Closing Bell - Closing Bell: Market Stability or Vulnerability? 3/21/23

Episode Date: March 21, 2023

Is the market’s rebound this week a sign of underlying stability or is it actually vulnerability to a nasty surprise? Jason Hunter – head of technical strategy at JP Morgan – gives his take. Plus, Fred Cummings from Elizabeth Capital Management makes the case for regional banks. And, Rob Thummel of TortoiseEcofin sees more upside for the energy sector. He explains why. 

Welcome to closing bell on Mike Santoli in for Scott Wapner we are live from post nine at the New York Stock Exchange this make or break hour begins with relief lifting bank stocks and the broad indexes as well even as suspense builds ahead of tomorrow's crucial Fed decision you see regional banks as a group up nearly five percent of two day bounce in that sector and that brings us to our talk of the tape. Is the market's rebound this week showing underlying stability or vulnerability to a nasty surprise that might come? Joining us now is Jason Hunter, J.P. Morgan's head of technical strategy. Jason, it's great to catch up with you on all this. It's been interesting market action. You know, we had a scare. The S&P 500 never quite broke down, stayed above the December lows. In fact, we're trading right now exactly where the index was the day before Silicon Valley Bank started to melt down.

So the volatility index spiked. Does that mean that we've absorbed a little mini panic and it's resilient or do you see risk of the downside ahead? So on a very near term basis, we've pointed to this $39.50, $4,000 area. And when the market first broke down through that, you can look at the last two months or so of price action, looked a little bit like a top. To move down through those widely followed moving averages in that same area, a couple of CTA-type trend-following levels in that area, had the potential to trigger downside risk to the downside there.

To move back above that now, what we've been saying is if you move above 4,000, you'll table that short-term bearish momentum. But bigger picture, the thing that got us negative going into December, up when the S&P was around 4,100, that's still there. We think it's very much a limited upside story with asymmetric risk to the downside. And why this particular scenario didn't release us to the downside, there's still that risk as we move forward. So we're right there, right? I mean, the S&P is five points from 4000. I don't know how precise we want to be about that trigger level. But the manner in which the market is held together may be worth noting as well. A lot of talk last week and coming into this week

about the very large growth stocks, the strong balance sheet companies, the old mega caps that really did hold the index together. Is that a sign of some kind of healthy rotation instinct? Or do you feel like that's just a narrowing of the market that we have to be aware of? Yeah, so late cycle, that's a narrowing of the market. What you normally see is cyclicals will be the first ones to come under pressure. Money rotates into the stable earners, the secular growth, and then finally into the more true defensive plays. And usually that would occur as the yield curve's heading toward inversion and when it first gets into aversion. We've been

inverted for roughly a year now. So at this point, that rotation into stable earners quality, we think it's a little late for that. And in fact, in some of our modeling, if we think there's limited upside for the S&P, there's probably even more limited upside for things like the Nasdaq 100 at this point, given the flow we've seen, not just more recently, but even in early January, saw a bit of a position squeeze that drove the Nasdaq higher as well. You know, you'll hear folks who are, I guess, looking at things half full. And they'll say, look, semiconductors have outperformed. They look pretty good. Coming into this phase, you did have some cyclical sectors that really were distinguishing themselves.

It seemed to be sending a relatively reassuring economic message, whether we can believe it or not. It seemed to be what the tape is doing. Now, banks falling apart is probably never good in any of these scenarios. But I wonder how you just sort of read the leadership profile. Yeah, so certainly coming into the year, it as a strategy team that was negative coming in, thinking 4,100 was a ceiling. When you hear stories about China reopening, not only semiconductors, but basic materials, industrials, all the deep cyclicals, really getting an enormous bid into January.

That's something that concerned me. And if that persisted and made the case for a PMI cycle bottom, we would have had a problem with our view. But as soon as you got into early February, even before that, the whole China-centric story started to fade. And more recently, with the panicky type trading that we've had in recent days, cyclicals really came under extreme pressure. Things like copper-gold ratio, European autos. I mean, you can go down the list with one exception, semiconductors, that not only held their bid, they actually caught an additional bid and almost started to act like secular growth. And we kind of wrote in a note that we published yesterday

that semiconductors have a bit of identity crisis here, where there is some rationalizing, these are no longer cyclical plays for various reasons and narratives, these are secular growth stories. And, you know, number one, that story is very stretched on the same modeling that makes the NASDAQ look somewhat overbought now and certainly limited upside. Semiconductors on that modeling using things like Fed expectations, economic surprise data, semis are incredibly stretched now. And we'd argue that this 3200 area on the SOX is probably something of a ceiling for the semiconductor index. I wonder if that's really just a read on NVIDIA being so much bigger and more of a force in the index, in the semiconductor index.

