Julie, you look at the summer driving season, over the weekend I saw that-- I live in Illinois. Premium gas here is now over $4 a gallon. So the prices have certainly started to escalate pretty quickly as we head into the summer driving season. So this may be something that affects the consumers pretty quickly in their pocketbook.

And ultimately, as we try and get back to hotels and restaurants getting back online, you wonder how much this will affect people's driving plans overall. Airfares are still fairly cheap, as I said, JetBlue talking about raising them. Again, what is going to be that longer-term effect over the next two or three months if this continues?

MYLES UDLAND: You know, and JJ, we see Tyson out this morning talking about a 7 and 1/2% average increase across-- across their products in the most recent quarter, and 7 and 1/2 on chicken, which, of course, is the vast majority of where they're getting their sales from. In this kind of environment, what are the names to play? What are the styles to play?

Because it kind of cuts both ways. On the one hand, maybe you have consumers squeezed a little bit. On the other hand, if companies are able to exert a little bit of pricing pressure, it may not hit margins to the extent that is feared by, you know, what kind of the simple spreadsheet analysis might otherwise tell you.

JJ KINAHAN: You know, that's a great point. And I think some of those consumer staples names particularly have some pricing power built within them. You know, chicken is a problem across the board, it seems, because they're-- some of the supply, some of the problems they've had in terms of getting the chicken to market has actually been something that's affecting them, which does make me perhaps a little bit nervous, because you see some of the fast food restaurants right now, that is such a competitive area in the chicken sandwiches, et cetera, how much pricing power do they actually have?

I'm not so sure right now. But I do think going back to some of the consumer staples goods, the Procter & Gambles, Kimberly-Clarks of the world, they do have the pricing power right now, so they may be able to make up for it in the margins and hey, maybe even a little bit more on top of that, because I just don't see it quite-- quite as competitive as I see some of the other areas right now.

BRIAN SOZZI: JJ, still tough to digest that worse-than-expected jobs report on-- on Friday. Why didn't the market fall out of bed on that report?

JJ KINAHAN: Brian, I think it's primarily because the "party" continues, if you will. And what I mean by that is the Fed continuing to keep liquidity in the system, not talking about raising rates in the short term because there's not the pressure on wages that many of us, myself included, had expected. You did see the leisure and hospitality industry create more jobs than actually the total report did. I would expect that to continue.

I think part of it, Brian, is being an economist right now as they're trying to weigh in these numbers, we have such differences in what the states themselves are doing from some that are wide open to others that are talking about coming out of some of the restrictions next month, I think it's very difficult to predict at what point these bars and restaurants, particularly, and hotels are putting people on the payroll. What I think you might see is sort of a roll over where those jobs sit next month.

And remember, in the construction sector, we had the same situation in February as part of the jobs report, where we were expecting a good number, it was a disappointing number, but it was because so much of the country was so cold. And in the last month, that number hit in a much bigger way. I would think you might start to see some of these particularly hostile-- hospitality and leisure jobs hit.

The other area I was a little surprised was health care. I thought we might pick up more there. But then I looked at some of the social services numbers, and the one number that jumped out to me there was that number was up overall and half of it was for daycare centers, which does show me that people are going back to work, or at least starting to plan to go back to work, which I think you'll start to see reflected in some of the future job reports.

JULIE HYMAN: Yeah, it's important to dig down into those components, for sure, JJ. I want to turn to your IMX index, the sentiment index that you guys use to measure sentiment on your platform. And it was down a little bit in April, but still near highs, right. So, you know, we keep talking about sort of the danger of peak stuff, right, whether it's peak GDP growth, peak margin expansion, et cetera. How close do you think we are to peak investor sentiment?

JJ KINAHAN: Well, this is more than sentiment actually, Julie, because it actually measures what people are trading. So it's not asking them what you're going to do. It measures what people actually did. So I think it's a much more accurate portrayal.

The biggest thing that I found interesting is the S&P 500 was up 5% last month, as you just said. Our IMX was fairly flat. Although our clients were net buyers of equities last month, they were also net buyers of fixed income. So what that tells me is what we've seen in the past is when people were sellers of stock they immediately put it back into the equity market. What we saw last month is that when our clients were sellers of stock, they actually put some of that into fixed income.

So I think we're getting to the point where it's a bit more cautionary. I don't know if we're at peak, but I think people are having a bit more caution, as we've seen the exposure people are willing to take to the market certainly upscale for most of this-- for most of this year so far as we've hit new records. But I think the fact that the NASDAQ had so much trouble-- and again, you know, stocks like Apple and Facebook tend to be really popular with our clients.

Facebook was actually a net sell last month. Apple was a net buy, but certainly not to the level we've seen in the past. So when you have the NASDAQ starting to have a little bit of, I won't say issues, because, let's face it, it's still only 3%, not even quite that off all-time highs, but when it shows some struggle, I think that perhaps makes our clients a little bit more cautious of being more all-in, if you will.

JULIE HYMAN: Yeah, interesting there. And if people are moving into fixed income but they still want exposure to big tech, they have a new option this morning. They can buy that huge new debt offering from Amazon, which includes a 40-year component. Interesting stuff there. Anyway, thanks so much, JJ. Good to see you. JJ Kinahan, TD Ameritrade Chief Market Strategist.