Closing Bell - Closing Bell: Fire in the hole! Stocks plummet on Powell speech 8/26/22

Episode Date: August 26, 2022

The major averages fell hard in Friday trading, with the selloff sparked by Fed Chair Powell’s speech in Jackson Hole. Fed watchers David Zervos and Peter Boockvar parse through the speech for clues about the Fed’s rate policy. Evercore’s Mark Mahaney breaks down the pain for big tech. Canaccord’s Tony Dwyer discusses the outlook for the markets. And LightShed’s Brandon Ross joins to talk about EA – which bucked the downtrend on M&A rumors.

Stocks falling hard as Fed Chair Powell's Jackson Hole speech sends a chill across Wall Street. We are at session lows. The most important hour of trading starts right now. Welcome to Closing Bell. I'm Mike Santoli in for Sarah Eisen. Let's get straight to our market dashboard for a look at these losses deepening as we go throughout the day. The S&P 500. Here's a one year look giving back a decent portion of that rally we got from June. As a matter of fact, as we see it right now at 40.80, this is right at a point where a lot of folks were looking for it. This is the August lows set a couple of weeks ago.

A lot of times you make a new low in a given month, and it has people reset their expectations for what the trading range is. Bigger picture, we never kind of broke that downtrend from the January peak, and yet the rally off the lows got a lot of credence to it. It was very powerful. So it's still in the mix here. This is where the the trenches are dug between the bulls and the bears here right around these levels. Now, take a look at high yield debt. Part of the message from from Jay Powell seemed intended as making sure that financial conditions don't get too loose, that the markets don't get too generous in financing risk. Well, here's the high yield bond ETF right here compared to a comparable treasury bond ETF. And what you

see is, by the way, that was the first Fed rate hike in March. Here you had the June lows in the stock market were basically when we had that big stagflation panic and you saw real weakness and widening of credit spreads. They really now have come back. So you see it's widening out again, this gap between these two. It shows you there's some more anxiety filtering into the financing markets, although we're well off those worst levels. And you see that gap between the two is not necessarily at a high stress level. Let's talk about all this. Let's bring in Steve Leisman now from Jackson Hole for more on Powell's speech,

Wall Street's reaction. Steve, what strikes you most here five hours later? You know, it's the market, what they were anticipating, Mike. It looks like they were thinking the Fed was going to come forward to get a more dovish speech from the Fed chair. Instead, Jay Powell, in his much anticipated speech here at Jackson Hole, taking pains, taking strides to say the Fed is going to be resolute in its fight against inflation, even warning, and something I've not heard from Fed Chair before, about the possibility that it could cause pain to some businesses and households.

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Powell liked talking directly to markets, making a specific point about warning investors against making too much of the recent decline in inflation, saying it's not going to be enough to change the Fed's course, at least not early on. While the lower inflation readings for July are certainly welcome. A single month's improvement falls far short of what the committee will need to see before we are confident that inflation is moving down. So we are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. Mike, I feel like those who have listened to the Fed speeches and comments that we've been reporting on the past couple of weeks,

those that listen to us and the Fed speak we had on here from Jackson Hole were not surprised by Powell's speech. I feel like those who may have been engaging in a healthy dose of wishful thinking, they're the ones who are most surprised. It looks to have been a good part of the stock market. Well, that's exactly the point in a sense, Steve, because there has not in the bond market been a very dramatic repricing of rate hike expectations or where the Fed is going to likely end up. It seems mostly as if what the stock market is taking from Powell's comments, very kind of blunt in this way, is that, look, a prolonged period of below trend growth, as he calls it, which could include a recession, are something we might want to expect right now,

as opposed to trying to fend off at the first sign that inflation ticks lower. Yeah, solid comments, Mike. I mean, two things. First of all, I think the bond market in the past couple of weeks has repriced in the sense, if you look at the Fed rate outlook, what you'll see is the market now has a peak rate of 380. It was down, I don't know, 330, 325 even a couple of weeks earlier. But if you look at that, the market repriced to just where the Fed was. I'm not sure the stock market was paying attention to where the bond market was. I think that's pretty critical. And then one other point, Mike, which is you remember in the last press conference,

I asked Chair Powell really twice how a recession would affect policy, and he really wouldn't answer the question. I think he answered that question today, and I think that's a significant change, where he's saying, look, there's going to be some pain, and that's kind of saying, even if it's a recession, we may have to keep going.

Well, without a doubt, Steve, yes, you have been kind of hammering on that point. You got the got the answer. Steve, appreciate it. Talk to you again soon. Let's continue the conversation with David Zervos, Jeffrey's chief market strategist and Peter Bukvar, Blakely Financial Group CIO. Welcome to you both. David, you heard us talking there, Steve and I. It is somewhat interesting to see the way the stock market has reacted to this. And I wonder if it's just a matter of, you know, the stock market had built in or was building in a greater prospect of a soft landing. And now they have to reduce that a little bit.

I know you were getting a little bit cautious about the possibility for further equity upside, given what the Fed was up to here coming into this week. What strikes you about the market reaction today? So I really agree with a lot of what Steve said. And I think the comments that he took, the excerpts that he took from Jay's speech were really the important ones. These guys are not in any hurry to make a turn or a pivot. And I think they've actually been quite steadfast in that statement. And there was some wishful thinking on the stock market side. But more importantly,

Mike, I think the stock market, when we were touching those June lows down at 3650 on the S&P, we had just gotten everybody pumped up for even more downside. We had all these folks talking about 3100 or below 3000. And really, that's why I think the stock market had the rip that it did. We had a lot of bad positions, a lot of people who had pulled themselves out of the market. They were feeling somewhat comfortable that they had outperformed the S&P. And then as the S&P started to rip back above 4,000, they were all underperforming the S&P and they all stepped over themselves to get risk back on. And I think that's why we were up at 4,300 and changed not long ago and why the Fed's message kind of hurt a little more than usual. So I really think

it was summertime positioning that drove a lot of this. Yeah, there's no doubt, I guess, there are exacerbating factors that are related to that. Peter, broader context in a way here is the Fed is now in the complete mirror image stance that it was in when it was saying we're going to keep rates at zero until we see the labor market tighten more than it ever really tightened in prior cycles. We are not going to flinch at the slightest turn in the unemployment rate. That was the that was the line right going into this tightening period. And in fact, we're going to let inflation trend even higher now.