And it itself is surrounded by secular growth sentiment. I mean, it just seems like it might be that kind of a profile. It's the market care dominator in that sector. Now, to be clear, you're thinking that we have to go back toward or to the October lows in the S&P. Eventually, this is going to work down that way? That's correct. Yeah. And basically, the idea is we get a retest of the lows. And when you go back, historically, look at recession-driven bear markets, that's still something of a more muted bear market when you associate the ones with recessions, if we're just simply retesting 3,500. And what would really bolster that view and what we've been watching most closely is across the market when we look at the fixed income market. If we see a continuation of the bear steepening, I'm sorry, the bull steeping that we've seen in recent days as the cyclicals came under pressure.

If that is reinforced as equities start to sell off toward that $3,500, ironically, it's the bad that will make the good. It's a market that looks forward and sees the Fed will pivot as we get into the second half. And then we'll look for things like cyclicals to actually start to outperform the deep cyclicals that you normally look for, small caps outperform. But for right now, the point is we still have to get through the down before we can get to the up. And people should be really focused on risk management at this point, especially where markets are priced today. Got it. And just to be clear for folks, a bull steepener in the Treasury curve is short term yields go down more than longer term yields, which is exactly what's been going on as people are positioned for potential Fed rate cuts in the months ahead.

Let's bring in Nicole Webb of Wealth Enhancement Group into the conversation. Nicole, you've been focused on, I guess, defense or quality within your portfolios. So I would assume you're also not really too concerned about upside risk, perhaps no matter what happens tomorrow with the Fed? I mean, the clients of our firm are looking for us to be kind of prepared for various possible outcomes. So when we think about the Fed decision tomorrow, it seems to us that, you know, in either direction, the Fed is a bit vulnerable. So as we're looking at positioning through 2023, to us, the probability of the economy eroding to some degree is much greater than the probability of expansion. And so similar to the points just made, we expect this range to be tested back to the October lows,

a bit to the high side that we've seen this year. Some of this growth versus value, who's coming out ahead, some of those duration trades, those themes continuing to be a bit omnipresent as we watch for more of this data to roll over in terms of the tightening we're seeing in the financial markets and that pushing through to bring us to the re-steepening of the yield curve and kind of the far side outlook of this year. What would you say to those who, and this has been kind of thrown out there multiple times in the last week or two, which is that all this upheaval in the banking sector, you've had the failure of a few banks, you've had some extraordinary measures by regulators and the

central bank maybe has just sort of pulled forward the moment when the Fed is done hiking rates. Who knows if it leads to cuts down the road? But it's relatively low cost in terms of the damage done in order to get to that point. When we were thinking a few weeks ago, Fed's got months and months and it's going to get up to six percent on the short rate. Is there any merit to that type of thinking? I mean, it certainly appears that the market is working in the assumption that the Fed is going to become more dovish. I think many of us are more waiting to hear what we hear than what action the Fed takes tomorrow. To your points exactly, because there's some question in is the resilience of the market thus far for the wrong reasons, meaning if we've

suddenly pivoted to this lower expected terminal rate without the meaningful progress, but instead issues specific to the bank sector in terms of how quickly rates moved and some of those underlying fundamental pressures there, that's not the same as seeing kind of meaningful reduction to services inflation, to wage growth, to the structural changes in the labor market. So those issues are still there, but yet we have to factor in the strength and resilience of the financial markets as a whole. And so, you know, it'll be very interesting to see how the Fed plays through that, especially after watching how the ECB took action last week. Jason, you mentioned that in bear markets associated with a recession, you know, you see,

you expect this particular type of pattern, right? A retest down toward those lows, maybe we're closer to actually being in the recession, I suppose. What cycle does it seem to be echoing if there is one or various types of instances? I'd say like if I had to pick one, given how much damage has been done already before we've even gotten close to recession data, it was probably if I think about how the market's going to bottom and when the data maybe materializes the early 1990s, where if you waited for the actual recession data to show up, the equity market was already rallying for a month or two months at that point. So our thinking is that the equity market puts its low in as we get toward the end of

the first half. And our own economists don't think the recession data comes until later. But at that point, if the market now is efficiently pricing the Fed to start pivoting, as we start to see that data sometime in the second half, the equity market starts to read ahead and rally out of that. So I'd have to pick that one. Yeah, no, it's a good sort of mental model of how things have tended to go in sequence. And, Nicole, just finally, if you could be more specific about what appeals to you right now in terms of your tilts in your portfolios and sectors and things like that that make sense.

