Closing Bell - 2-Week Losing Streak, Recession Risks & Distressed Opportunities 12/16/22

Episode Date: December 16, 2022

Stocks selling off again as the major averages fall for a second straight week on rising recession fears. Fmr. Federal Reserve Vice Chair Richard Clarida says the Federal Reserve will ultimately bring down inflation with its rate hikes, but doesn't think that will result in a severe recession. Wolfe Research's Chris Senyek explains why he thinks stocks will fall 20% from here. MKM Partners Rohit Kulkarni and Loup Ventures Managing Partner Gene Munster discuss whether they see buying opportunities in beaten down tech stocks. And Canyon Partners Co-Founder Josh Friedman says the recent sell off is creating buying opportunities in the distressed debt market.

Stocks under more pressure today as we wrap up another ugly week here on Wall Street. And we could see more volatility in this final stretch as a bunch of options expire. This is the make or break hour for your money. Welcome everyone to Closing Bell. I'm Sarah Eisen. Here's where we stand. Down 348 or so on the Dow. Low of the day was down about 550. S&P 500 down one and a quarter percent. Every sector is lower right now.

The worst performing is real estate. Some of these commercial real estate players, Bernardo, Prologis getting hit especially hard, Ventos at the bottom of the list. We've also got groups like consumer discretionary, utilities also trading down more than 1.5%. What's holding up the best? Communication services.

It's still lower, but you do have names in there like Meta and Netflix getting a little bit of a rebound. T-Mobile also helping that group rebound just a bit. The 10-year Treasury yield higher, a little bit of selling, but not on the short end. The 2 p.m. Eastern, the S&P 500 is down more than 5 percent. You've got most sectors lower for the week. The only one that's going to end up is energy, everybody else down, consumer discretionary hardest hit. Tesla's a big part of that story. It's one of the big losers on the week. Coming up this hour, we will talk to the former Federal Reserve vice chair, Richard Clarida, about this week's rate hike decision and the Fed's delicate balancing act to bring down inflation. Kick it

off, though, with the major averages. They're down for a third day in a row as the Fed hangover worsens. We are also headed for a second consecutive weekly loss here. For more on the market volatility, let's bring in Canyon Partners co-CEO Josh Friedman. Josh, it's a good day and a good time to talk to you. What is your takeaway from this week where we got softer than expected CPI inflation? That was good news for the markets. And then the Fed, I guess, projecting a hawkish message. The way I look at it, Sarah, and thank you for having me on the show again, I view it as certain markets face headwinds and certain markets face tailwinds. And I think what we're seeing right now is some of the headwinds that are facing the equity markets. We're still

standing in the 75th to 85th percentile in terms of almost any valuation metric you could possibly mention for equities. So you have multiples that are high. Earnings are clearly going to be challenged both by higher interest rates, by higher labor costs, by margin squeezes. You have growth under under under attack by the Fed, which is clearly trying to engineer a bit of a slowdown in demand. And then you no longer, on the other hand, have the TINA economy where there's where there's simply no other alternative. In this in this case, you can put your money in treasuries and you can earn in excess of 4%. So I think there are a lot of headwinds that continue to face the equity markets,

whether it's a soft landing or a hard landing or whether the Fed oversteers or doesn't oversteer. On the other hand, I think... Sorry. I didn't mean to cut you off, but just because you think the market is still overvalued at this point. I just think there's not clear visibility as to when you resume some of the more obvious attractiveness in valuations or the catalyst that would spur things higher.

We're coming from a very, very crazy place in terms of valuations across all risk assets. And the corrections that have taken place in the equity markets are not so enormous or so great off the peaks as to make that market clearly systematically attractive, in my view. Clearly, it's more attractive than it was two days ago. But I think some of the challenges that I mentioned continue to face that market. Whereas I think if you look at the other end of the spectrum and you look at credit markets, which have also taken a tremendous beating this year, you're already at a point where a half a trillion dollars has been exiting from the mutual fund world, causing a lot of pressure on pricing. Banks are basically not lending to broad swaths of the economy today,

including real estate, which is immediately challenged. High yield market is new issue markets down something like 80 percent year to date, I think 78 percent. And the Fed is continuing to speak in a hawkish way. So pricing in the credit markets now is so different than what it was any time in the last decade to the point where there's first lien debt yielding 12, 13 percent, 11 percent, 14 percent, and second lien debt or unsecured debt yielding even higher. Now, it's not systematically available. The markets aren't perfectly fluid and liquid, but they never are. But I think that there are tailwinds there where there are headwinds facing the equity market. So they have very different types of optionality than what we saw even any time really before March.