It's it's acting as if it's again a one mandate Fed, except the mandate is whatever it takes on inflation. And we're not going to regard what's necessarily happening in terms of the wear and tear on the economy. It's a great point, but also highlights something that Jay Powell has realized that in order to have sustainable maximum employment, you first need stable prices. And you do point out correctly that, yeah, they prioritized one side in 2020, 2021, and then flipped it. But over time, it's stable prices that is really the foundation of a healthy recovery. And I think that that's an important distinction in Fed policy, where they went from this asymmetry approach or symmetry approach on inflation.

And as you highlighted, mandating or wanting those jobs back that were lost to focusing on inflation that affects everybody, whereas unemployment affects only a small group of people. Right. And so they are not, David, going to anticipate a favorable turn in inflation. They've been saying this for a while, of course. They need to see multiple months of evidence that it's going in the right direction. But there's always, you know, the market's effort to see around the next corner is going to have people asking, well, the leading indicators of inflation might actually start to become a little bit more benign. And maybe whatever the Fed is saying right now, realities might mean something different next year. Is that not something that an investor should engage in right now, David?

I think Jay told you something a little bit different. I think he said, look, he didn't say different. I think he said, look, we've he didn't say this explicitly, but we just had like the biggest miss on inflation that we can remember at the Fed. Anybody sitting around that table were sort of akin to, you know, sort of misses that were happening in the 70s. Thankfully, inflation expectations are anchored five year forward, five year break evens. And the survey data are really holding in remarkably well. But the Fed doesn't want to play with that. It's going to stay in a Volcker-esque structure for a lot longer than people probably think. And I think that's what Jay was pushing today, even invoked some old Volcker quotes in his speech today. And that's been something we've pushed really hard on at Jefferies,

that this was kind of Jay's Volcker moment. He's staying with that. And he's going to make sure that we don't get the 70s, that we don't get an unhinging of the inflation anchor that Peter was just talking about. The most important thing for long run growth

is having anchored inflation expectations. Jay knows it. Peter was just talking about it. And I think this speech was all about making sure that we think about the long run and not get too caught up in a little bit of short term pain. It's just not that important in the big picture. Right. Well, Peter, I guess that that brings up the other analysis, which is how much can the economy withstand? What kind of a cushion has been built up, whether it's in consumer and corporate balance

sheets, which don't seem particularly strained, whether it is in just the labor market that's been, as Powell said, unbalanced in the direction of being perhaps too tight. So can we have an economy that deals with the most hawkish Fed in a couple of generations and doesn't necessarily have a particularly damaging recession? Well, I think there's no chance that we avoid a recession. But whether it's damaging or somewhat mild is, I think, more of the question. Now, people think that mild leads to a quick recovery. I'm more worried about something that's maybe mild but drawn out.

You know, easy money has been the lifeblood of economic activity for a while. So when you go to the other side, this rate shock that we've seen, to me, there's an economic adjustment of note that we have to digest. And it's not something that's going to happen quick. I mean, we've seen how quickly the housing market responded to this very sharp rise in interest rates. We're already beginning to see it in autos. And just the general rise in the cost were beginning to see it in in in how in the autos. And just the general rise in the cost of capital. Is going to impact behavior all throughout the

markets and what can we have even discussed so far yet here is Q. T. which then has its own impact on financial conditions. And the valuation of asset prices. So to me this still has a long progression of events play out- again, because of this rate

shock. And I think that people are being way too nonchalant with the impact of QT. David, how does all this inform what you would expect out of markets from here? I mean, you mentioned that at the lows in June in the equity market, that around 3600, things seem pretty washed out, pretty oversold. People were off sides expecting further downside. What about now? Do you still have some kind of confidence that that might be a floor, even if the ceiling is not far where we traded last week? You know, it's really tricky.

We talked about picking bottoms in our piece this week, and it's not an easy task. And many people have picked bottoms along the way in this one or in past bear markets and gotten shellacked, basically. So I think the reality is, Mike, that there are some really positive forces for the equity market associated with high nominal GDP growth that are going to exercise themselves as we go down and test some of those lows that we saw in mid-June again, if we have to go do that. I think you have to be pretty nimble and you have to think that it's certainly possible, put a 50-50 or even a 60-40 probability on it and understand that down there,

you need to be kind of in a position where you can get a bounce like what we just had this was an epic bounce from 36 50 down up to 43 and change i mean these are these are incredible uh movements in just two or three months so i think the market did get itself back to closer to on-site a lot of risk was put to work in the high yield market and in the equity market but uh but again and i thinksite. A lot of risk was put to work in the high-yield market and in the equity market. But again, and I think there's a lot of cash that is looking to get back into risk if we do go down again. So I'm not in the 3,000, 3,100 camp. Never been there. I don't think that's the number you should be looking at. But can we go back to that mid-3,000 number again and test

around and play around? I think it's certainly possible as we go through the fall. And as Peter points out, we sort of feel out what QT really does. I think the market's priced a lot of QT in, but as it really picks up steam and we go for the full 95 or 94 billion a month that we're looking at, it's going to feel a little different. It might hurt a little more than some people think. Right. People at least wait to see how it does filter through, if at all. And, you know, that the lows in June would be about a 10 percent drop from from here in the S&P 500. David Peter, thanks very much. Appreciate the conversation. Thanks, Michael. All right. The Nasdaq is feeling the brunt of the pain today. It is down three and a half percent with big declines for the mega cap names. Let's bring in Mark Mahaney, head of internet research at Evercore ISI.

Handicap, where things might go from here, Mark, it's good to talk to you. We've had really so many waves of, I guess, valuation adjustment in parts of the NASDAQ. You've had really even the mega caps have become looking cheap in some regards, something like a meta. Yet Apple has kind of retained this big premium. How would you try to boil a lot of that down

to say how much of the macro and policy stuff has already made its way into that complex? Well, there's a lot to that. So, look, we've had a massive D rating since the beginning of the year because, Michael, as you well know, we had a massive re-rating last year. So we had multiples that were well above their average bands going into the end of 21. And we took all of that out through June. And then we went into estimates risks, estimates cuts. And I've had three quarters in a row where about 70 percent of the companies that I cover, I'm talking about the December, March and June quarters, have had negative estimates, revisions and relatively material ones. I haven't seen that level of negative revisions in multiple years.