Yeah, absolutely. Really starting last year, we started to hyper focus on quality. And to us, that specifically was looking at companies with strong balance sheets and consistency of cash flow. And so when you tilt that over into a more slightly defensive posturing, we're looking at healthcare names, some of those that haven't performed in the same way as others. So a name that comes to mind is Johnson & Johnson. We still like Merck, although we've seen more of a run-up in that name versus over the last six months how J&J has performed. And then Thermo Fisher, just with some of that consistency of cash flow through various outcomes. We still are holders of longer duration

quality bonds, individuals, as we believe that could play out in one of the scenarios in which we do go into a mild recession. and then continuing to barbell growth and value as they continue to kind of have these meaningful waves of under and out performance relative to where the market believes the Fed is headed. Those are our top three positioning plays right now. Yeah, those rotation swings have been pretty rapid recently in past several months. Nicole, Jason, thanks so much. Appreciate the time today. Thank you. All right, let's get to our Twitter question of the day. We're asking, what is the Fed going to do tomorrow? Pause, hike 25 basis points, or do something else?

Head to at CNBC closing bell on Twitter to vote. We'll share the results later in the hour. And let's get a check on some top stocks to watch as we head toward the close. Christina Partsenevelos has that for us. Hi, Christina. Hi. Well, let's start with shares of Coinbase surging right now. There's a few catalysts the crypto exchange will integrate with the Brazilian government's payment system to start allowing crypto purchases with Brazilian currency. The government platform already has about 140 million users, but this is about adding further legitimacy to cryptocurrency.

Speaking of which, crypto, Bitcoin, up, what, 21% just this month alone. So that means there's more support for crypto, driving one analyst at Tiger Securities to give Coinbase a huge price target upgrade to buy, of course, from $65 to $200 a share. Coinbase is only at $84.46 at the moment. But you can see shares are up over 12%. Switching gears, Vernado Realty Trust is firmly in positive territory. Analysts at Piper Sandler upgraded the stock to neutral from underweight. They note that the market's view of the office sector is bleak. But they say even though office life is changing, the office, like here, isn't going away entirely. And Tornado will keep doing his business. All right.

Reassuring in its way. Christina, thank you very much. We are just getting started here. Up next, Treasury Secretary Yellen speaking in D.C. on the state of the banks. We are live in Washington. Plus, how you can best trade the financials where one investment strategist thinks you should put your money to work despite all this uncertainty. That is all after the break. The index is pretty much at the highs of the day.

S&P 500 just below the 4,000 level. Closing bell. We'll be right back. Treasury Secretary Janet Yellen speaking today at the American Bankers Association in Washington. Kayla Tausche joins us now with what she had to say. Hey, Kayla. Hey, Mike. Secretary Yellen today said the banking crisis is stabilizing with deposit outflow slowing down. And she said the U.S. banking system remains sound, drawing a contrast, a stark contrast, to the 2008 financial crisis, which touched nearly every bank.

And while Yellen chalked up that confidence to the government's swift and decisive action to keep any systemic risk in check, she said regulators are vigilant and may still need to do more. It's our intention to remain vigilant in the days and weeks to come. And as I said in my remarks, that means potentially intervening if a smaller bank experiences the kinds of difficulties we have seen that pose the risk of contagion. Across town in Washington, top bank executives are gathering with the Financial Services Forum, a different trade association, but that's a meeting usually attended by the senior most government financial officials. That meeting is usually to discuss policy issues, and it's been previously scheduled.