So is that what we got a taste of this week, where the equity market sold off hard and the bond market rallied, even with the Fed talking about higher rates for longer? Yes, that's exactly what we saw. And it would not surprise me terribly to see that going forward. It's very hard to predict the exact trajectory that the Fed share would like to map out. And sometimes he says one thing and then walks it back. But in the equity market, I used to say the old market was to buy the dips market because the Fed was there to protect you whenever there was anything adverse that happened. This is almost the opposite. So instead of buying the dips, it's sell the peaks,

because any time there's good news, it's bad news, because that gives the Fed more license to take on even more aggressively the inflation that's embedded in the market. So if the market starts to creep up, the Fed chair speaks more aggressively. Do you think that they are going to make a mistake? Do you think they're overdoing it? I think they might oversteer a little bit. I guess one of the issues that I see, Sarah, is that interest rates are a very blunt instrument for addressing general levels of demand. And this is one of the reasons why the Fed, I think, is jawboning as much to try to encourage people to contract their spending, to contract their hiring and cause more general slowdown in the economy. If you just use interest rates, certain industries are much

more affected than others. Obviously, the number one industry that's affected is single family new home sales, because you can afford about one third of the house that you could afford before rates went from, call it, 2 percent to 6 and�2. That's not the same as the way certain other industries are affected. So it's a very blunt instrument. And then do you address the short end of the curve or do you start selling all those treasuries and address the long end of the curve?

So it's not a perfect instrument. And I think that that's why the Fed would like the market to do some of the work for it by continuing to speak in a hawkish way so that the market will restrain demand by itself. So what are you guys at Canyon expecting as far as a recession? Is it in your base case for next year? And how painful could it look? It's very hard to predict exactly. I think people like Goldman and Morgan Stanley have talked about what they call an earnings recession, which is their way of saying, I guess, that unemployment is exceptionally low levels and consumer balance sheets are pretty strong and bank balance sheets are strong. get hit quite badly, where stock market prices get hurt. But maybe it's not quite so painful

for the economy overall or so long or such an over adjustment as to cause tremendous human suffering. I do expect the Fed is more likely to oversteer a little bit or to keep rates up a little higher, just to be certain, especially given how much understeering they did going into this phase by missing inflation and letting it get this far out of hand. But I think from our point of view, that creates an asymmetry because you have capitalizations where there's a lot of equity value and a lot of cushion. And yet the debt's already trading at basically recession levels with high embedded real returns. I've been asking about distress every every few months here, and I know you've been sort of standing guard waiting for that to pile up. Do you see more opportunities in the new year

from earnings season, from earnings outlooks to create more distressed opportunities for you? Yes, we're starting to see more of that. Obviously, the real estate industry is one area where I think many projects were awaiting refinancing at levels that simply can't possibly exist in today's markets. There'll be rescue financings there. I think certain companies didn't fix their interest rate and are burdening themselves, have burdened themselves with a large amount of bank debt that's floating rate that now yields an awful lot more than it yielded before. So we're starting to see those companies look more marginal. And we're also seeing distressed levels of debt in companies that aren't necessarily themselves distressed, but where there's a mutual fund for seller into a market that's not awash in liquidity. The high yield index is not as wide as it has been in certain past market downturns.

I don't really expect it to be as low or trade as wide as it traded in the past. Part of that is because the average ratings are so much higher in the index today. There are fewer triple C's. There are more double B's. It's just a healthier index. But that being said, there are a lot of companies that are going to suffer margin contraction with increased labor costs, margin contraction with increased earnings. And some of them will be forced with refinancing debt in a market where the new issue market is essentially shut down. And we're starting to see an increased flow of that. Definitely. So ultimately, what is the 2023? What is the most exciting opportunity in this tough environment for you, Josh, in 2023? Right now, I basically like

floating rate bank debt, both firstly and secondly, and across the board. I think it requires a great deal of attention to specific balance sheets and staying power. It requires you to be opportunistic and not just by the index. I think it's more of a security picker's market as opposed to a general market. And I think that leaves you with a margin of safety. And as we get closer to the brink of whether there's a real recession and how painful it is, at that point, maybe there are opportunities to delve deeper in capital structures and do true restructurings. strong companies that have decent balance sheets, have decent competitive positions, but where debt is simply trading under an awful lot of pressure in a fairly safe place in the balance sheet. I think the risk return there is the best in the market. Do you think the growth of private credit has fundamentally changed the dynamics of the banking sector, made them more sound, more safe? I don't know if it's made it more safe or not. It's clearly