And, you know, I hope that the numbers or estimates are down enough to accommodate the softening recessionary conditions that we're obviously going into. We don't know that, but I hope the numbers have been cut enough. So at least a lot of the valuation risk has been taken out. Your prior desk talked about, you know, hard money, easy money. That's how I now think about stock picks. So if you tell me we've got hard money environment for the foreseeable future, sustainably high inflation rate and sustainably high interest rates, it's a different list of stocks you want to be looking at than if you've got an easy money output. Yeah. So characterize what hard money stocks look like right here. I mean, kind of the observable earning support and balance sheet

stability or what? Yeah. Yeah, you got it, Mike. So it's those it's companies that you can look at and say, well, in free cash flow or these companies are trading at, you know, 12, 13, 14 times gap earnings. You know, we're not doing EBITDA. We're not doing adjusted earnings. So I'm talking about in the space that I look at, I'm sure Apple and Microsoft fell into that. But in the space that I look at, it's Google would be one. Meta slash Facebook would be another. Booking would be another. eBay could be a name in there. And then if I want to get a little bit creative, I actually think a name like Uber could work into that because I think you're going to start seeing a real dramatic increase in free cash flow there. But I'd throw all of those into my

hard money basket, names that can outperform, but they've got to have a free cash flow supports. They can't be long duration assets. They got to have real profits in 22, 23, not 24, 25. Their long duration assets won They got to have real profits in 22, 23, not 24, 25. Their long duration assets won't work in a hard money environment. I have to say in that category that you described there, Meta does really stand out just in terms of how really didn't catch back, get back much of the of the total losses from the highs. It really does screen out as looking very cheap based on current earnings and all the rest of it. Just what is the nature and the level of skepticism about the current earnings power of this company that's leaving the stock where it is?

That skepticism, Mike, is dramatic. This is the new eBay. This is the new Yahoo. It's perceived, i.e., to be a melting ice cube, a deteriorating asset because of TikTok, because of these privacy changes that apple implemented that really kind of gutted a lot of the advertising marketing plans that were out there or the ability to really track and measure campaigns and then there's regulatory risk being thrown at facebook and then it's just this belief that it's matured out i don don't think those four headwinds

are accurate, or at least I think they're hedges against the headwinds, if you will, if that's not too complicated. So I like Facebook here. I think there's a path for revenue growth acceleration. They haven't had their breakout quarter. Amazon, I think, had that last quarter. Facebook hasn't. Meta hasn't. But I think it has the potential to do that as they start turning on Reels monetization and as they do other things to start turning on reels, monetization, and as they do other things to improve the platform. And it's still, this is a really nice business model. Even under duress, it's 30% operating margin.

Even under duress, they're generating $25, $30 billion in free cash flow a year, which will give them plenty of strategic options. And they're returning that cash to us as shareholders. So I just think there's a lot to like about Facebook when the market certainly doesn't like it. And then just to get on to some of the kind of easy money type names, this would have been, you know, the very high growth, high expected growth, low earnings power. I know you say something like a Shopify Roku where the story was really something that, you know, took years of faith. Yeah. And Shopify, boy, I think I upgraded this in November at the peak. So, you know, it shows how little I know. But, you know, these long duration assets, I don't know if they can work in a hard money environment. But if you

get clear signs that inflation is not just moderating, but is really coming back sharply and that there's going to allow interest rate pressures to really abate. You know, then I think you can see a path to working towards some of these long duration assets. I don't know what's going to happen first, Mike, whether they those stocks actually those financial conditions actually work or the companies at some point along the way shop. I can generate a lot of free cash flow, but that's a couple of years out. I just don't know which comes first. But anyway, these are good growth assets. You know, Roku, even some of the speculative names like Dash that just, you know, are generating small amounts of profits, but have a lot of potential in the future. I think you can make money in those, but you have to be a very patient long-term investor to want

those stocks down, unless you've got a really specific catalyst over the next three to six months. If you don't have that, it's hard to see those stocks outperforming in a hard money environment. Yeah, maybe they'll come back one day. It reminds me of the early 2000s. Some of them came back hard and some of them some of them didn't manage to. Mark, thanks very much. You're right. Good to see you. All right. We have a news alert on 3M. Seema Modi has the story. Hi, Seema. Hey, Mike.

Reuters is reporting that a judge today declined to dismiss the 230,000 lawsuits filed against 3M accusing the company of selling defective air plugs, ruling out that its subsidiary Aero Technologies' bankruptcy filing did not necessarily protect 3M from exposure to those claims. Remember, back in July, 3M did say it was going to voluntarily initiate a Chapter 11 proceeding for Arrow, which is its earplug business. So at that time, Wall Street has seen that as less of a risk for the stock, but based on the comments from this judge, suggests otherwise. And that is why you're

looking at 3M shares down nearly 9%. We have reached out to the company and we will get those comments to you as we get them. Mike, for now, back to you. Seema, thank you. Yeah, it has been a real overhang on the stock and now intensifying with this news. Thank you very much. Let's get back to the broader sell-off. Here's a live look at the S&P 500 sector heat map. Energy, nicely outperforming.

