Closing Bell - Closing Bell: 2-day win streak, Oaktree's Howard Marks on market volatility & Fmr. Bank of England Governor on risks of a recession 5/3/22

Episode Date: May 3, 2022

Stocks closing higher for a second straight day ahead of Wednesday's Federal Reserve decision on interest rates. Oaktree Capital’s Howard Marks discusses this year's wild market volatility and why he thinks the worst of the market's excesses have been corrected. Bridgewater’s Rebecca Patterson says she doesn't like stocks or bonds right now and explains what investments she finds attractive right now. Oppenheimer’s Chris Kotowski reveals the three big banks he thinks look cheap. And Former Bank of England Governor Mark Carney on whether the Fed will achieve a soft landing and avoid a recession.

Welcome, everyone. Stocks are inching higher. The Fed meeting gets underway. Is it the calm before tomorrow's rate decision storm? The most important hour of trading starts now. Welcome, everyone, to Closing Bell. I'm Sarah Eisen, live here at the Milken Global Conference in Beverly Hills, California. Here's where we stand right now in the markets higher, as Kelly noted. We're off the session highs. We got as high as up 280 on the Dow, but we've also been lower, down more than 100 today. S&P 500 going strong, so we're building on that reversal we saw yesterday, up seven-tenths of a percent. It's the cyclical groups that are leading the market. Energy, financials, materials,

consumer discretionary underperforming. NASDAQ also part of the rebound, up four-tenths. And small caps doing especially well, up one percent. It's kind of value cyclical kind of day. Check out the most active names at the New York Stock Exchange in this final hour of trade. Chegg getting hit hard today, down almost 30% off earnings. CEO Dan Rosenzweig on CNBC earlier today. Ford, which continues to be in the most active names, along with some of the EV makers as well. It's up today. Nokia and Uber ahead of Lyft and Uber earnings coming this week. We've got some great guests coming your way here from Milken this hour, including the former Bank of England governor, Mark Carney,

his thoughts on central bank policy ahead of tomorrow's all-important Fed decision. Bridgewater's Rebecca Patterson on the wild moves here in the market where she's putting money to work. And we start with another heavyweight market voice here, our first guest of the hour. Joining us is Howard Marks, co-chairman of Oak Tree Capital Markets. Howard, it's a pleasure, as always.

Thank you, Sarah, it's great to be here. Been very eager to talk to you about this current market volatility. We're having an up day, but boy, has it been a rough start for stocks, for bonds. Where are you, where are we, do you think, in this process of correcting? You know, I don't believe that anybody knows how far things are going to go.

I do think that the worst of the excesses have been corrected. The groups that did the best in 20 and 21 hit the hardest. Generally speaking, you would think, and I'm not saying that was all excessive, but you would think that the things that not saying that was all excessive, but you would think that the things that did the worst contained the excesses, and they've been hit hard. Tech. Tech, of course.

And the increase in interest rates has brought down the prices on what we're most interested in, which is credit or bonds and so they are now offering much more attractive yields than they did six months ago so I think that I'm not far from saying the decline is over nobody knows that but I do think that the worst successes have been have been addressed so would So are you buying bonds right now? We're not market timers. And so, you know, I would say that we were slower to put money to work when high yield bonds yielded in the threes.

That's not anything to write home about. Now they yield in the sixes. Now they can be a real help to an investor trying to address a return that they need. So I feel much better about the value today than six months ago. We're going into this major Fed meeting. It's kicked off today, decision tomorrow, expecting a double rate hike, expecting they're going to start trimming their balance sheet. Do you think they're going to be able to do enough to tame inflation this year? That's a tough question. They're going to do a lot.

More than the market expects? I don't know anything that the market doesn't know. So, you know, they're going to do a couple hundred basis points in the balance of this year, which is a lot. Exactly whether it's, you know, what we're talking about is, among other things, limiting psychology. Nobody can tell you whether X, Y, Z action is going to be enough to influence inflationary expectations. But I think I think it'll get people's attention. And, you know, it'll slow business, it'll increase the cost of doing certain things, and this should have a limiting impact on inflation. You know, the Fed is now working

off a playbook that Paul Volcker developed 40 years ago. It worked for him. Exactly. If you say to me, how much do they have to raise to get inflation? Nobody can tell you that. People can only express opinions. But they'll do a lot. I think they put a high priority on constraining inflation.