substantially changed the nature of the banking business. You see commercial banks that are worried about falling in the league tables as they compete with a private competitor who has different regulations, maybe a less leveraged balance sheet and doesn't have the same capital requirements as a commercial bank. But these things have a way of correcting themselves. One of the opportunities in the market today is simply that the banks have responded to the emergence and the growth of private credit in real size by using their own balance sheet to bid aggressively to buy debt. And the result has been that they've gotten the Fed started to raise rates and banks got hooked with exposures they never would have expected to get hooked with. Things like Citrix and things like Twitter. And there are many,

many other names. The good news is their balance sheets are quite sound right now, so they can afford to take a loss and they can move on. But I think private credit will change the change the landscape for quite some time to come. I think it's here to stay. I think it's big size. And I think it's a product that has merit. Josh Friedman, great to get your outlook. Thank you for joining us. Thank you very much. Have a good holiday season. Happy holidays to you from Canyon Partners. Speaking of real estate, that is the sector that is being hardest hit right now.

It's down three and a half percent in the market. All the sectors are down. That one hit the worst. After the break, former Fed Vice Chair Richard Clarida, now a global economic advisor at PIMCO, will join us to talk about the Fed's rate hike path and whether he thinks we can avoid recession in the year ahead. You are watching Closing Bell on CNBC, downtown, about 350. A number of Fed officials on the tape today, including some comments from San Francisco Fed President Mary Daly. She says the Fed is, quote, far away from our price stability goal. Follows comments earlier from New York Fed President John Williams, who said it's possible the Fed will have to hike more than the 5.1 percent peak federal funds rate forecast. But adding that going to six or seven percent is certainly not his baseline. Joining us now exclusively is the former Federal Reserve vice chair, current PIMCO managing director, Richard Clarida. It's great to have you back, Rich. Welcome.

As always, great to be on the show, Sarah. So look at the reaction post Fed meeting. The S&P is down more than five percent since the statement came out on Wednesday afternoon, and treasuries have rallied and yields are actually lower. What is the Fed going to make of that? Well, it is an interesting picture because really for the first time in this cycle, the market is just not signing off on the path in the dots. The dots have the top of the funds rate range getting to five and a quarter. And as I look at my screen, that's not priced in. You know, we've gotten some good inflation data. So part of this may

simply be the markets are expecting the Fed won't need to do what the dots said. But today we had both Mary Daly and John Williams pushing back. So there is this tension, a tug of war, which may be with us for a while. Who prevails? You know, I think ultimately the Fed is going to prevail. The chair has said they're going to keep at it till the job is done. I myself think that's what we will see. We will see the funds rate getting up as projected in the SEP a couple of days ago. So I think eventually on this one, the market's going to come up to the Fed, at least in terms of the peak funds rate. It can't be good, though, for the Fed or for the markets that the Fed and the markets are on different pages as it relates

to the outlook for where rates are going. No, it's not good. And as I said, there may be a benign explanation, which is the market has so much confidence in the Fed that it won't need to do as much as they say. or it could be the market challenging the Fed's reaction function. You know, I take them at their word. Inflation is too high. It's been too high for two years. It's not been transitory. And I think policy does need to be in a restrictive range for some time. And that's what we heard from the chair and what we heard today. So I agree it's not good, but I think ultimately the Fed will do what it takes to bring down inflation towards the 2 percent goal. I guess then the question is just how much damage

is there going to be and whether the lower rates are a reflection of the fact that they're going to have to backtrack because you've already got the yield curve most inverted since the early 80s and we're starting to get some weaker data, including today's flash PMI. So the odds of oversteering, harder landing rise. Is that the case? I believe they do. Look, I think that, you know, the chair did say a couple of weeks ago that they don't want to over-tighten or under-tighten. And I accept that. But there's really a risk to the institutional credibility of the Fed if it does not bring down inflation.