Countercyclical, again, down less than 1%, but everything else down quite a bit more. Technology, all of the higher valuation cyclical stuff, such as consumer discretionary, as well are underperforming. Although industrials down about 3%. That has been a leadership group. Materials also not escaping the pain. Utilities also have been hitting new highs recently, down just 1.5% today. Let's dig deeper into some hard-hit areas in this sell-off. Steve Kovach is looking at Apple's pullback. Diana Olick watching the homebuilders

and Pippa Stevens covering the energy stock. Steve, start us off with Apple. Yeah, Mike. So Apple shares taking a leg lower today on a Politico report saying the DOJ could file its antitrust lawsuit against the company by the end of the year. Now, this lawsuit is said to be covering the same issues regulators have been hitting Apple with for the last two years or so, largely focusing on Apple's market power with its App Store. The investigation reportedly focusing on whether or not Apple stifles competition by taking fees from developers selling on the App Store and requiring customers to use Apple's payment system. Apple has argued these fees support the App Store and requiring customers to use Apple's payment system. Apple has argued these fees support the App Store, and without it, a lot of these companies

wouldn't even make money at all. It also lowered fees for most developers amid all the scrutiny. Meanwhile, the European Union is ahead of U.S. regulators, passing the Digital Markets Act, expected to go into effect next year. That could require Apple to allow alternative app stores and payment methods, hurting the profitability of the app store and that all-important services segment, Mike. Just so I'm clear on that, Steve, in terms of how this DOJ report fits into what Apple's been contending with already, is it just another investigation of the same set of issues, or does it seem like it might be something fresh? Yeah, it's largely the same set of issues, or does it seem like it might be something fresh? Yeah, it's largely the same set of issues, Mike. The same thing we've heard developers like Spotify and Match Group kind of complaining about for the last two years or so. They basically don't

want to pay these fees, and it's hurting their profitability. And Apple argues, well, you need to pay these fees because the App Store supports your whole business. And that's where the conflict is coming, Mike. Got it. Yeah, it makes sense. Although hard to know exactly how much of that is in the stock. Apple's actually outperforming the Nasdaq, even with a more than 3 percent drop today. Steve, thanks very much. Talk to you again soon. Homebuilder stocks sinking as well in the reaction to J-PAL. Diana Olick has a look at the biggest movers there. Hi, Diana.

Hey, Mike. Yeah, the homebuilders are taking it hard with the ITB, which includes home improvement retailers like Lowe's and Home Depot off over 4%. Big builders D.R. Horton, Lenar, even Toll Brothers, which had been higher this week on remarks from the CEO that they were seeing renewed buyer interest in the last few weeks. But while Powell didn't say anything about housing specifically, he did talk about maintaining restrictive policy stance for some time. And that means higher rates. Now, mortgage rates don't follow the Fed exactly, but they are influenced by Fed policy. Mortgages loosely follow the 10-year yield, the yield on the 10-year Treasury. And that yield spiked way up during the speech,

came down sharply right after then, pretty volatile all day. But up again, we actually saw mortgage rates pull back a little bit in July and the first part of August. Likely White Hole saw that bump, but they began climbing sharply again last week in anticipation of this speech today. Mike. Yeah, Diana, Powell's comments about, you know, a long period of restricted policy certainly having an effect. I think also perhaps there may have been some folks out there wondering if he would give a nod in the direction of the pain that's already been felt in housing in terms of the activity declines, even the softness in prices, and maybe make that a gesture of saying, well, we've already kind of done part of our job. Clearly, he's not taking much heart in the fact that, you know,

supply is now up relative to sales and all the rest of it. Yeah, it was surprising. I mean, obviously, it was a very short speech, much shorter than expected. But it was surprising to me that he talked a bit about the consumer, but said nothing at all about the housing market, given what's going on in the market right now. This very sharp pullback. And we're actually starting to see home prices come down a little bit. And that was new this week. So you got to wonder how he's factoring all that in. It has to be a part of it.

But again, nothing from him specifically, Mike. Yeah, he seems to welcome it, at least for now, Diana. Thank you very much. The energy sector also lower, but it is still by far the top performing group in this sell-off. Pippa Stevens has a closer look. Pippa. That's right. Energy stocks are holding up better than the rest, down about three quarters of one percent, making it the best sector today.

It's also the only group in the green for the week with a gain of about four and a half percent. Now, oil did briefly trade in the red after Chair Powell's comments, but it later recovered those losses and is ending the week in positive territory with Brent back above the $100 level. Now, drilling down on the energy sector, it's really the upstream players that have been outperforming. APA, Marathon Oil, Devon Energy and Pioneer all registering solid gains for the week in an otherwise down market. UBS saying that energy stocks look attractive here. A resurgence in commodity prices is a risk for the market broadly. So holding energy stocks can mitigate some of that potential downside, Mike.

You know, Pepe, it's interesting given that the market as a whole is showing a bit of concern about, you know, economic downturn and consumer demand perhaps getting hurt. At the same time, you have all of these other factors that seem to be lifting natural gas prices and crude prices to a degree, supporting crude prices based on what's going on in the world that almost seems to have not as much to do with the global economic cycle. Yeah, there are a lot of factors beyond the Federal Reserve that are influencing energy equities at this moment. As you noted, we have a rebound in demand in China that could really lift things in the back half of the year, as well as ongoing sanctions against Russian energy.

So the commodity market is a little bit more insulated than perhaps it normally would be, given all of these catalysts that could potentially push prices higher. And again, the SPR release, that's going to stop in October. So a lot to watch here in the coming months to this fall. Oh, for sure. Yeah. Many, many things in play. Pippa, thank you. Let's now get a check on the markets. They are sitting near session lows.

The Dow is down 884 right now by 2.6 percent. The S&P 500 mentioned around that 4080 level was the August lows. It is slightly below that right now. The Nasdaq down about three and a half percent. Joining us now, Aswath Damodaran, professor of finance at NYU Stern School of Business. Aswath, great to great to check in with you here in terms of the market kind of repricing on the fly here in terms of equities. It's been part of the story all year. Valuations getting compressed in equities in reaction to what's happening with monetary policy and growth expectations. Just big picture. How does it look to you?

Does the market seem to be roughly in tune with what the macro outlook reads as? I'll give you a conditional response. I mean, this is a market that's been driven by inflation almost all through the year. For the first six months, markets had no idea what was coming. In July and August, the good news was markets thought they'd arrived at a consensus. They thought the economy would slow down, but it'd be a soft landing. And then inflation come down pretty quickly. This week has been a reminder that just because markets reach a consensus doesn't mean that that consensus is right or it cannot change.