Well, Volcker also sunk us into recession in order to do that. Yes. Is that something that you are predicting for the US economy as well? History suggests that when you have a program of rate increases, you're highly likely to get a business slowdown. You know, I had a loan outstanding in the 70s,

and I got a slip from the bank in 81, which said your rate is now 22 and a quarter. Don't think we'll get that high this time. No, no, I don't think so. We had special factors at work then. But that was enough to, A, bring down inflation, B, induce a recession. Are you thinking this year, recession? No.

Next year? Possible. My, you know, well, I can't insist that I don't forecast and give you a strong answer to that. But I don't think it's around the corner. There are a lot of factors. You know, corporations are in good shape. Consumers in good shape. The balance sheets are high.

So I wouldn't think in the short term. So are you active for years? I feel like you've been bemoaning the lack of distressed opportunities. That's really your bailiwick. Well, there still aren't many distressed opportunities. The coming up, I think it's I think, look, on the one hand, the deluge of money that the Fed produced in the pandemic covered over a lot of distress and a lot of companies that would have gone bad were were buoyed, what we call zombie companies.

And as long as companies can get money, then they don't default. The other thing is that in recent years any corporation that wasn't asleep at the switch pushed out their bond maturities and converted their debt to fixed rate. So they fixed their debt at low interest rates. So this combination of factors means we're not going to see defaults and bankruptcies on a large scale anytime soon. So where are the opportunities for investors in this turbulent period? Well you know if you want to get involved there will be there will be opportunities. Lending to you know there will be shopping centers and office buildings that have problems. And if you want to lend to those sectors, if you think that they're cheap enough, you'll have lots to do.

There are other sectors. You know, there's been a lot of lending to tech companies. And if their earnings are affected, you know, historically, we didn't lend to tech companies because they didn't have that many assets for the creditor to attach. There has been a trend toward lending to tech. If companies' earnings really falter and the capital markets make it hard to borrow more, we could see the fall to the tech sector. There will be some. In the tech sector? There will be some. So beyond lending to distressed tech companies, I know you've talked a little about the FANG valuations in the past. It seems like

you're not necessarily a buyer of equities, but what do you make of the fall from grace some of these names Netflix has had? You know, in one of my memos back in, I think it was 2015 or 16, I wrote that in the real world, things fluctuate between pretty good and not so hot. But in the market market they go from flawless to hopeless and you know a year and a half ago you know the leading companies were considered flawless now some of them look what they did to Netflix now they're considered hopeless and the 67% down here today the swing from a from a company that everybody thinks is flawless and is buying into to the belief that it's hopeless and you've got to get out. That can be very violent, as we've seen

in Netflix. So is that an opportunity? Is that an interesting buy? I can't. What about crypto? I think you've been warming to that. Well, you know, I wrote a memo in January of 21 talking about my time with my son. We were locked up together during the pandemic and we had a lot of talks. The main upshot of that was he convinced me to stop talking about things i know nothing about and certainly crypto is an area where i don't know enough to opine are you buying it anyway? a lot of people don't know about it and are still buying it uh...

he convinced me to avoid that topic i do want to ask you also about politics because I know you're active in No Labels. You've hosted a fundraiser lately for Senator Joe Manchin. And there are some real questions. We're in a midterm year. There's now this leak, the Supreme Court document draft, looking like they're preparing to overturn Roe v. Wade. How does that color the investment horizon for you over the next year or so? The main thing is that it introduces considerably uncertainty.

I think that we have never seen the country as politicized as it is. And, you know, the future is quite unclear. Will we have Trump versus Biden, which is one thing, or will we have two other candidates? And at this juncture, you know, two and a half years from the 24 election date, nobody knows the answers to these questions. So considerable uncertainty. And is there a hedge against that? Pardon me? How do you hedge against that? You don't. I mean, this is a fact of life.

The only thing you can do is, you know, there are ways to have a portfolio which is more protected against uncertainty. Most of those ways involve accepting a lower expected return. So if you're concerned about the uncertainty and the outlook for short-term fluctuations, you can make your portfolio safer, but you usually can't make it safer without running the expense of making it lower returning. Howard Marks, always good to catch up with you. Thank you.

It's good to be here. Coming by very loud here. Oak Tree, who I believe said that a bulk of the correction looks to be done. Correct? That's the headline. That's your opinion. You said it. I wouldn't say that.