But it does come as executives are focused on keeping First Republic Bank afloat and are currently discussing on contingency plans for that $30 billion deposit investment, Mike. And certainly that sale process is underway, but banks want to figure out exactly what their exposure and their risk is to that bank and what they can do to keep it solvent. For sure, Kayla. And, you know, Secretary Yellen's remarks specifically mentioning if a smaller bank were to have trouble, clearly there's a little bit of a hesitancy to make these broad, anything that could be read as a broad guarantee, perhaps because, you know, they're not able at Treasury to make such a guarantee. Right. And she leaned heavily on the systemic risk exception, the fact that the government can intervene if a bank in this situation is found to have systemic risk to the global financial system. That is clearly the determination that they made in the case of Silicon Valley Bank,

in the case of Signature Bank, and then in a slightly different fashion regarding First Republic Bank. But she stopped just short of suggesting that, you know, she would support this temporary, you know, lifting of the deposit insurance cap, which is something that's also under consideration here in Washington. It certainly is. Kayla, thank you very much. Sure. Well, regional bank shares surging on those comments from Treasury Secretary Yellen. My next guest says the bank industry is well capitalized and calls the broad sell-off an opportunity for long-term investors. Let's bring in Fred Cummings of Elizabeth Capital Management to talk more about that. Fred, it's great to have you. So clearly, whenever you have banking stress, when you have institutions

that fail and you have a fast moving deposit flight, people naturally are going to wonder just exactly how pervasive these issues are. How can you offer some assurance that, you know, this is not going to be a game of waking up every day and finding some other bank or several banks in a similar position? Well, first and foremost, investors and consumers need to understand that this is really a crisis of confidence. When you look at the fundamentals of the banking business, banks have near record levels of capital. They have very strong liquidity and they're entering 2023 at record levels of profitability when you look at return on average assets. And more importantly, we've been in touch with a number of our portfolio

companies, as well as listening to conference calls with managements across the country. And the message is the same. Their customers are not panicking. We are not hearing that the banks are experiencing outsized deposits, outflows, and that gives us a reason to be optimistic. And I think once we get to earnings season, that same message will be communicated throughout and that should help to restore confidence in the banking sector.

How do you treat, Fred, these estimates that now are making their way around, this new attention on sort of paper losses on the books of banks from longer duration, fixed income securities and loans and things like that and and and stress testing each bank in a sense on our own for whether they can get through this if forced to sell because that seems to have been the game when people are panicking about these stocks. Yes indeed and a number of people have talked about it and I wanted really to address in this receptions out there with regards to' inability to sell their available for sale security portfolio and remain well capitalized. We looked at the 127 banks that comprise the S&P Bank Index. so their entire available portfolio, only nine would drop below the well-capitalized

threshold of 7% common equity tier one ratio. And so that's a relatively low number. And that really speaks to the strength of the capital bases of these institutions. And more importantly, the banks are not going to have to liquidate these securities, particularly now that the Fed has structured that term lending of a facility. But that was a misperception on the part of a number of investors. And so we looked at the numbers, and that's the conclusion that we drew that banks could easily sell their available for sale portfolio and remain well capitalized.

Well, I mean, we've had this little two day bounce in the sector, but the selling that led into it was just indiscriminate. So obviously, if you think that this is a more localized problem and most banks are healthy, which types of banks? I know you have a long, short strategy are now attractive based on the punishment they've taken. Yeah, well, we think there are a broad range of banks that are attractive. One of our favorites happens to be a bank in Texas, Texas Capital Bank. This is a twenty 28 billion dollar bank they brought in new management in 2021 and he's transforming their culture from a wholesale bank to relationship bank and we think that stock's

going to do very well we also like banner corporation in washington state this is a company that's focused on internal profitability improvement they have a great deposit franchise and they have very low credit risk the same can be said for east west bank court which happens to be one of the most profitable banks the country posting a two percent return on average assets uh they too have a great deposit franchise and it's a very well managed institution. And then I'd also add that we like a small bank here in Ohio, Peoples Bank Corporation. This is one of the few banks that's been able to do accretive acquisitions over the last nine months. And they have great earnings visibility as we look out to 2023.

But fundamentally, the types of banks that we are attracted to have strong capital bases, have very attractive deposit franchises, and we think they have very low credit risk. And that's going to be the next focus area for many investors, given the fact that the economy is expected to slow in coming. Absolutely. Some names we don't often talk to. I really appreciate you bringing to our attention, Fred. Thanks very much. Thanks for the opportunity, Mike. All right. Anytime. Up next, we're drilling down on the energy trade. Our next guest forecasting some serious upside for the sector. He'll make his case. Closing Bell. Be right back. Welcome back to Closing Bell. Seeing some big moves in solar stocks as we head toward the close. Pippa Stevens joins us now with a look at those. Hey, Pippa. Hey, Mike. Well, solar stocks are pacing for their best day of the year, and we are seeing

