Closing Bell - Closing Bell Overtime: Markets End At Session Lows; Evercore’s Roger Altman Reacts To The Fed Hiking Rates 0.25% 3/22/23

Episode Date: March 22, 2023

Markets tumbled into the close as investors weighed Fed Chair Jerome Powell’s comments at the press conference after the Fed hiked interest rates 25 basis points. At the same time, Treasury Secretary Janet Yellen testified to a Senate committee that there were no plans for broad increases in deposit insurance. Former Chairman of the Council of Economic Advisers Jason Furman and Evercore’s Roger Altman reacted to the Fed’s move while Quadratic Capital’s Nancy Davis and Jefferies’ David Zervos digested the market sell off. Plus, Zelman & Associates’ Alan Ratner on KB Home earnings and Brad Slingerlend, NZS Capital Co-Founder, on trading tech after the Fed. 

What a sell-off in the last 35 minutes, going out right at the lows. That is a scorecard on Fed Day, but winners stay late. Welcome to Closing Bell Overtime. I am John Port with Morgan Brennan. We've got a jam-packed hour breaking down the Fed decision and the impact going forward on your money. Coming up, we're going to get reaction from former Council of Economic Advisors Chair Jason Furman, who says there's one key message Chair Powell conveyed in his news conference. Plus, Evercore founder Roger Altman will give us his first take on the decision to hike rates and the late session plunge. Let's get straight to our panel with stocks hitting an air pocket in the final moments, final minutes of this session.

Joining us are Nancy Davis from Quadratic Capital Management and David Zervos from Jeffries. David, boy, what happened there into the close, you think? And I guess building on that, what do you sell when the Fed thinks the economy is slowing enough that it doesn't have to keep hiking because credit's going to get harder to come by? You know, I think this is all this two weeks has introduced a lot of uncertainty to the Fed, to the markets, to everybody involved as to how much of a pullback there will be in the credit provision process, particularly to small and medium sized businesses, which are a bit of the lifeblood of the economy or are the lifeblood of the economy. So we're flying a little more blind. That should take risk premiums up. And I think, you know, you're seeing a bit of that in equities. I'm not sure, you know, how to explain the plus one to down two or what down one and a half.

You know, there's a lot of positioning that no doubt is in there. And I don't know that we want to get into every little minutia. But I do think this brings in a lot more uncertainty than where we were before. And that's why the front end of the bond market is priced the way it is. People go to that for safety. They see higher probabilities of accidents. And that's the sort of the hedge for accidents, if you will. And that's really been the fundamental change. A lot of stuff hasn't really changed this year in terms of levels.

S&Ps are largely unchanged. High yields unchanged. The real change is the two-year note level yield is significantly lower, and the prospect for lower rates down the road. I don't think you told me what you sell in this environment under these conditions, though. That was the end of my question. I think you stick with what we've been saying, which is you stay away from the riskiest part of the capital structure in the United States economy, which is equities, and you focus on the senior secured part of the capital structure that has really, really high yields in it. And that to me is, you know,

high yield debt. And today I'm actually quite impressed that the HYG ETF is ending at least five seconds ago when I looked up on the day with the S&P down 60 points. So for me, I think the fixed income markets are still the place to hide. The credit markets are still the place to hide. And the equity just doesn't give you the risk return profile that you need, given where we are in the cycle with this Fed. Nancy, I want to get your thoughts on what we heard from Fed Chair Powell, especially given the fact that we've seen a change in some key language, the fact that it's no longer ongoing, that we are seeing words like may and some when it comes to additional policy affirming.

Was this a dovish 25 basis point hike today? Absolutely, Morgan. Bumpy replaces pain. Pain was the word Powell kept using at Jackson Hole, and today he talked about bumpy. He talked about how the credit markets are tightening and how that will be a tightening policy. He also kind of dodged the question on quantitative tightening. They kept QPT the same, but since they've put in place all these facilities, the Fed's balance sheet is expanding right now. They might not want to call it quantitative tightening, but it's pumping liquidity into the system. And I think that's really dovish.