You said it looks like it. I think the worst excessive have generally been ironed out. There you go. Howard Marks. Stocks, as you can see, are picking up steam here as we go into the close-up. 165 on the Dow, but it has been a brutal year for the bulls. And a number of hedge funds are pacing for dire returns as well. Mike Santoli breaking down the performance of some of them in his dashboard next.

You're watching Closing Bell on CNBC. Up eight-tenths on the S&P. Most sectors are higher. Building on gains here into the close, check out today's stealth mover, IPG Photonics. Don't talk about that often. The laser maker, one of the biggest winners right now in the S&P 500 after beating

Wall Street's earnings estimates and announcing it will shift production away from Russia in favor of increased capacity in North America and Western Europe, the stock popping more than 7%. Hedge fund giant Tiger Global posting a 15% decline in April, taking its total 22 losses to 44%. That's according to reports. Mike Santoli taking a closer look at the performance of hedge fund favorite stocks Mike for the dashboard today. Which ones are you watching. Yes.

Well the Tiger Global was really riding the big cap growth and even mid cap growth names on the way up was a great performer. And those were actually in a lot of different hedge funds. I'm talking here not so much about macro hedge funds. We're talking about longased equity hedge funds. They really were in these stocks that were supposed to be compounders. They're supposed to be resilient growth names. You could pay up for them because they were going to pay off in the long term. So here are two portfolios.

This is the Goldman Sachs hedge fund VIP ETF, and this is called the Guru ETF, which both of them concentrate in stocks that are widely held and in fact are very kind of crowded with hedge fund ownership. And what you can see right here is they've really fallen off both relative to the S&P and the Nasdaq 100. You know, some people felt like a lot of these top performing hedge funds were really just fang proxies. It really wasn't just that. Names like Palo Alto Networks is high on the Goldman list. And S&P Global even is the top holding in Guru. So it was just these sort of general kind of growth mid-cap favorites that got a lot of sponsorship here. I would say, Sarah, just in terms of trying to gauge

market cycles and whether things are getting washed out, a lot of people pointing and laughing at Tiger Global. There was once envy and now there's a little bit of satisfaction that other investors are taking from their struggles. And maybe that's part of the process of getting washed out. Shot and fried at its best. Mike, thank you. I'll see you in the market zone. Mike Santoli.

Take a look at where we stand. Up 151 points on the Dow. That's kind of in the middle of the range where we've been. We've been down more than 100 today, up 280. And we're building on some gains here into the close. S&P is up three quarters of a percent. Every sector is positive except for the two consumer sectors, discretionary and staples. NASDAQ up almost a half a percent. And the Russell pops more than 1%. Still ahead, we'll talk to former Bank of England Governor Mark Carney about his expectations for tomorrow's Fed decision and whether he thinks a global recession is looming.

As we head to break, check out the travel stocks led lower today by Expedia. It's getting crushed on mixed earnings. Hyatt, Hilton, Booking, they're all falling in sympathy. The comeback trade in travel, though, has been very strong lately. Airbnb, by the way, also down about 5%. We'll be right back. That one reports after the bell. Welcome back. Check out some of today's top search tickers on CNBC.com. Ten-year note yield, of course, is on top. We're pulling back away from that 3% level. We hit it yesterday for the first time since 2018, all ahead of the Fed interest rate announcement tomorrow. As far as the other ones, big cap tech, Amazon still not getting much love after its tough quarter last week down half a percent. It's kind of a mixed picture in technology.

Amazon and Microsoft lower, but Tesla, Apple are higher today. Apple up almost a percent. And Pfizer, which had good earnings, good sales of its COVID-19 drug, propelling that stock up 2.4 percent. The Supreme Court set to overturn the constitutionally protected right to abortion insured in the nearly 50-year-old Roe v. Wade ruling, according to a leaked opinion draft reported by Politico. Just a few minutes ago here at Milken, I spoke to Reddit co-founder Alexis Ohanian. We were talking about Web 3 and big business issues facing companies and the community in 2022. And I asked him whether big business should respond to this one in particular. Listen. I do think businesses have responsibility I think it comes down to the the approach that CEOs