Because we still have no idea how deep and long this recession will be and how quickly inflation will come down. So I think we're in for these periods of uncertainty. And this week is a reminder that we're not quite done. Now, you say that inflation has been clearly the beacon for where markets are going to go from here. So that would seem to be the huge swing factor in terms of deciding if the market's fairly valued, overvalued or not. We're not just going to necessarily take, you know, last month's CPI to do that calculation. Is there a way to handicap what the market is

already pricing in, in terms of the future trend of inflation? I think the market's pricing in about a 2% to 3% inflation coming in pretty quickly. I mean, that's what you see in the T-bond rate. To me, there is no better indicator of the long-term expectation of inflation than the T-bond rate. So right now, market is pretty upbeat about what will happen inflation and as we saw in the 1970s sometimes markets don't quite get how difficult it is to get inflation under control and that was I think Jerome Powell's message today which is just because you have a month of good inflation doesn't mean we've got this monster under control and I think that reminder is needed because I

think markets are getting a little ahead of themselves in terms of having the inflation bogeyman back in the closet. Yeah. And I guess in terms of the the internal drivers of the overall stock market valuation, which, you know, into the end of 2021, dramatically concentrated in the very large growth stocks where you had embedded, you know, expectations of great growth for years to come. They've come in a fair bit. Is there a way to assess whether, you know, they've rationalized at all by now? No, I think the tech sector, I mean, I think we make a mistake of classifying it as one sector, but there's old tech and new tech. If you look at old tech, I don't think it was ever as overvalued as people claimed it was. New tech, the Zooms, the Pelotons, the Shopify's

clearly got way ahead of themselves. And I think old tech will behave much better than new tech. And you're seeing this in the market. I think they will hold their value better. And if you look at a company like Apple, I think it's the greatest cash machine in history. And if you're concerned about holding on to value, I'd rather hold Apple than I would Coca-Cola. So that's interesting to hear you say, because if you just look, I guess, surface level at Apple's valuation, it's premium to the S&P 500. It looks like it's pretty stretched relative to its history. But you think that it redeems that valuation just based on the cash flow dynamics and things like that? Over the last five years, Apple has returned close to a half a trillion dollars

of cash while still increasing its market cap. I mean, that's amazing if you think about it. So I think when you compare Apple to other companies, that cash flow factor has to be brought in as do its margins. I mean, this is a company that's been able to maintain 30 percent margins through good and bad times and its pricing power. So in a sense, if you're worried about inflation, this is a company that I think has a chance at least of holding its own inflation is never good, but it's a chance at least of holding its own if inflation

is, you know, just stays high. In terms of what you had characterized as new tech, I mean, I guess you could even extrapolate it to the sort of venture capital backed private companies that really were aggressively valued. That's so that has really been largely flushed out of out of the system. Is that going to be a positive or is that just going to, you know, those stocks are just going to kind of haunt the the indexes in the market for a while well i hope they've been completely flushed that's what we don't know yet i mean we know there are a lot of down rounds with these companies with venture capitalists but we have no idea whether this is the end of the downgrounds history suggests that when you start to see downgrounds as a

almost a trigger effect that causes more downgrounds. So risk capital has gone to the sidelines and showing no signs of coming back quickly into this market. And that's concerning if you're invested in these young companies, especially money losing high growth companies, because without risk capital to back you up,

those stocks are not coming back. Yeah, they need more before it pays off. Professor Aswath Damodaran, thank you very much. Good to speak to you. Thank you. All right, now for more on this sell-off, let's bring in Tony Dwyer of Canaccord Genuity. Tony, take us through where we are in your game plan here in terms of the range you think the market looks to be trading in and how today's macro news has been digested. Well, Mike, thanks for having me, number one. Number two, so we expected the summer rally, as you know, we kind of pulled the plug on that. It had an extraordinary rally. I mean, you had a 16 percent rally off the low. And ultimately,

that brought in a lot of thrust indicators. You and I have been doing this a long time. And our old friend, Marty Swagg, used to say, don't fight the Fed or don't fight the tape. No matter how you slice it, you're fighting one or the other here up until today. You had the high momentum that carried more than 90 percent of S&P components above the 50 day. That historically has been a great signal. But the problem I had with it that we talked about earlier in the week on fast money was that I can't find any of those occurrences where the Fed was tightening interest rates, where you made a major market low and a momentum shift. So we're just in this conundrum of which one's more important, the momentum or the fundamental macro backdrop?

And we obviously have kind of bounced between taking our lead from either of those, depending on the day or the week. It is completely a market of mixed messages in that sense out there, right? I mean, you have, you know, the inverted yield curve, the three-month, 10-year is going to invert before too long, most likely. The Fed does what it's going to do. That usually means, you know, be careful. Recession vigil is underway. At the same time, as you say, the tape itself acted pretty well off those lows. Is there a way to, I guess, kind of synthesize those two points and come up with a strategy or is it just to be open-minded about both directions?

I think you have to be open minded right here, Mike. Again, we our call was for, you know, tumultuous first half, then a summer rally based on the three conditions we had were fear of Fed had been extreme in April, May and June. Then you had the oversold condition. I mean, think about the fact that the University of Michigan consumer sentiment number in the history since 1949, I think it was started, we've never had that negative a sentiment. So we had this, the ingredients were in place, and of course, economic expectations got too negative. Mike, for the life of me, I don't understand why people think we're in a sharp recession or two. I know it's two negative quarters of real GDP, but we had 7% nominal growth. Corporate profits were OK. So the recession call and how we go from here comes next year. And to discuss the yield curves, everybody's got their own favorite yield curve, right?

You got 2, 10, 5, 30, 3 month, 10 year, whatever. When you look at the percentage of yield curves i get from my friends at ned davis the percentage of yield curves that are inverted hit 55 percent a couple of weeks ago going back over the last six or seven cycles like every time that you've had it get to 55 which it did again a couple of weeks ago you've ended up in a recession the fed is is raising rates to a historic degree, and they're only halfway done based on what the indications are. In a levered, generationally levered system with rising inventories and slowing demand, that's a tough one to say you've got to chase a market that's at 18 times.