So I actually think I would probably go the opposite way if I was going to be calling the market. I would actually say credit. Credit is really priced. You know, rates are the yield curve is incredibly inverted. It's priced still for a massive recession. It's lower now than it was even in the late 80s. And so I think the bond markets are really saying the Fed is still making a policy mistake. It's normalized a little bit with the front end since the Silicon Valley bank blow up. But there's a lot more, I think, room in there for credit

spreads to widen and more defaults to come in, because right now we haven't seen any pickup in the default cycle. I want to get into all of that a little bit more, but stay with us because we're going to bring Steve Leisman, CNBC's senior economics reporter and our own in-house Fed whisperer into the conversation. You're in the room with Chair Powell's news conference. You asked the question, you asked about firming, actually. Steve, break it down for us. Look, Morgan, good afternoon. What the Fed tried to do here was to strike a balance between still high inflation on the one hand and recent banking turmoil that threatens the economy. So what happened? It hiked

a quarter point for the ninth straight time, signaled some additional policy firming may be appropriate. And that's instead of the old language of ongoing increases are likely. So backing off a little bit on the how definite another hike is going to be, said the banking system is sound and resilient as we expected, but said tighter credit could weigh on the economy, on activity, hiring and inflation. But the extent of those effects are uncertain. So here's how Fed Chair Jay Powell himself in the press conference explained how the connection between rate hikes and the banking turmoil. We're looking at what's happening among the banks and asking, is there going to be some tightening in credit conditions? And then we're thinking about that as effectively doing the same thing that

rate hikes do. So in a way, that substitutes for rate hikes. So the key is we have to have policies need got to be tight enough to bring inflation down to 2 percent over time. It doesn't all have to come from rate hikes. It can come from tighter credit conditions. As a result of the bank failures, Fed officials did not on average hike their outlook for rates for the year end. They maintained that 5.1 percent median from the last meeting. The key now is for the Fed to monitor how banks react. If they pull back lending sharply and it helps bring down inflation, the Fed could be potentially done here. If it's business as usual at the local bank in terms of lending, the Fed could have more work to do. He did also, Morgan, I think significantly ruled out potential cuts. Yeah. The fact that he said

some additional or actually I should say, quote, recent developments likely to result in tighter credit conditions. I mean, any sort of sense on when that could possibly begin to materialize and the type of data points that the Fed is specifically looking at in terms of that? We're going to get some data each week in the Fed's balance sheet that gives us some insight into what's happening with the banks. We'll also get some the senior loan officer survey. There's some other surveys that tell us what's happening in the banking industry and that should give us an idea. Also rates. One of the things that happens with credit tightening is rates actually go up more for borrowers. So that's another thing to look at. And I think Nancy was talking about spreads. That's another area where

if credit if creditors in general are stepping back, depends on what market you're talking about. But you could have higher rates when it comes to credit credit spreads relative to to to risk free treasury. So those are some ways we're going to look for and try to find what's really happening in the economy. I think, though, Morgan, that ultimately the tell is going to be inflation, either inflation that comes down or it doesn't. And if it doesn't, the Fed's going to do more work. And I was trying to come up, Morgan, with how to call inflation. Either inflation comes down or it doesn't. And if it doesn't, the Fed's going to do more work. And I was trying to come up, Morgan, with how to call this. Remember we went into this with these two ideas, dovish hike or a hawkish pause? I don't think it's either. I think it's kind of like a hike and a maybe or a hike and come see me in a couple of months. I think that's

what it is. Steve, I wonder how you interpret what the fed said about credit i mean does data dependent for the fed now mean credit availability dependent on balance more than in the past versus labor market and inflation because i believe powell did say that it's really hard to read this kind of credit tightening uh in in the data is. It is. And that's why my job is so interesting, because the data points that you need to look at to determine policy are going to change and change quite a bit. I'm going to be listening and watching David Zervos's commentary on stuff like that. That's something that's going to be of interest. We're also going to have to, you know, just watch this very carefully in terms of what's happening in

markets and whether or not any of this ends up having an impact on uh on the economy in general we're going to watch the high frequency data do you see jobless claims tick up um he will know something about flows in the banking system though jonathan that we will not know so i think he's also going to be looking at that. And there'll be areas where he might have some concern that deposits are still flowing out of some of the small and regional banks. And that would give him some concern about additional concern about credit restrictions. Steve Leisman, thank you. David Zervos, HYG, which you mentioned, actually ended about closed about flat and it's down about four percent after

hours i don't know what you think that says and i mean our after hours four percent i'd be shocked if that was true but let me look at it yeah yeah i mean i could be wrong but that's what it looks like i'm i was seeing um does do you think data dependent has more to do with credit availability now same question i just posed to leaseman look i think with credit availability now? Same question I just posed to Leisman. Look, I think the credit availability story is key, and Steve kind of hit it on the nail on the head when he said we're going to be looking at a lot of new pieces of data. That Thursday balance sheet report from the Fed is now going to become mission critical. Someone said it in the earlier hour that maybe that's the new CPI report. The more these banks are using it, the more people are going to get stressed out.