I won't even say founders but CEOs and boards want to take and I think it is possible to build a business and run a business that is what what's the word, not immune from politics, but choosing to take the position of we don't want to take a position. But for me personally, that's not how I think the path to greatest returns are. I think the path to greatest returns are building a business that is principled, has those same principles publicly and privately, because that's how you attract the best talent but uh i i you know i think this is this was a very scary memo to read uh i really i thought the supreme court already decided on this and that women had a right to it and to choose um

but we will see how it plays out clearly making its way into the conversations here at this business and financial conference. The other hot topic of conversation is Twitter and Elon Musk's purchase, which, of course, I asked Ohanian about as founder of Reddit. He said he's not as optimistic as the most optimistic and not as pessimistic as the most pessimistic on this deal, but is in favor of banning hate speech, which they did on Reddit, he said, after he stepped down from the board. Up next, former Bank of England Governor Mark Carney is here to talk about whether the Fed can achieve a soft landing, really, and avoid a recession. That's next on Closing Bell Dow. Just lost, actually, about 100 points, up 54. We'll be right back. Stocks higher in today's session. Energy and financials are the best performing sectors right now. Dow's up about 110 points. It's been another crazy volatile day here on Wall Street where we are holding on to the gains of six tenths on the S&P. Investors are bracing for the big Fed

decision tomorrow. And joining us here first on CNBC is former Bank of England governor and Bank of Canada governor Mark Carney. Great to see you. Great to see you, Sarah. Now at Brookfield Asset Management. So you must be a little relieved you're not a central banker right now. It's a tricky task. They have to bring down these really high inflation rates, Bank of England, the Fed, without trying to sink us into recession. Yeah, it's a very different world. I mean, I stopped being a central banker two years ago. My entire time, 13 years, it was about too little demand in the global economy,

trying to stimulate, get inflation up, get demand up. Totally different scenario now. We've got a series of supply shocks. The Fed and others are grappling with that, and they've got to get very broad-based inflation down. Do you think the Fed will be aggressive enough? So we're expecting 50 basis points tomorrow, trimming the balance sheet sheet about 250 for the year. Is that going to be enough? My personal view is they probably will need to keep going after that into 2023. There's a few factors that are shifting what is balance in the economy. One of them is that the reality of COVID, unfortunately, is probably the equilibrium level of unemployment has gone up in the United States, not gone down.

It's logical. People weren't working for a few years. A lot of industrial restructuring at the same time. So you get some churn. It's gone up. So unfortunately, the Fed will probably need to rise above that three percentage point level. They will feel a bit their way as they go. They're not going to pre-commit to doing that. But in my judgment, there's more to come in next year. Will there be a recession? Well, it depends on a variety of factors. It is a fairly narrow path, though, for them to

walk in order to avoid that. Global economy is slowing. You have the challenge of inflation, which is quite significant in the United States. They will need to raise rates a fair bit and that will slow demand as a consequence. Now against that, strong consumer balance sheets, housing shortages in the United States and other factors that mitigate it, but in my judgment it's going to be a very close run thing. So now in your new hat at Brookfield, Brookfield's been pretty active in the deal-making space. So do you expect this volatile environment and the new rate reality, inflation, to impact capital markets and the deal flow? Well, it's certainly impacting capital markets, as you know, Sarah.

It's making financing a bit more difficult for some types of deals. It's making the IPO environments more difficult. I think for us, Brookfield, we're focused on the backbone of the global economy, infrastructure, real estate, climate transition, all of those areas. Actually, this provides some pretty strong tailwinds for them. So we're pretty excited about that aspect of the environment. Obviously, we want a world that's growing strongly, and we'll do our bit to help support that. And you've also launched, you've raised, what, $15 billion for this new fund that you are

deploying capital, you're buying businesses? Yeah, what we're doing is, our view is that the climate transition is a transition. You can't just flip a switch and all of a sudden become green across the economy. So, we need to go to companies who have high emissions, provide them with capital, get those emissions down. And that is a very, very large investable universe. It goes everywhere from utilities to steel companies, automakers, across the spectrum. So we raised a tremendous amount of capital very quickly for that. We're out there deploying it. We're seeing a huge range of opportunities and getting emissions down in the process.

Is it an awkward time for that? Because at a time where we need fossil fuels, is it harder to push companies to decrease dependence and go to renewables? Well, I mean, the price of oil is above 100. Gas is at an all-time high. Actually, companies are looking at it the exact opposite way, which is actually I would like reliable, low-cost power with low volatility, which is what wind, solar, hydro, and very soon hydrogen is going to give them.