broad-based strength, but there are a couple of notable movers, including Canadian Solar. The company reported stronger than expected fourth quarter results and said it expects full-year solar module shipments to be up 55 percent relative to 2022 at the midpoint of its range. Sunova is also jumping. Now, this move follows heavy losses last week, which several people told me were thanks to investors' misunderstanding of filing from the company. Sunova announced that it's in talks with the DOE loan program's office to guarantee the majority of the company's loans to lower-income customers. But importantly, this program hasn't yet been finalized, and it also had nothing to do with the banking meltdown. CEO John Berger telling me, Mike, that it was in the works for more than a year. Back to you. Wow. Maybe a sign

of how skittish some investors are. Pippa, thank you very much. Energy stocks gaining today as oil prices rebound from 15-month lows. And our next guest says there's more upside in store. Let's bring in Robert Thummel, senior portfolio manager of Tortoise Ecofin. And Rob, obviously been a tough run. Natural gas had, you know, kind of a crash. Oil has not really performed as many thought it would with China reopening and the global economy reawakening. So what's your diagnosis of the issue initially in terms of why there has been this weakness? Yeah, no, thanks, Mike, for having me on. So I think really when you look at it, there's been a lot of uncertainty in the market. There's been a lot of discussion about are we in a recession?

And now with this banking crisis, is that the triggering event that's going to actually cause this recession? And so I think if you have a recession, really commodity prices tend to trade off. And so that's really what we've seen in natural gas and oil over the past several weeks. And so now the question is, is how deep and how severe is it going to be? And so that's really put energy stocks in a position where there's some really good long term and short term opportunities for investors. Yeah, I was going to say, I guess, are we going to be free of those looming recession fears for a while? I mean, even if we don't get one statistically, it would seem like that's going to be the psychology for a while around just all investments. Yeah. Well, the reason why we like the energy sector, Tordis, is simple, and it's this, Mike. The way to dispel or combat any uncertainty, even if it's how severe the recession is going to be, at least for companies, is generate a lot of free cash flow and reduce debt.

And the energy sector across the board has really done that over the last several years and will continue into the future. It's a pretty simple formula. If you generate a lot of cash, return it back to shareholders, reduce your debt, that in our mind is a pretty compelling investment opportunity and one that, you know, investors can really get behind even in an uncertain environment, whether it's recession or banking crisis or any other uncertainty that's out there. You've focused a fair bit on energy infrastructure type investments, right? Pipelines and things like that. Has there been a surge in investment in those areas to the point where, you know, it's going to be some overcapacity down the road? Are we not there yet?

Yeah, no, that's a very good observation. the shale boom to build out adequate infrastructure in order to be able to transport significant amounts of increased volumes of U.S. oil and natural gas, both domestically as well as globally through exports. But that infrastructure has largely been built out. And you're right. There now is excess capacity. So that's why we really like energy infrastructure, because you can still have oil and gas volumes in the US grow, which they will, but you don't have to, these companies, these energy infrastructure companies don't have to spend a lot of excess capital and CapEx. So effectively

all the incremental cash flow goes back to the investors in the form of higher dividends or maybe potentially stock buybacks as well which, you know, when you look at the energy infrastructure sector you're getting six, seven, eight, in some cases even double digit dividend yields, which in this environment is pretty attractive. Yeah, I noted, I mean, what, like energy transfer would be a name in that area that you might own 10 percent stated dividend yield right now. You don't think that the relative yields look a little bit less attractive given the fact you can get, I don't know, 5% in some T-bills? Well, obviously, there's incremental risk in energy transfer versus T-bills, as you highlight. But when you look at what energy transfer is doing, and then we still think that that spread and that risk spread or that risk premium you're paying to buy an energy transfer is still too wide. If you look at the free cash flow yield for energy transfer, it's more than that 10%.

So in other words, what I mean by that is that not only provides energy transfer enough money to pay that 10% dividend yield, but also buy back some stock as well. And so we look at, you can look at it as a spread to T-bills, but you can also look at the free cash flow yield as a spread to the broader market. And the S&P 500 dividend yields probably 5 or 6 percent. The free cash flow yields 5 or 6 percent. The free cash flow yield for energy infrastructure is double digits. So that spread is just too wide from our perspective. Gotcha. And could, of course, that payout grow over time. Rob, good to catch up to you. Thanks a lot.

Thanks, Mike. All right. Up next, NVIDIA's big AI moment is here. The company holding its annual developer conference. We're breaking down what its latest push might mean for its already roaring stock. Is there more room to run? We'll discuss when Closing Bell comes right back. 22 minutes until the closing bell.