Right. No, exactly. It's hard to say chase it. At the same time, you know, you're kind of going through this list of we've never seen this before. This is what an exception to the usual cycle is. I remember on the way up in 2020 and 2021, we did the same thing on the upside. We never had a market double off the low as fast as it did. So obviously there's a bit of a whipsaw effect. And I wonder what the indicators are telling you in terms of how the real economy is going to perform through this when it comes to things like consumers having more of a cushion than they have in the past. You look at things like the senior loan survey and whether, in fact, banks are willing to finance growth from here. How does that shake out at this point? Mike, I really think we have to separate

the economy and the market. But again, it goes back to what is the Fed going to do from here? Right there. And they're raising interest rates in 2020. My mistake coming up, I think we did a good job of looking at the low for on all the extremes like we had in June of this year. And then I kept calling for a retest initially, even though. And what caused us to shift from there was when the Fed announced they were buying high yield corporate debt on April 9th. We called it a game changing decision. But by then the market had ripped. So I was wrong at that point. It's different on we've had this call for the fall fall since really the early spring because the Fed is still raising rates. And that's the difference on a test. When you look at a test of the low to me, again, any momentum shift, I am respectful of the market momentum. Any momentum

shift, however, where it was a sustainable low and a real V bottom, every time I could find it, it came with an E. Not just a Fed that stopped raising rates as much, but an actual easier Fed. So we're in between here. Yeah, we are actually making new lows here for the session, down more than 900 on the Dow, more than 3% on the S&P 500. So down below those kind of previous August lows in the S&P that we had been watching for a bit, down 3.7% on the NasDAQ. So, Tony, in terms of the what do you do question, what's your best guidance on that score? In terms of sectors, in terms of types of stocks? People keep expecting, because I was bullish for so long, right?

I was the mega bull, right? But here's the problem. It's all about money availability. And people forget that back in the 2007, 2008, 2009 period, or even the 2001, 2002, and 2003 period, liquidity really shrank. And that's really ultimately the driver for stocks is the direction of earnings. That's driven by economic activity, and that's driven by money availability. Now, again, what do you do? People like me are famous for coming on here and telling you exactly what to do with high conviction. You don't have to do anything. Like my dad used to come down to the basement and look at my brother

and me and say, don't just sit there, do something. All year I've been suggesting, don't just do something, sit there. If you don't have a high conviction level, that's when we get whipsawed. And I don't. I have a market momentum that's telling me you can't bet against it. And I got a fundamental backdrop that tells me you don't want to add to it until you go back and at least retest that low. So that's been our framework for months. I really don't see any reason to change it and make a big bet given the backdrop that we have. We have another, you know, we have a jobs number coming on Friday, CPI number the week after that, and then the Fed meeting. So we're looking at three plus weeks when it seems as if the market is going to have this intense focal point on one place

and probably will react to it there. You have a September seasonal weakness, midterm election patterns. Maybe there's a little difference there. Is there any way to sort of say what to look for to know if the market has overshot or given you some kind of signal that things might be firming up? So the great the great philosopher Mike Tyson said everybody's got a plan until you get punched in the face. Right. So every time I look back at interest rates, when they're spiking and when the Fed is really tight, they end up easing pretty quickly. The data point that I'm really focused on here, Mike, is the unemployment rate. Remember, the core PCE, for some god-unknown reason,

the Fed has let the narrative be about the CPI. The core PCE, which they've stated in the past they use because its weightings are better and more even, that peaked months ago, a few months ago. So we know that inflation is getting a little bit better. It's not where they want it to be. Today's message was cleared by Fetcher Powell. But I think the real thing that's going to be the kicker of when they're going to not just at the National Federation of Independent Business, Small Business Hiring Plans Index, it leads the unemployment rate by four months. And we're coming to the point where it should pivot. So I don't know if it's August or September, but ultimately I want every I'm watching the unemployment rate more specifically, because like I said, when the economy starts to really punch in the face in an election year and the markets are weak, I don't know how hawkish they're going to sound. Exactly. Yeah. No, there should be a rethink before maybe Powell suggested there would be today.

We'll see how that goes. Tony, great to talk to you. Thanks a lot for coming on. Thanks for having me, Mike. Have a great day. All right. And with the Dow down more than 900, let's get right into the closing bell market zone. Nancy Tengler from Laffer Tengler Investments is here to break down these crucial moments of the trading day. Plus, Deirdre Bosa on a firm's slide and light sheds Brandon Ross on one video game stock that's outperforming today. Let's start with the market, Nancy. Pretty severe repricing in equities. Bond market says we kind of had this. Would you take it as an opportunity or a warning in terms of what stocks are doing today? Well, you know, one day does not a market make. But I get your point, Mike. We had been adding

risk back to our portfolios in June. And then about a week and a half ago, two weeks ago, I can't remember anymore. We you know, we cautioned our clients not to throw money in indiscriminately, not to chase the rally, and we gave ourselves that same advice. But then I also think that this can be an opportunity. If we get some sustained volatility to the downside, I think you want to go in and add to those high-quality names run by great management teams that have pricing power. You've heard it from everyone, dividend growth, reliable earnings growth, because we will slow down and we think we will be in recession in the first half of next year. And so the market's going to shift then to the companies that can deliver reliable earnings. And by that, I mean,

just take a look at Palo Alto Networks, this report that just came in this week. I mean, this is a company that raised guidance and beat on just about every metric. So you really want to pick your spots. That happens to be a stock that's in our 12 best ideas portfolio. But there are plenty of others that that are going to provide an opportunity because we think this is going to chop around for some time. Well, let's hear Fed Chair Jay Powell. He said this morning in his speech at Jackson Hole that higher interest rates will persist for some time and more pain is ahead.

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. So, Nancy, in this way, Powell has been casting the fight against inflation as, in fact, the populist way to help the overall economy and the average consumer out there. And that way,

it's sort of like, look, the political kind of popular point two years ago was get unemployment down as far as possible. Now it's you have to slay inflation. On the other hand, just this morning, we got a pretty welcome decline in the PCE core number. It seems as if there's some of the leading indicators of inflation look like they're going in the right direction. Is there a risk of getting a little too negative about the inflation outlook based on Powell's warnings? Yes. I mean, if you look at the economy, the PMIs have rolled over. Supplier delivery times have improved, which indicates the supply chain is loosening up and unclogging. You've got new orders down, prices paid down. And then we did see this core PCE number that the Fed likes to look at that

improved somewhat. I think one of the things that the market's struggling with is, and I do believe in redemption, but he has made a series of mistakes ever since he joined as Fed chair, starting with October of 2018. That was his first bear market when he spoke rather loosely about how long he was going to raise rates. And then again last year, ignoring inflation, insisting it was transitory with a laser beam focus on the labor market, all the while the federal government was supplementing benefits for people not to work. So I think this is why the market tends to overreact in the very near term and then recalibrates as time goes by. I don't think he said anything new. And the Fed members have been saying all of this for the previous two weeks. So I liked the shortened speech and the lack of taking questions.