So look, we have a series of conversations, largest companies around the world, think Amazon, think others, who are looking for clean power globally because they know that relying on a volatile fossil fuel-based energy system is not in their long-term interest. What do you see when it comes to Europe, which you have a pretty good handle on as well? Clearly they need oil right now, and they need to decrease their dependence on Russian oil very fast. Do you see a Russian, a European recession as a result of all of this?

Look, Europe came into this in pretty good shape, but it's a big hit. My personal view is that they will need to stop, they should, and need to quickly stop paying for Russia's war by paying for Russian energy. That means a short-term scramble for hydrocarbons from other areas. They found some, they haven't found them all, but what it's also meant is that they have tripled, they didn't double down on the

climate transition, they have tripled down. They're tripling hydrogen, they're increasing wind solar, they're adding battery storage in scale. So again, you know, distinguish short-term and medium-term. And for someone like Brookfield, it's the medium-term that we're focused on. Mark Carney, good to catch up with you. Great to have you. Nice to see you.

The former Bank of England governor, now Brookfield, where he's the vice chair. Up next, Bridgewater's Rebecca Patterson on whether she's finding opportunities amid all this market volatility. 26 minutes left of trading. S&P holds its gains about half a percent higher. And don't forget to sign up for the CNBC Fantasy Stock Draft Challenge. You can scan this code or go to CNBC.com slash stock draft challenge. Mark Carney signing up

right now. It's free. Scan the code. We'll be right back. Stocks holding on to gains into the close, but it has been a brutal few weeks for the bulls. Here's what billionaire hedge fund investor Paul Tudor Jones told CNBC earlier on Squawk Box about the current situation for investors. You don't want to own bonds and stocks. You start with that. It's going to be a very, very, a very negative situation for either one of those asset classes, right? You can't think of a worse macro environment than where we are right now. Joining me now, Bridgewater's chief investment strategist, Rebecca Patterson, here at the

Milken Investor Conference. Don't want to own stocks or bonds. That's been true. Is that still the case for you? Yeah, it is. I mean, roughly we're neutral equities right now. We have been looking for higher yields or bearish bonds for some time.

We continue to hold that view. With the Fed pulling back as a big buyer of bonds, the question is who are the other players in the market who are going to come in? And right now we simply don't see enough of those folks incentivized yet to buy bonds, even with slightly higher yields. So we still think yields have room to rise. What about recession odds rising?

I mean, even Howard Marks was just here, Mark Carney. It's going to be tough to avoid if you look at history and you look at what the Fed has to do. So if we are slowing into a recession, aren't bonds a buy? I mean, eventually they could be. I think that the question is, does the pattern that we're used to over the last 30 years still hold? Right. So we're used to seeing you have rising growth, you have falling growth. Inflation is low and stable. It's secondary. Focus on growth. Today we're in a different regime. Inflation is the and stable. It's secondary. Focus on growth. Today, we're in a different regime.

Inflation is the bigger deal. And so we're at a place right now where the market's pricing in that inflation is going to be back near pre-pandemic levels within two years with only modest Fed tightening. So if you think, OK, does that math work? We don't. We think that either the Fed is going to have to tighten more than expected to get inflation to their target, or inflation is going to be higher than expected. So when you're thinking about balance in your portfolio, Sarah, you mentioned bonds. We think the place you get balance today isn't bonds, it's commodities, it's inflation-sensitive assets. So you have to think differently about your portfolio construction. The paradigm of the last 30 years is not working now. So commodities, what else do you like in this environment?

Well, again, you're trying to think what's going to protect me against inflation so I can have a balanced portfolio. If bonds aren't doing it, if inflation is the key driver. So it could be within the equity universe, companies that are going to be able to maintain pricing power. And we're seeing more of that coming through this latest earnings season. Who's able to maintain their margins versus who can't? So that's one. Commodities, diversified commodities, we still see a lot of upside there. Inflation-linked bonds are another opportunity that we see. And then even in the currency market, Sarah, you and I have always been in love with currencies. But the currencies representing commodity producers, so things like

the Canadian dollar, just had Mark Carney on. We think that is a currency you want to be actually long that against the dollar. Even though the U.S. dollar has been so strong, really, relative to most everybody. Most everybody, but not everybody, right? So the commodity producing currencies, not all of them, but many of them have actually been outperforming the dollar this year. Where the dollar has been strong is against countries where inflation isn't as big a driver and or where the central banks just have a different reaction function. Japan is seeing a little bit of inflation, but they're being very, very determined to hold on to their yield control policy. And that's what's resulting in