Here's where we stand near the highs of the day the s&p 500 just under the 4 000 mark up 1.2 percent that's about a 10-day high uh the dow up about 267 the russell 2000 outperforming up two percent and the nasdaq keeping pace uh just about up one and a half percent shares of nvidia have been on a wild ride up more than 70 percent year to date So how much room does that stock really have to run from here? Christina Partsenevel is here with more on the stock on the back of its annual conference. Christina. Well, it's hard to find anyone on Wall Street who is not bullish on NVIDIA, given its contribution to generative AI. And at today's conference, the CEO, Jensen Wong, touted the importance of capitalizing on that trend. Listen

in. We are at the iPhone moment of AI. Startups are racing to build disruptive products and business models, while incumbents are looking to respond. Generative AI has triggered a sense of urgency in enterprises worldwide. Today's big announcement was around a new GDGX supercomputer that will allow companies to build and train their own AI models with new partnerships announced with Oracle, Microsoft, Adobe. And the goal is to have all of these partners and users be able to access these supercomputers that you're seeing on your screen just from a regular web browser. There are other announcements, a new GPU, graphics processing unit, and new lithography capabilities, which is really just complicated lighting processes to design

chips. And that will make an even more powerful two nanometer semiconductor, resulting in more collaborations with TSMC, ASML, and Synopsys. But investors are watching NVIDIA. Why should we care? Well, it further entrenches NVIDIA into the semiconductor manufacturing supply chain. The stock, like you mentioned, moving higher year-to-date over, what, 80%? Up today ever so slightly, 1.7%, versus the SOX, which is only up, look at that, 24 percent year to date. And NVIDIA, too, is on track for its best quarter since 2003. Investors like it.

They sure do, Christina. And, you know, it's a $650 billion market cap right now. It dwarfs almost everything else in the semiconductor industry, right? It's like 50 percent bigger than Taiwan's semi and market cap terms, just multiples of AMD at this point. And, you know, it's almost as if the market only really bestows that kind of market value on companies that thinks are more than hardware. You know, they have to have some kind of recurring and defensible ecosystem around them. And so clearly that seems to be another piece of the NVIDIA message to investors. We saw that with a lot of the announcements made today. This is about becoming a cloud service company. So it's not just a chip name.

It's going to transition and maybe even, you know, five to 10 years from now, more than 50% of NVIDIA's revenue is actually going to come from software, reoccurring subscription models and all that. So it's no longer just that, hey, semiconductor designer or GPU provider. Yeah, trying to escape from that idea of the quick cycles in hardware.

But 60 times forward earnings, we'll see if they can justify that. Christina, thanks so much. Thank you. A quick programming note. Don't miss the CEO of NVIDIA. That is tonight on Mad Money. Last chance now to weigh in on our Twitter question. We asked,

what is the Fed going to do tomorrow? Pause, hike by 25 basis points, or do something else? Head to at CNBC closing bell on Twitter. We'll bring you the results after this break. Let's get the results of our Twitter question. We asked, what is the Fed going to do tomorrow? The majority of you saying hike by 25 basis points, about a 75% probability. That matches the bond market's probabilities of what's going to happen in a day. Up next, we're counting down to Nike's numbers. The retailer reporting in overtime. We'll break down what you can expect when those numbers hit the tape. That and much more when we take you inside the Market Zone.

We are now in the closing bell Market Zone. Eric Knutson of Neuberger Berman is here to break down these crucial moments of the trading day. Plus, Phil LeBeau on Tesla's big move and Omar Saad from Evercore and what he's watching in Nike's earnings. Earnings are due right after the bell. Eric, good to have you here today. We have the market actually making new highs for the day, going back about a week and a half in the S&P 500. Seems like there's some comfort building or at least a lack of fear as to what the Fed might do tomorrow. What's your best guess on their decision and what are the immediate implications, do you think, of what they do? Yeah, the Fed's grappling with whether they're going to be Arthur Burns and

be too dovish as inflation is high or whether they're going to pull the full Jean-Claude trichet and hike into a banking crisis. The ECB's already done the trichet and hiked into the banking crisis. And we think the Fed will take that next step, a 25 basis point increase, but probably wrap that in some pretty dovish language, indicate they're close to the end, if not at the end. And in a way, it almost doesn't matter. It's priced in and at this moment, what's most important is the broad liquidity being provided through the Fed's balance sheet and some of the programs they put in place and liquidity they provided last week on the one hand. But also on the other hand, what we do expect to see