You know, I think the Fed's models historically have done a pretty good job. But obviously, they and I and others missed a lot of other folks missed the surge in inflation. Now, some of that's Ukraine, but some of it is that the economy is overheating. And I do think that if there is a risk, it may be a risk of oversteering. But I do think if there is a slowdown next year, I don't think there's any reason for it to be particularly severe or sharp. You know, whether or not it turns out to be a recession or not will be will be in the data. But I do think the Fed's trying to engineer a slowdown and that's what we're going to get in activity. Why not look at the falling rate of inflation, which is good news, especially in some core categories, which drove us higher, like lumber and others, and the fact that we're

starting to see some of the even rents lower. I know that's a big component of CPI. It's a lagging indicator. Why not look at that and pause to see how much damage was done by the very aggressive tightening that's already been done. They've raised rates every meeting since March, and they've had four triple rate hikes in a row. You're exactly right. You know, Sarah, I do think they're looking at that. But as the chair indicated in his remarks a couple of weeks ago and reinforced in the press conference this week. They're also looking at the categories of inflation that are very sticky, what they call the non-shelter services part of the basket. So I do think they expect good prices to come down, used cars and the rest. And I do think we're seeing some evidence that housing and rent

inflation is going to come down. So that's all good. But that leaves about half the basket that is right now not yet returning to levels that they want to see. And I think they'll be looking very closely at that non-housing services component and in particular at wage inflation relative to productivity. So let's talk about wage inflation. So for those that don't understand why the Fed has to target lower wages and higher unemployment, which is not good for America to deal with the inflation problem. How do you explain that, especially with the fact that real wages, you know, they've been falling? It's an excellent point. And let me be very clear. The Fed wants everybody to get a wage increase if it's commensurate with productivity

and price stability. And indeed, Sarah, what we saw before the pandemic is that we were actually cutting rates in 2019, even though wages were going up quite nicely because price inflation was too low. So let me be clear, the Fed is not targeting wage inflation, it's targeting price inflation. But right now, wages are going up, depending on your index, between 5% and 7%. And that's just not consistent with the 2% inflation objective. So I think we will see some rise in unemployment. That's what the Fed has penciled in for 2023, about a percentage point increase. And the Fed is expecting that that will do the trick in terms of bringing inflation down. But the labor market

is hot. You know, we have two vacancies for every job and we have we also have a reduced labor force compared to pre-pandemic. So the labor market is overheating. So your view is that they do get up to their target rate that they're expecting, but above five percent in the what in the first half of next year. And then what do Do they pause or do they pivot? Do they have to cut? Because the market is now starting to expect cuts. Absolutely. And we saw some of this back in 2006 and 2007 when the Fed said pause and the markets heard done and the markets heard cut. As I said at the beginning, Sarah, I think this is going to be an ongoing part of the tug of war between Fed communication and the markets. I do think they'll, I take the dots at their word, at their dots,

that they'll get up to roughly five and a quarter. And then I think they intend to hold there for some time. Now, the length of time will depend on the data. And in particular, if we do begin to see underlying inflation moving down sharply, I think they will respond to that. That would be a good that would be a good thing. I think it would be justified then. The Fed has indicated in the long run they think the funds rate is going to be somewhere around two and a half percent. So this is a restrictive policy. And as the economy responds, they'll have an opportunity at some point to reduce rates. What about financial conditions? You wrote about that in your in your post yesterday about how

ultimately they might need to continue tightening just to keep financial conditions from loosening too much because every time they hint at otherwise, the market rallies, the dollar sells off and it's counterproductive. Rates go down. Sure. So we've had a little bit of a tightening in FCI, as you point in the last two days, obviously, in equity values and in other parts of the spectrum. So I pointed out just a general consideration for the Fed is that, you know, very few people, including very few banks, borrow at the federal funds rate. And so the Fed transmits policy through broader financial conditions.

And if financial conditions continued to ease and ease substantially, that other things being equal would mean the Fed would have to do more. I think we're a long way away from that, but it's certainly something to be watching. So ultimately, do you think we can avoid recession with this outlook? I think that there's a chance, you know, that we'll, that can we avoid a recession? I think that there's a chance, you know, that we'll avoid a recession. I think there's a greater chance that there will be a sharp slowdown that may ultimately be declared a recession. We might not know it as we're going through it. I don't think there's any necessary reason for a hard landing here. The fundamentals of the economy were very good going into the pandemic.

Households have a big cushion. Banks are in great shape in terms of liquidity and capital. And so, no, I think we could avoid a recession. I think most likely there will be a recession given the inverted yield curve. But it doesn't need to be a deep or long recession. And so I think that's the way I characterize it. Well, it's certainly great having you after this big week of Fed meeting and market reaction. Richard Clarida, thank you for your time. Thank you, Sarah.