dollar yen taking off. Yes. That's a whole nother segment for another time. Rebecca Patterson, thank you for coming by. Great to see you. With some of the tips that you've been giving, I know, to some of the clients here at Milken. When we come back, financials holding up as major averages give up gains. Oppenheimer sees an opportunities right now in a trio of banks, a new call. We'll talk to the analyst behind the upgrade. The banks are doing quite well today. That story plus a countdown to earnings from AMD and Lyft. When we take you straight inside the market zone, we've lost the gains and the Dow has just flipped negative down 10 points. We'll be right back.

Dow's just gone negative. We are now in the closing bell market zone. CNBC senior markets Thank you. steam here into the close unable to hold on to yesterday's rebound after that brutal sell-off last week i did speak with oak trees howard marks earlier in the hour he weighed in on where he thinks markets are in this current correction listen well i don't believe that anybody knows how far things are going to go i do think that the worst of the excesses have been corrected the the groups that did the best in 20 and 21 hit the hardest. Generally speaking, you would think, and then I'm not saying that was all excessive, but you would think that the things that did the worst contained the excesses, and they've been hit hard. Mike, it's notable from him especially because he was the one, a longtime distressed investor. He was the one last year

saying everything's in a bubble. He really zeroed in on some of the tech valuations, which had gotten overdone. It's notable to hear him say that he thinks a lot of the excesses have been corrected, which he corrected me to make sure I got that right. That's right. Yeah, I mean, that's what happens, I guess, when you see the IPO index, ARK Invest flagship fund. You see the cloud stocks. You see the SPAC index all down 45 to 60 percent from their highs. That's where the biggest excesses were. They've been largely

drained away. Who knows if entirely so. I think the big question now, the battlefront has moved to what does it mean for the broader list of stocks, for actual fundamental based parts of the market and whether, in fact, earnings forecasts have to come in and whether the Fed will, in fact, tighten financial conditions to a point where the overall market has a little more trouble. So I agree that the froth part of this cycle has largely been unwound. But now it's kind of a question of what happens next with the rest of it. Look at that yo-yo chart intraday of the Nasdaq, which just went negative again, fairly positive. It's been all over the map today. Speaking of stock winners back in 2021 and 2020, education technology company Chegg plummeting today after the company cut its revenue outlook,

citing lower enrollment and saying current economic conditions are prompting consumers to prioritize earning over learning. Overall, the past month has been rough for some of the traditional pandemic high flyers. Chegg was one of them, but there's also Netflix, of course, Teladoc losing half of their value, nearly that in the time frame, Mike. Pandemic is over, as you can see by some of these stocks. The question for investors is, what do you do now? Is this an overreaction or is it a totally fundamental shift in the business outlook? Well, I think the issue with a lot of these stocks, and maybe Chegg is one of them, maybe Teladoc is another one, you had the pandemic

tailwind of massive adoption and pull forward of demand. And you've got scale on some level. But did you actually reach kind of profitable escape velocity, even with all those advantages? And I think a lot of the conclusion right now is not quite, at least not to the point where you can project out several years from some of these companies that are below the Netflix scale. Obviously, nothing near Amazon, where they were kind of upstarts, wanting to dominate an emerging area of tech or consumer e-commerce, and maybe didn't quite get to that point

where they've outran all the competition and got the business model finely tuned. So I think the market's gonna struggle with that for a little while. Yeah, so some relief today for a Teladoc, but boy, the one-month chart on some of those names is ugly, ugly. Oppenheimer making a bullish call on SVB Financial. Morgan Stanley and JP Morgan today upgrading all three bank stocks,

saying each has around 30% upside potential in the next 12 to 18 months. And joining us now, Oppenheimer Senior Research Analyst Chris Katowski behind the call. Chris, you think it just got overdone in terms of fears of slowdown and recession for these banks? Well, if you look at it, last year, banks were outperforming the market by about 700 basis points. And up through January 13, they attacked on another 1,000 basis points of outperformance. And what drove that outperformance was a simple narrative, which is that the economy is hot, and that's going to lead to loan growth accelerating, and it's going to lead to rising rates. And rising rates are good for bank earnings, and they're not good for growth stock multiples, so banks should outperform.