lead to considerable tightening as banks change their posture in this more challenging environment. And that's the part that we think is going to have the biggest negative impact on the economy. And negative impact on the economy to the point where it causes a significant downturn or simply moderates the growth? Because, again, we were just talking a month ago about it looked like things were overheating, too hot for the Fed's taste. Fed was going to have to go to six percent on the short end. The conversation's entirely changed. And what's your confidence level that we will get a recession or something like it? So certainly recession risk has increased. We came into this year saying it was better than 50-50 odds of recession, and we'd say that's still

the case within the next 12 months. The markets are partying like it's 2009, like we're going back to the kind of post-GFC playbook of easy money, low negative real interest rates, low inflation. And we think that the next five to 10 years is going to look quite different than the five to 10 years after 2009. We're likely to get stickier inflation, and the market isn't fully accounting for that yet. That the Fed is projecting that they're going to, you know, positive 2% real yields. They may not be able to do that much, given the news we've had, but they're going to, you know, positive 2% real yields. They may not be able to do that much, given the news we've had,

but they're going to stick with the notion that they're going to go back to positive real yields. We're not going into a negative real yield environment, and that is going to be challenging for the economy. So we do think the economy is going to slow. Recession risks are high, and we don't think that's priced into equity markets yet, which lead us to be underweight equities in our multi asset portfolios.

And so in favor of fixed income here even you know with all the yield volatility we've seen. Sure short duration fixed income and cash frankly you know cash is yielding 5 percent that's comparable to the earnings yield on the S. and P. 500 that's a very very strong competitor from an asset allocation standpoint. So we're overweight cash, we're underweight equities, and we're overweight fixed income. What we like in fixed income is high quality, shorter duration credit. We added duration as yields rose to around 4% on the treasury, 10-year treasury. Frankly,

we're looking at trimming duration at this juncture. Our fixed income team's been trimming duration in this environment. But there is really interesting opportunity in shorter duration credit, in mortgage-backed securities and structured product, where you can pick up pretty attractive yields with a lot of mitigated risks in this environment. Yeah, certainly providing a buffer, if nothing else. Eric, great to catch up with you. Thanks so much. Yeah, thanks a lot. All right, Phil, this move in Tesla, it's been kind of eye-catching today. What seems to be behind it? Well, if you're looking for a catalyst, and it's not a huge one, and ordinarily it would not be a catalyst that would have this kind of

impact, but take a look what Moody's did today regarding the debt rating for Tesla. Raised it out of junk status, raised it to BAA3. That is following the move that we saw from Standard & Poor's last fall. So now you've got investment grade credit rating for Tesla. Again, this ordinarily wouldn't have a huge impact. They cite strong liquidity, deliveries growing, prudent financial policy. Put that together with the anticipation that we might, might see a pause or perhaps the beginning of the Fed lowering rates down the road. And that gave all of the EV stocks a nice pop today. Tesla

by far the most action today, up, what, 8% on the day. But there you see the rest, Lucid Fisker, Lordstown and canoe guys back to you yeah and uh elon musk doing his share to try to uh whip up uh some enthusiasm for a potential rate cut excuse me down the road calling for half a point but um you know rivian was also an interesting one here we've got some comments out of adam jonas at morgan stanley the stock now trading right around its cash on the books right Right. Right. And that's an interesting point because we're looking at a situation where people are saying, what does the future hold for Rivian? Everybody that you talk with on Wall Street will tell you the same thing. They like the management team, they like the product, and they like what

they are hoping to do in the future. The question is, how do you get from here to there? And in between, there's a lot of hurdles that need to be overcome. And that's why I think a lot of people are saying, where do you go with Rivian? Do you see this as the base, Mike, or do you look at this and say, it's going to be choppy waters at best over the next several quarters? Yeah, we remember how difficult and uncertain it was when Tesla was traveling that road subscale and trying to ramp up. So they're starting from a little bit behind. Phil, thanks very much. Appreciate it. Omar, Omar Saad at Evercore.