You bet. Former Federal Reserve vice chair. Let's show you what's happening. We've come back a little. The Dow's down 270, started the hour down almost 400 points. S&P 500 still down a full percent. But again, climbing off the lows here as we go into the close. A lot of options expiring around the close. So watch out for volatility. You've still got every sector lower,

but not as sharply. And communication services are about to go positive. Materials are also doing better. Real estate still down about 3 percent. And the Nasdaq comp down eight tenths of one percent, adding to the losses week to date more than two and a half percent. There's the Nasdaq for the month it's down as well almost seven percent tech's terrible year gets worse when we come back we'll debate whether now is a good time to dip your toe back into the space or whether we can expect more pain ahead we'll be right back check out today's stealth mover it It is Darden Restaurants.

Wall Street taking a bite out of this stock today. The owner of Olive Garden and Longhorn Steakhouse Brands, beating Wall Street's earnings estimates, raising the midpoint of its full-year profit and revenue guidance, but rising food costs, rising wage costs. They're pressuring margins and leaving a bad taste in the mouth of investors. Stocks off its lows, down 2%. Tech stocks, they've been underperforming the broader market all year long. This week, no exception. Up next, a pair of top analysts on whether a tech turnaround is on the horizon.

Markets coming back here a little bit. Dow's down about 221 points or so. And actually, within the S&P 500, which is now down less than a full percent, still down for a third day in a row here. Communication services just popping into positive territory. That group being driven higher by Meta, T-Mobile, Netflix, and now some of the big media companies like Fox, Comcast, our parent corporation. There's the Nasdaq down seven-t of one percent again off the lows for the day. Still down on the day and on the week overall, down more than two and a half percent. Big tech companies like Apple and Amazon, they haven't been spared lately in the sell off, with the exception of Meta, which I mentioned is hires from that upgrade of J.P. Morgan today. Joining us now is Rohit Kulkarni of MKM Partners and Gene Munster of Loop Ventures.

My main question to both of you, and Gene, I'll start with you, is where earnings expectations are for this group? Have they come down enough to reflect the reality of what we're looking at next year? The simple answer, Sarah, is unfortunately, I don't believe that they have. In the case of Meta, I think that they have, but for the most part, all these large cap tech companies, most of them are going to need some downward revisions. And the market, especially for tech investors, moves at a more rapid pace. And I think when we think about the December quarter specifically, I'll just highlight one example of the work that I think the buy side needs to do going into a print. Apple, I think their business is doing exceptionally strong. However, there might be some softness to

that iPhone number. They said as much on November 6th. And you really need to look at the iPhone number, the December quarter in the context of the December plus the March quarter. That is an exercise that I think investors are probably not going to want to go through. They're going to probably sell first and ask questions later, which kind of speaks to, I think, some of the vortex that a lot of these tech companies, I generally think it's going to be a messy December quarter for large cap tech. Varahi, what are you doing with your expectations for some of the names you cover? Yeah, I agree with Gene. I think in pockets across internet, I think expectations are coming down, but not fast enough.

We think Q2 Outlook would be the clearing event. So still, 1Q Outlook is something that people will still need to come down. In pockets, public cloud computing is decelerating at a rapid clip. You have advertising headwinds, you have e-commerce headwinds. So the main swim lanes of internet, we are seeing headwinds. And I think when do

estimates bottom out? I think 2Q outlook. So I think, as Gene said, it's going to be a messy 1Q outlook event. And probably we are going to be bracing for more downside here. Whether that's in the stock right now, in some cases, probably we are getting there. In Amazon's case, probably we are getting there a lot. Amazon closer to $80 is probably where almost all the bad news is priced in, I guess. Right. So that's what I was going to ask next. Oh, go ahead, Gene. Yeah. Can I add on to that is that my experience is that I agree that it's going to be tough. But my history is that it's rarely priced in. And as much as bad as it's been for tech investors, I'm feeling it every day, as bad as it's been,

I think that in as much anticipation around negativity, three quarters of the time, it's not priced in. And so you might get lucky and happen to own the one where the numbers go down and the stock goes up. But I still think that it's largely not priced in. So I'm looking at your picks there. You like Meta, Apple, not surprising. Gene, and Take-Two Interactive, why are these the best opportunities in this space? Well, when it comes to Apple, I think that, again, this is the near term versus the long term. Near term, Biosec needs to have their coordinates correct going into the March quarter as well, understanding that. But I still think that demand is strong. This is just

the fabric of our tech. And so I think that Apple is going to continue to power through. I still think that they'll show a headset in WWDC next year. I think that that's going to be a catalyst for innovation for them and multiple expansion. And I'm inching up. I've just been standing right at that 50-50 line on the car. But it's going to be something that ultimately, I think, in the next couple of years can be a massive, can triple the size of their business. And so that's Apple, Meta. I think that a lot of analysts love for Meta lately. Well, surprising that wasn't the case a month and a half ago. But in the case of Meta, Zuckerberg's comments at the deal, New York Times deal book on December 1st suggests that engagement is strong. And I think that's ultimately the most important piece. They're the only company