But I don't think there's a lot of new information there. The economy is slowing. The bond market's telling us we're going into recession. And that's it. That is a fact. And so the Fed has to be very careful as they hike from here not to really add exponentially to the downside in the economy. We do have the Dow down more than 900, S&P down more than 3%. It's, you know, we've now worked ourselves into a point where 50 versus 75 basis points in September somehow seems like it's crucial, even though it might not have before. 50 is going to feel like, you know, a dovish move.

Right. Yeah, I think that's right. And that's why I think on just the day-to-day basis, you really can't draw too many conclusions. I think you mentioned earlier in the segment that it is a midterm election year. And I think Tony was dead on and we've been saying the same thing. How hawkish is the Fed going to sound after this September rate hike? I don't think so very much. And let's not forget QT. Quantitative tightening is going to double to 90 billion rolling off the balance sheet in September. There are people who have estimated that the decrease in the balance sheet's worth one to four and a half percent in rate hikes.

Strong dollar is also a tightening financial condition. So I'm not convinced that we're going to see unrelenting rate hikes for the next six to nine months. Yeah, at some point there was certainly the opening for him to emphasize that those things and emphasize how far the tightening campaign has come. But he chose not to do that. So we'll see how that goes from here. Meanwhile, bank stocks are falling along with the broader sell off. But it's the private equity names that are taking the brunt of the pain. Leslie Picker joins us. So, Leslie, private equity names, I guess they're kind of leveraged to financing conditions and things like that? Yeah, they're basically acting as leveraged beta. When you think about the portfolio companies that sit in these large asset managers,

they're looking at their comparables, they're falling in the market today. And then these are, you know, the ones in the portfolio companies are illiquid. They often have a bit more debt on them. And so, you know, when you hear commentary that sparks fears of a recession, these stocks do tend to fall. There's also the added headwind of the fact

that rising interest rates kind of reverses this dynamic that they've enjoyed over the last few years, where when rates have been low, they've been able to capture a ton of AUM, a ton of assets under management, as a result of being kind of a replacement, in essence, for the yield that they weren't getting in traditional areas. If the 10-year is higher, if there are other pockets of the credit market where investors can get yield, they weren't getting in traditional areas. If the 10-year is higher, if there are other pockets of the credit market where investors can get yield, they don't need private equity as much to get that outperformance. And wasn't there, I don't know if this is at least a psychological input to this sell-off, Leslie, but was it Blackstone that sort of decided they were going

to stop buying so many single-family homes in the real estate business this week? And just a sense out there that there's some indigestion in terms of some of the activities they've been engaging in? Yeah, it was a Blackstone portfolio company that said that. And you're right, that does create kind of this psychological dynamic because the one benefit private equity firms have in this market is theoretically when you see valuations tumble, that's opportunistic for them because they can buy at you see valuations tumble, that's opportunistic for them because they can buy at these lower valuations, especially in the public markets. But if even a, you know, entity owned by Blackstone is saying, actually, you know what, we're just not seeing much opportunity in this particular pocket of the market,

it has investors start to wonder kind of what's next from there. Nancy, so many value investors have become enamored with this group of stocks within the financials. They have, you know, the business models, the assets are sticky. They're really just asset gatherers at this point. It's not as if the companies themselves have so much debt. I mean, have you viewed them that way or do you think there's risk there? No, no, we haven't. We've actually been moving in the other direction with our financial holdings. We've been adding insurance names, minimizing our exposure to money center banks. If you go back, Strategas did a great analysis, Ryan Grabinski, and he went back and

looked at tightening financial conditions. Financials are the worst performing group of all sectors in the S&P. Technology kind of comes in mid-range, which is why I think it's sort of rich that we always get these huge sell-offs in old tech names, which should do really well as growth slows in the economy. They will deliver the kind of reliable growth. I don't want to chase the riskier parts of the financial sector at this point. Got it. And Leslie, thanks to you. Meanwhile, one bright spot in the market sell-off is Electronic Arts. That stock getting a pop after a report said Amazon will buy the company. Our David Faber knocked down that report earlier, citing sources.

Let's bring in Brandon Ross from LightShed. Brandon, just broadly speaking, it seems as if there's just a ton of attention and chatter about the video game makers, whether they're ripe for consolidation and the big tech and media companies desire perhaps to participate in a bigger way in that industry. Well, I think that that prevailing viewpoint started because there actually has been consolidation in the industry this year, most notably with between Activision and Microsoft, which is a deal that is expected to close maybe by the end of this year. All the big tech platforms are interested in sharpening their 3D interactive skill set. It's something that's very difficult to build on your own. So they're out there probably wanting to make acquisitions. The question is, who are the right targets and will the government allow such acquisitions, especially under this administration? And that's something we're skeptical about. You're skeptical of that. Yeah, that is a big

question hovering over all them. Take two is also up today in an awful day for the markets. Brandon, I'm afraid because of what the market's doing, we got to just leave it there for now. We do have the Dow down close to a thousand points at this point. Shares a buy now, pay later company, a firm falling off a cliff after the company reported a larger than expected loss for the quarter and gave soft guidance. CEO Max Levchin was on tech check earlier and he talked about his outlook for the credit environment. It's a conservative view in a sense that we don't know what the credit future looks like. I think the economy is not in the healthiest place. We just heard Jay Powell speak just to that point. And so I think we are being very cautious in managing credit,

but we are extremely confident in our ability to grow the business. Deirdre Bosa was part of that interview. She joins us now. And Deirdre isosa was part of that interview. She joins us now. And Deirdre, it is not just Affirm. Other fintechs getting slammed today as people worry about the credit risks. What's the current line on these companies? Well, I mean, this is one of the growth areas of the market that kind of fall out of favor when risk off. It's also unprofitable, especially in the case of Affirm. But there's a number of factors here. One is delinquencies.