What are we looking for in Nike's numbers today? You know, it's had a little bit of a run in the stock as people have flocked back to the quality names in consumer. Yeah, absolutely. That's certainly our view in soft lines right now. We think in this judicious consumer environment where consumers aren't spending willy-nilly on everything and anything, certain franchises are really being able to separate themselves from the pack. Nike, in our mind, is one of those franchises. Plus, you know, we're still amidst a sneaker boom, in our opinion,

and as consumers replenish and fill their closets with more and more sneakers. Tonight, I think that there's two key questions as we look at the earnings. China, the China reopening. Nike's obviously been a beneficiary of huge growth in China over time. And then it's been a drag during COVID, given all the shutdowns and some of the other factors happening there. It's going to be one of the first data points after the Chinese New Year, this long after the Chinese New Year. So it should be a very interesting update. The other question, I think, is the margin unlock. Is Nike's underlying kind of DTC-driven margin unlock going to show through a lot more now that some of the margin headwinds are easing, whether it's the elevated costs and freight, as well as some of the markdowns

they had to work through on apparel inventories that built up in the U. S. Yes obviously inventories have also been. A bit of I in you know in focus you mentioned that Nike had some big investors into I guess I give a little more detail about their strategy and things like that what's your

read on that this is going back I guess a couple months. Yeah I mean I think there's a couple things going on you know the company as back, I guess, a couple of months. Yeah, I mean, I think there's a couple of things going on. You know, the company, as many companies were, you know, were a lot more quiet during COVID, a lot less interaction within the company and certainly with external players and investors. So I think they took the opportunity to take some of their key shareholders, bring them in, reintroduce them to new management teams they hadn't met before, and I think show them some product as well. From what we heard, usually a good sign when Nike's bringing some of its

key shareholders in. I doubt that's a decision they would make ahead of a series of challenging financial times ahead. I think really, Nike's put a lot of hard work in on the inventory as well as building the underlying digital ecosystems and product pipeline and

local consumer connections and markets from China to North America. Everywhere in between I think that's- you're going to see the numbers play out tonight and in the coming quarters as well. You mentioned that- you say we're still in a

sneaker boom- and what does that meant. For Nike in terms of market share obviously everyone. Is interested in in all the kind of newer fashionable models but- it seems have they reaped the benefits. So to speak from. Adidas's struggles

already or is that still- you know in the future as well. Yeah I mean this is a great kind of double edged question on the one hand Adidas and some other companies had struggles in the spice and excess inventory in certain markets

including China. But on the other hand consumers are wearing sneakers more which means they're wearing through them more. A lot of sneakers are white, which makes them wear through more quickly. And people are wearing them more occasions, which means they want to have more pairs in their closets. So we're talking about billions and billions of sneakers and feet out there that need to be, you know, kind of clothed with sneakers, if you will. So, you know, Nike to me is the biggest potential beneficiary. Obviously, in this kind of rising tide, there's a lot of boats being lifted. You hear companies like On today, the stock is up huge on great numbers and a very strong demand outlook.

Brands like Hoka. So, you know, Foot Locker yesterday, new CEO Mary Dillon stepping in. I think that's another company that's positioned to benefit from the sneaker boom. But Nike is the biggest player, has the largest supply chain, the biggest pipeline of innovation, the strongest marketing machine, on and on and on. They're probably the one that's going to reap the most rewards. And by the way, an entirely kind of built up digital direct-to-consumer ecosystem now to sell consumer sneakers directly. So a lot of factors that put Nike at the center of the sneaker boom of beneficiaries. And quickly, not a cheap stock, kind of never is really, but what's your upside target and what does that imply for the multiple? Yeah, I mean, look, I think this is a company, it's really about the margin unlock.

We know there's kind of a very strong long-term demand for athletic active apparel. These are replenishment products in an oligopoly style market with the number one player. You know, historically, the margin has been capped at 12, 13 percent range. And now, you know, there's this, you know, theoretically, this big DTC margin unlock coming. If you think about Nike as a high teens margin company, you know, 50 percent larger, you're talking about eight dollars of earnings that can kind of hold, you know, the kind of 30s multiple, you know, which as a digital consumer hyper growth you know mega cap global stock you know 30s multiples you see that a lot another part estee lauder for example uh some of

the fast-growing cpg companies i think nike as well as some of the fast-growing tech company i think nike it really fits in that group of companies all right see if it can uh can show it's on that path after the close. Thank you very much. Appreciate that, Omar. Let's take a look at where we are. The S&P 500 looks like it's going to go out right around 4,000. That's about a two-week high. You've seen the equal-weighted S&P also up nicely. Tech participating today as well at about a 5% rebound in the regional bank stocks ahead of the Fed Day tomorrow. That's going to do it for Closing Bell. Let's send it over to Overtime with Morgan Brennan and John Ford.