to make that. So those are two that I'd focus on. Rohit, for you, you mentioned Amazon. You think all the negativity there on earnings is priced in. So I assume that's one of your top picks and I think Uber's on your list too. Yeah, I agree. And Amazon, when you're having shrinking markets, I feel Amazon gains market share in all three markets that they operate in, commerce, advertising, and public cloud. I feel they are going to be gaining share throughout first half of 2023, and we'll start to see evidence of that. I think Amazon is also probably six to nine months ahead as far as cost cutting is concerned, and we start seeing that leverage as the quarters progress. Again, as I said, probably there is one more quarter of

haircuts for Amazon that we need to go through. And then as the markets start to stabilize, I feel Amazon is the one that has the most absolute upside in mega caps in my book. Uber, I feel fundamentals have been improving throughout the year, but stock has had negative sentiment on regulatory things. So I feel as fundamentals stay stable and they continue to execute, I think there is a catch up here where valuations are extremely disconnected with what Uber has been executing over the last 12 months. Uber is the only large cap company in the 20 companies that we looked at that have had upward revisions in revenues throughout the year. Not a single mega cap company that we looked at has had that, yet Uber stock is down 40%.

I feel that that disconnect doesn't last too long. So I think that's why we like Uber as well. Right, Gene. We'll leave it there. Thank you both for joining me with some of the opportunities in what has been another week here where tech has gotten slammed. Take a look at where we stand right now in the markets, about 20 minutes until the close, off the lows and climbing sort of into the close, well off the lows, down 200 points here

on the Dow. S&P is down three quarters of 1%. So we're still looking at some pretty broad declines. But as I mentioned, communication services now higher. Materials also coming up. The low is only down a quarter of 1%. Real estate is still the big drag. And the Nasdaq is down six-tenths of 1%. Banks have been among the weakest performers in December. Today, we got news that Goldman Sachs could be planning another round of layoffs.

Coming up, we'll discuss whether now's the time to buy some of these hard-hit names. Up next, Fairlead's Katie Stockton on the key levels investors need to be watching as the market sells off. That story, plus a bullish call on consumer staples and the outlook for the banks when we take you inside the market zone. Down 205 now on the Dow.

The recovery continues. We are now in the closing bell market zone. Wolf Research Chief Investment Strategist Chris Senyak is here to break down these crucial moments of the trading day. Plus, JMP Securities' Devin Ryan on the banks and Fairlead's Katie Stockton on some technical levels to watch here in the sell-off. We'll kick it off broadly, Chris,

with the market coming back a little here into the close, but still capping off another tough week overall. Just getting some new Fed headlines crossing the wire. Now Fed-Mester, clearly the blackout period is over and they're all talking. Just chiming in here with more hawkish comments saying she expects the Fed to hike by more than its median forecast, that she welcomes the recent inflation data, but not willing to call a peak. It will take time for

inflation to ebb. You get the point. They don't want the market thinking they're getting ready to pause just yet. So does that mean more pain? It's been exhausting since the Fed Chair Powell press conference. All the Fed speakers have followed very hawkishly. So I think that Powell clearly had misspoke back at the Brookings Institute and that at least the markets interpreted that way. So very hawkish speak. They want the labor market to be weaker. They want wages to fall and stocks are going to remain and risk off. You've been pretty bearish most of the year. Right. Right. Chris. Has anything changed for you in terms of the outlook?

Nothing's changed in the outlook. In fact, we've been more bearish. We think we have a deeper recession next year. We think ultimately the Fed will go too far because they'll have to. That's what ultimately the only thing that will do to break the wage growth and unemployment up is to really get into a deeper recession and break that wage price spiral. So we're still bearish. We issued our outlook last Monday for 2023. We think there's at least 20 percent downside from here for stocks. Wow. We're going to talk about that more. But first, let's hit the banks, because some news today on the financial side. Goldman Sachs planning to cut up to 8 percent of employees

in January, according to reporting from CNBC's Hugh Son. The stock is down nearly 10 percent year to date. Rough year, but outperforming the KBW bank index, which is down more than 25 percent. Let's bring in J&P security senior researchalyst Devin Ryan. Any reason to think these Goldman cuts are not happening across the entire sector, the other banks too? Yes, Sarah, I think the whole space is going to see some reduction. You know, Goldman was kind of alluding to this last week at their conference that just they have to get tighter on expenses. And, you know, there's a lot of uncertainties we just heard about in kind of the macro outlook. So I think you'll see others probably do similar. There also is a little bit of a Goldman centric aspect here. You know, they have their financial targets are very focused on and operating margins are trying to live up to. And so if you think