That was the narrative all year long last year. The narrative now is that the recession is a foregone conclusion so you sell the autos you sell the banks you sell housing stocks they've shot all the usual suspects and i guess my point of view is uh nobody really knows about whether there is a recession that's imminent you know i i was an analyst in 1994 when the Fed raised rates six times for a total of 300 basis points. And we had like six or seven years till the next recession came through. And banks performed fabulously through there. And so what I would say is, A, nobody knows whether we're going to be in a recession, but the market is already discounting

it from the price of the bank stocks. So that makes the bank stocks less risky now and then b i think uh the market is going to be really pleased by how well banks perform and how much they de-risk their balance sheets since the great financial crisis well besides the higher you know the rates and the slow down concerns there are also worries along with that about lending and whether that has staying power, about the capital markets and the drop-off we've seen in M&A and IPO activity. So what are bank earnings going to look like in this environment in the coming quarters, plus the higher costs for everything from labor to general expenses? Yeah, people focus on all these little nits and they do not stand back and look at the fact that these companies have been consistently earning a low to mid teens return on equity in all different kinds of environments for the last six or seven years. And, you know, what happened in the pandemic when rates came down so sharply and suddenly is that commercial banks' return on equity dropped about two percentage

points, but it wasn't catastrophic. The investment banks went up five or six percentage points. And, you know, the outlook is that, you know, probably for the next two years, they're going to be back in that 14, 15 percent range on average, which is a great place to be. And you can make a lot of money here if you can buy a company that's earning a 14, 15% return on equity at roughly half the market multiple and have it with a safe and sound balance sheet. Those are going to be good stocks.

Mike, what do you make of the call? Banks are doing well today. Financials are the second best performing group in the market, but as Chris notes, well off the high. Stocks like JP Morgan, more than 30 percent off their recent highs. Yeah. And, you know, J.P. Morgan, if you look at the valuation back under 11 times forward earnings, which is, you know, pretty low, actually, relative to the five year average. If you have high conviction that recession is far off and we're not going to see any financial

accidents, the credit markets are going to see any financial accidents. The credit markets are going to remain reasonably well behaved. That's where we are now. And if you think that's the case for six months, then I do think a lot of the risk has been taken out of the big bank stock. So that makes sense. They're also a little bit less popular than they were coming into the year when everyone thought it was going to be this perfectly easy rotation out of, you know, tech and growth and into value in banks. And that's over. No, it's working today, but definitely has not worked lately. Chris Katowski, thank you very much with your call on SBB, Morgan Stanley and JP Morgan.

Western Digital is actually the best performing stock in the S&P 500 right now and the tech sector after activist investor Elliott Management disclosed a nearly $1 billion stake in that company. In a letter today, Elliott pushing for Western Digital to split off its Flash memory business, arguing the company's acquisition of SanDisk is not working well. Separately, in chip world, NVIDIA is under pressure today, but off its worst levels, after Morgan Stanley resumed coverage of the stock at equal weight, citing concern about deceleration in gaming and NVIDIA's, of course, comparatively high valuation. Meantime, AMD, one of the big names set to report quarterly results after the bell.

Christina Partsinevelis joins us. What should we look for, Christina? Well, the first thing is PC weakness. We know just last week Intel warned or guided for June to be much weaker. So how is that going to eat into AMD's market share? Then you also have GPU. You just mentioned gaming. You're using these graphics cards. There's concern that gaming is starting to slow down.

GPU availability is coming out, and that's lowering prices for GPU units. So I'll be looking at the margins there. And then Xilinx. Xilinx acquisition closed in February. So will that change the full year guidance for AMD going forward? There's a lot of other factors like supply chain inflation, you know, the regular shutdown in China, too, that we'll be looking out for commentary. But I'd like to point out, too, that we will have the CEO, Lisa Su, on CNBC tomorrow morning as well as an exclusive after these earnings results come out. But the stock, though, down, what, 37% on the year,

the worst constituent of the SMH, lower than the SOX ETF, one of the worst performers in the NASDAQ 100. And yet earnings, they've beat out of the past five years. Yeah, after years of a multi-year run for this stock. Higher. Christina, thank you. Thanks. Lyft earnings also coming out after the bell.