As the economy softens, as inflation rates go up, there's this fear that customers, especially their younger ones of buy now, pay later, could miss payments or not be able to reach them. There's also the question of cost of capital for the Affirms, for the buy now, pay later companies itself. It goes up as rate goes up and rather growth and gross payment volumes, right? They've seen enormous growth over the last few years, but if e-commerce returns to pre-pandemic level, something Max Levchin did talk about, are they going to continue to keep that revenue up?

And actually, if you go back and look at a firm's latest quarters, revenue has been flat over the last three quarters. So it does raise questions about how much you're paying for this growth, especially unprofitable growth, Mike. And, you know, Dee, it strikes me that a firm's point is that not only were they early in this whole market, but that they have a better underwriting algorithm. They do have smarter technology. They're not going to get caught so badly in a credit downturn. But the

only way investors are going to gain confidence in that is if they make it through a downturn and prove it. Yeah, it's true. But you also see what's happening at some of the other fintech lenders. So if a firm's delinquency rates can be better than them, then maybe that does prove it. But, you know, I've known Max Levchin for years and he's talked about this even in the boom times. He likes to say that when the tide goes out, you'll see who's swimming without their bathing suit. And I think that's what investors will be looking for going forward is who's been taking on too much risk, who's had a better judge of creditworthiness of their users, especially as buy now, pay later, is so popular with the younger generation. For sure. Now, Nancy, if you were kind of sticking with the less risky parts of the banking and finance industry, I'm guessing these areas don't tempt you. No, the riskiest stock we have in our Garpy portfolios is Square.

And you could you can make the same argument, certainly best in class, a lot of things going right. And the stock's gone from 240 down to $69. So I think in this environment, you need to take some risk, but you want to really pepper your portfolio with, as I said earlier, the companies that have reliable growth and in particular dividend growth, because that's going to be a really good offset against inflation and a declining market. We are down now just over a thousand points on the Dow, three percent. The S&P 500 down a good bit more than three percent at the moment as we sort of have the losses deepen into a summer Friday close. Maybe in that sense, not too surprising. Nancy, it's interesting if we're talking about recession risks starting now or going into next year because the market peaked in January.

And it seems almost as if the market peaked too soon to be pricing in a recession that was over a year away or something like that. Is there any way to make any sense of that or is it just that, you know, each cycle is different? Well, you know, that's a great question, Mike. I think one of the things that struck me was when the yield curve inverted in 2019 briefly, and then we ended up in a recession that was pandemic driven. So I do think there's some wisdom that cannot be explained in the markets and the ability to look far ahead. That said, I do think we're going to continue to feel some pain through August and into September. But then as attention returns to earnings and the midterms, I think we're going to continue to feel some pain through August and into September. But then as attention returns to earnings and the midterms, I think we'll rally hard into the final quarter

of the year. But, you know, that's my guess. I don't know if it's already been priced in. It felt like recession was priced in in mid-June. And then this rally sort of took us, you know, away from that. So we'll see. Yeah. I mean, one of the as you as you allude to one of the strongest historical patterns is the market performs really well from a midterm election into this sort of midway through the following year. We're not there yet. Obviously, we have to say I think it's also important, Nancy, to point out that when markets do have one of these nasty macro sell offs and people flee from risk,

when they rebound, it's not always because everyone sees it's all clear, right? I mean, 2011, I was looking at that. It was bleak. Everything was. And it ended up being a pretty good buying opportunity. Right. And 2017, where we had negative earnings or no earnings. So I think investors need to be buying stocks that they can hold for three to five years.

No need for the capital. Look at names that, again, are growing the dividends, steel dynamics, public storage, and then add some risk in via technology. And I think you'll be really happy in the next three to five years. Dee, you know, just in terms of tech at the very top of the market cap scale of this market. We keep thinking that, in fact, we've had the reckoning and they've paid their penance. And we're not really seeing it here, perhaps with the exception of Apple. Yeah, Apple sort of continuing to be that safe haven. But I was just looking at shares of Alphabet. They're down more than 5 percent. Even Amazon is down four and a half percent. And there was this thinking, Mike, that perhaps they had taken their medicine earlier on in the year. You know, they had overcapacity problems. They had labor issues. They hired too much too quickly during the pandemic. But really, this macro

backdrop is a threat to all of them as well. The e-commerce story with Amazon, even AWS. I mean, the cloud giants fared pretty well last quarter, still some deceleration. But I think what this brings up, especially when Fed Chair Powell says that there's going to be more pain for households and businesses, our company is going to scale back even in the cloud space, which has proved pretty resilient. In the case of Alphabet, down more than 5 percent. Of course, it is tied so closely with digital advertising sales, which is an easy thing for companies to cut right away if they are trying to save some costs. Yes, for sure. That is a shoe that has not dropped. If it is going to, we'll have to see on that, Dee. Thank you. And Nancy, you mentioned steel dynamics before. Does that mean you think the industrial economy is in decent shape?

I do. I mean, look at the industrial production numbers that we got. That's one of the cross-current confusing data points. But I think it's also important to point out that, you know, with unit labor costs rising so dramatically and productivity down, we think people are going to continue to spend on the cloud. CIO report done by RBC says 86 percent are going to increase their spending on software. So Steel Dynamics is an interesting company because it does have a digital component, but more importantly, it has an ESG component. And so we like the company. We think it's a great place to be for the next three to five years. And it flies in the face of a cyclical downturn, I know,

but it's got a unique spot in the steel space. There's a lot of offsetting currents right now. Nancy, thank you very much. And thank you, Deirdre, as well. As we head into the close, about 30 seconds left. We are tracking for more than a 3 percent decline, about 3.4 percent in the S&P 500. The Dow is down about 1,000 points. The S&P has now broken the early August lows. We're still hanging on to more than half of the total rally from the June low up into last week's high down to that low thirty six and change would be another ten percent

drop from here market practice looking like a washout about ninety percent. Downside volume on the New York Stock Exchange that does it for closing bell on a Friday have a good weekend.