about last year, 2021 was just aberrationally strong. And if they take out 8000, which is the rumored number up to that, that would just get them right back to where they were starting 2021. So, you know, it's a little bit more than they normally do every year, but I wouldn't look at it as some drastic, you know, shift in strategy or something that means that there's a much bigger shoe dropping here. So we're comfortable with it. I think they've alluded to it. And we're still actually pretty constructive as you look beyond kind of middle of next year. I think what you said about the growth is really important, the perspective here, right? They're coming off of a period of

strong growth where, I don't know, they didn't do layoffs last year like this, did they? In the last two years. And they've grown the bank, they've grown the assets, and so have others. Yeah, so exactly. I think when times are really good and you need a lot of people to help execute all that business, you don't take as close of a look at your headcount. And I think that if you just look again, they've grown their headcount by over 8,000 from the beginning of 2021. So this will just get them right back to kind of that level. And I think that, you know, again, the macro backdrop is very challenging.

And, you know, we're, you know, in our opinion, in kind of a pretty choppy trading range for a number of these stocks here. But we do think we're actually getting closer to the bottom end for financials relative to maybe the broader market. You know, financials are trading at 50 percent of the S&P 500 forward PE multiple. So, you know, I think it's going to be choppy going here for the next couple of quarters. But beyond that, we actually start to get pretty constructive here. Ryan, thank you very much for joining me. Appreciate the outlook on the banks.

Let's talk about the consumer staples. That's Devin Ryan, I should say. Two first names threw me off. Devin Ryan from J&P. Take a look at the staples. They're lower today, but they've been outperforming and holding up relatively well in December.

Analysts at Bank of America revealing their top picks today in the sector heading into 23. The bank likes Coca-Cola, Mondelez, and Procter & Gamble in the multinationals, saying peak U.S. dollar, peak U.S. interest rates will help boost those stocks. In value, they're going with Kraft Heinz and Philip Morris. While in quality, it's Monster Beverage, Hershey and PepsiCo. Bank of America saying Staples could be one of the top sectors next year. Prices remain high, but inflation and costs are moderating, they say, leading to more margin expansion. Chris, is that I know you can't talk to specific names, but is it a group that you favor?

They have defensive characteristics. We do agree with the dollar weakness call. I think that'll be more back-end loaded next year rather than front-end loaded. And they have durability of earnings. I think the big story in the first quarter of next year is going to be owning names that have earnings resistance and aren't going to see the negative downward earnings revision cycle. So we like them. They're expensive, but they have pricing power power and their input costs are certainly moderating.

What other sectors do you characterize as defensive? Because real estate is traditionally in that basket, but real estate has been pummeled really hard today and other days, warnings about what's happening with the commercial real estate outlook, getting lending. Yeah, real estate, we'd avoid. It's a mixed bag. I think there's many headwinds. The group's not cheap enough. We really like health care, farm and managed care in particular. That's been our favorite sector all year. It continues to be our favorite sector as we look to next year. Valuations aren't stretched. They often defend defensive characteristics, not a lot of political risk for the time being, given a divided Congress. And they throw off real cash flows. And investors

today that we speak with want to own businesses that throw off real cash flows. And health care does exactly that. All right. So health care and staples. Let's turn to broader level, broader markets and talk about some key levels to watch. With us now is Katie Stockton. She's founder and managing partner of Fairlead Strategies, also a CNBC contributor. Katie, everybody was watching on the S&P that 3,900 support level closed below it yesterday. Looks like we're going to close below it again today. What does that mean? I mean, it's really kind of a minor level, but it does show the loss of momentum that

was really evident at the start of last week. We now have pretty widespread overbought sell signals looking at our bottom up work. Individual stocks are seeing their overbought oversold measures roll over. We also had some counter trend signals in the major indices that were confirmed yesterday. So a lot of the indicators do point lower. The breach of that 3900 area is certainly a setback. And the next support for the S&P 500 is around 3500. I don't think that level is relevant between now and year end. In fact, I think we'll see some stabilization next week, perhaps a little bit of a Santa Claus rally before a downdraft in January.