That stock, dear, now also down nearly 30% year-to to date. Rideshare demand took a hit amid the Omicron surge. We know that. But the company has seen demand shift and bounce back as we shift to this post-pandemic environment. Joining us now is Dan Ives from Wedbush Securities. Dan, what do we need to know about Lyft? Would you buy it into earnings? Yeah, I mean, we'd be buying this as well as Uber. You know, I think right here we're seeing a rebound in terms of this reopening on ride sharing. I think they could pass costs and rising prices to the consumer. And I think this is an underestimated one, especially in this type of macro. It's a recovery name. And I think Lyft

here, risk reward compelling, we would be fired. Why is the streep in so negative on these names with travel stocks and other reopening themes working a lot better? Well, I think the biggest issue has been the driver shortage. Driver shortage, you know, of course, that was a headwind for both names, especially Lyft being pure plan ride sharing. You had Overman Crown in terms of earlier in January, which obviously was a negative. And I think it's just been one thing after another with these names. But I think finally driver shortage issue is done.

I think the profitability is starting to come back. Ride sharing underestimated by the street. Stocks are super cheap, in my opinion. I believe Lyft and Uber, especially when we talk about disruptive tech, two of the best plays, you know, what I view as lower risk in terms of this market, especially in the reopening that we're starting to see going this summer. What about pricing power? Because we know the rides have gotten more expensive to deal with the driver shortage and everything else in the economy. Where does that go if we do start to see a consumer slowdown? How much power do they have?

Yeah, I think they still have probably about another 10 percent, 15 percent pricing power. And I think that's something where I think the street's worried that that's going to diminish what we're seeing in terms of rides. But ultimately, if you look, massive tailwinds, as more go to the offices, restaurants, travel, they'll be able to ultimately pass that price through. And I think that's really going to be the key here. And they're going to be able to do it profitably. That's going to be the theme with WIP as well as Uber. And these are names right now, I think, many kind of users,

you wouldn't even touch them, under-owned. And I think there could be a lot of good news ahead, especially on this reopening. My question, so you like them both, but Lyft or Uber. Is Lyft more insulated? Because U.S. growth is better right now than global growth. Uber's got the global story and not as much of a pure play. So do you favor that? Yeah, I think Lyft is a springboard name, pure play, domestic.

There's no ultimately, you know, from the food delivery, there'll be a bit of a headwind for Uber. That's what I like about Lyft. It's massively under-earned and really it's viewed risk-reward here. I think a lot more things go right than wrong when I look at Lyft and then to a lesser extent with Uber. Yeah, $50 target there stocks at 30. dan we'll see what earnings show us after the bell thank you dan eyes from wedbush you heard the two minute mark two minutes to go in the training day mike

what do you see in the market internals with the fb holding up half a percent we've seen a little slippage in the nasdaq and the dow yeah so I mean at the index level it's been just ping pong on a pretty short table today. Staying within the range of the last two days. The highs for the day were basically the level that the market fell off of in the late afternoon on Friday. So really noncommittal ahead of the Fed. You see very good breadth though, almost 3 to 1 advancing

to declining volume. So you're holding most of yesterday's rebound rally even though it wasn't really big in terms of absolute upside. Take a look at the two-year note yield. That is going into the Fed meeting at the highs. The longer maturities have come in a little bit, but the two-year, the most sensitive to Fed expectations, is just about 277,

so clearly baking in maybe 10 more quarter-point hikes for the year. Volatility index really got crushed. It's now below 30, and we're six or seven points below yesterday's high, so that's creating another little spike on the year. Volatility index really got crushed. It's now below 30 and we're six or seven points below yesterday's high. So that's creating another little spike on the chart. But as you can see, they're a long way to go. Probably have to wait till after the Fed meeting for that, Sarah. Yep. Hockus expectations rising with that two-year note yield. Mike, thank you. We've got less than 30 seconds to go here before the close. Take a look at the Dow right now. It's higher by 76 points. Boeing, Goldman, Chevron, biggest contributors to the Dow gains. Nike, Visa, and Microsoft are

the biggest losers on the Dow. S&P 500 up about a half a percent. So we are continuing to rally off that turnaround we saw yesterday toward the end of the session. Energy and financials are your best performers. Consumer discretionary and staples are your worst. NASDAQ is going to close out in positive territory. Dip negative a few minutes ago. It's up about a quarter of a percent. So kind of a split for big cap tech today. Small cap's doing exceptionally well. That does it for me here on Closing Bell.

See you back in New York tomorrow.