And that 3500 level, it does look in jeopardy. I don't think it's a real we can be convinced that it's going to hold on the way down. We're looking for a bit of a volatility event where we can liken the current setup in the volatility index to 2008, unfortunately. So we're kind of bracing for more downside, but perhaps not between now and year end. I had a question for you about technology, the NASDAQ in particular, and the relationship with rates. Because for most of the year, the story was as rates went up, technology was in the eye of the storm. NASDAQ is still underperforming and the 10-year is below 3.5 and is way off the

highs. So how do you make sense of that? And what does it tell us for next year? Yeah, I think it's all about the mega caps, right? I mean, we've actually seen a short-term breakdown in Apple stock this week. And that's something that I think is going to be a big drag on the major indices. And that's, of course, been a big drag on the NASDAQ 100 and the S&P 500 technology sector. So it's the influence of these mega caps that's been so difficult for the overall sector. It's kind of set the tone. Whereas if you look from sort of like a small and mid cap growth perspective, those names have done in some cases better in relative strength terms. They've had nice relief rallies.

It's not to say that they won't also see as sharp retracements here, but you can make a case for them longer term that perhaps they already have an important low in place. You just can't make the case, you know, the same case for Apple, Tesla, of course, and the others. So would you tell people to buy small and mid-cap growth names? I think perhaps on the next retracement, yes. But here, there's too much risk. I think with the overbought downturns that we have, and so many names came right up against their 200-day moving averages, it's been such a reliable resistance level in this environment. And now they're reacting to the overbought conditions. So I would give them some room, probably aim to wait until end of January,

perhaps early February, and then revisit and see if we have breakdowns, in which case I'd still avoid them. Or if you see some additional support discovery, those summertime lows are remaining intact and ideally also seeing divergences to the upside in the indicators, momentum gauges, overbought, oversold measures making higher lows even as prices come down. Is there a particular sector, finally, Katie, that looks ripe to you for a comeback, a good opportunity right now? I don't know about a comeback, but I still do favor the defensive sectors, as you've been discussing. Healthcare does have really among the best relative strength posture.

We've seen a little bit of a downtick outside of defensives in energy. I think it's still one of the best sectors for right now from a longer-term momentum and relative strength perspective. But staples are certainly fair game in relative terms. Utilities have staged a bit of a recovery. And I'd say utilities, if I had to compare them versus REITs, which they tend to kind of stay in sync directionally, I would say utilities over REITs. Utilities over REITs. Got it. Katie Stockton, thank you very much. Appreciate it. From Fairlead Strategies. Chris, I also wanted to ask you about dividends and what the strategy is there.

Should you be buying dividend payers into next year as sort of another way to remain defensive, especially if yields are falling now? Yeah, dividend stocks tend to be inherently defensive because of the yield and the growth and the cash flows to support that dividend. Our favorite strategy is the dividend aristocrats, which is widely known in an area where you have companies that have a 25-year consistency of increasing their dividends over time. There's some staples names on there, of course, utilities, among others. So that's where we'd be putting new money into the dividend aristocrats, which into what we think is going to be just a really choppy market in the first, you know, couple quarters of the year. Just a minute or so left in the session. Few new 52-week lows, advanced auto parts, trading at lows that we haven't seen since 2020,

Signature Bank and Baxter, new high for Arch Capital Group. So what would change your mind, Chris? What would have to happen next year to make you feel like it's time to buy? Well, we stick to our market bottom checklist. We have a lot of different indicators we're looking at. The first thing is leading indicators need to find some type of bottom. You saw the S&P Global manufacturing out earlier today. It was weaker than expected, I would argue, in recessionary territory. That needs to find some sign of bottom. We want to see the VIX spike above 40. There's not a lot of fear

in the market. And we've got to have a better sense, importantly, about what the Fed's going to do, how high they're going to go, where the pause ultimately occurs. And there's just too much uncertainty around that to start to think about a market bottom. Obviously, as prices fall, naturally, we have to get a little bit more optimistic. But we're just not there yet. Chris Senyak, thank you for joining me from Wolf Research. As we head into the close here, we've seen the Dow come off the lows. It's heading south again, so it is going to be a down day. The biggest drag right now is McDonald's, Home Depot, UnitedHealthcare, and Microsoft. In fact, it's a pretty broad sell-off, just a few winners, Caterpillar, Amgen, and Boeing. S&P 500 looks like it's going to close down a percent. That means 2% for the week. The Nasdaq losing almost 3% for the week, down about

a percent today. You did have some relative strength today in names like Meta, Adobe did well, Netflix did well, but overall, a tough week and the second down week in a row. That's it for me on Closing Bell. Have a good weekend, everyone, into overtime with Scott.