That said, I would turn it on its head and say the Fed did add $300 billion of reserves back into the system. It did quantitative easing by every measure of what that is or balance sheet expansion. You can parse it up and say it was not traditional purchasing of securities and the like. But the bottom line is the reserves were added and securities were taken out. And that is a big deal. And that may continue to be a big deal. We could find out that that's up another two or three hundred billion. And net net, that is an't easy, not a tightening. And it offsets a lot of the credit tightening that we're worried about that comes from the banking stress in the regionals.

And the volume is really low. It was down, but now it's flat again. Yeah, I would have bought that all day for me down for a second. It was a shot. All right. I want to I want to keep tugging on this thread, Nancy. I want to get your thoughts on this very topic, too, which which you brought up before we went to Steve Leisman. And that is the fact that, you know, quantitative tightening or at least technically as it has existed, has not changed per pal today. But we did have this expansion of the balance sheet. What does it mean for all of the volatility we've seen in fixed income and specifically in the bond market in recent weeks? And how does that continue to, I guess, manifest and materialize there now? Well, I think it's a tremendous opportunity for investors to add inflation-linked securities to

their portfolio because the balance sheet, whether they want to call it QE or not, the balance sheet is expanding. The Fed has eased off their path right now of rate hikes. And inflation is priced in the future way below the 6% last CPI print. Just the five-year inflation expectations is right around 2.2%. So I think it's time to stand on the soapbox and say, look, we hope the Fed's got this. But I didn't have a lot of confidence in the Fed when Powell said that he was surprised to hear about Silicon Valley Bank and how did that happen? I was thinking to myself, what is he talking about? You know, it's mortgages. It's always what blows up every single market is always short volatility. It's

always the same. It's just in the bond market. It's in the vol markets. It's in these mortgage books. A third of the ag is mortgages. So I think it's a huge opportunity for people to wake up and realize that the ag has no inflation protected bonds whatsoever. And a third of it is short volatility from the mortgages. So it's really important to be diversified. Don't go by name only. And it's a great opportunity to buy future inflation expectations because they're right around the Fed's 2 percent target. Yeah. You're saying, Nancy, to add inflation linked assets here. What do you have in mind when you say that? Well, so we own I'm the portfolio manager for the quadratic interest rate volatility and inflation

hedge ETF. About 80% of our fund is a type of U.S. Treasury bond called TIPS, which are Treasury Inflation Protected Securities. And then we add interest rate options to fix the issues that exist with TIPS, which is mainly what Pal talked about, that a third of CPI is linked to rent, and it's very much a lagging indicator. So we add inflation expectations outside of CPI to the portfolio. And I think it's a really great time for investors to be looking at diversifying assets like that because inflation expectations in the future are trading at a huge spread to where realized are. David, we also saw the Fed lower growth forecasts for 2023, 2024. Can you argue the Powell just raised the odds that we could potentially go into recession here?

You know, the forecasts are pretty aggressive, Morgan, even as a four and a half percent unemployment rate by the end of the year, which I, you know, in the last segment, I think folks were kind of reiterating that's a big move. That would mean a lot of job openings go away and a lot of jobs get lost in the second half of this year. So the Fed sees a sting coming. And I think they want a sting to come. They want that mild recession. They'd love a soft landing. They take a soft recession and they want inflation heading back to two, which, you know, for me, Morgan, is just a reason, yet another reason to sort of say, why do I want to be in the riskiest part of the capital markets? Why do I want to be in the first loss piece of every business, which is the equity piece, when I can be in the second or the third loss piece and still get

pretty big, juicy yields? So I keep coming back to that at the end of this cycle. If you think there's a default cycle company, if you think there's problems in credit, there's going to be a lot more problems in equities before that, because the equity guy gets blown out before the credit guy. That's why they're credit guys. That's why they're bondholders. They're not in the first line of fire. So I don't have that view that it's going to be that dire. But if you have more dire views, you're supposed to be stepping back from large amounts of equity risk in your portfolio and recognizing that last year fixed income got absolutely wrecked. High yield was at 4 percent or less. Crazy, crazy low yields.

And now you've got plenty of names out there where you can find eights and nines and even some low double digits if you want to dig deep. I think that's where you get paid in this cycle. And if nothing happens, you collect a coupon. If nothing happens in equities, you get paid nothing. And you took a lot of risk to get nothing. Nancy, last word here. Are we paying too much attention to the Fed, not enough to the economy? I mean, the Fed seems to be looking at what the slowdown in credit availability is going to do. Is it possible the stock market's not pricing in that slowdown and the effect on earnings? Absolutely. I think the rates market, we've had one of the most inverted yield curves in the history of the financial markets.

The rates market has been screaming recession policy mistake for a long time, whereas equities and their corporate credit, it's the same kind of beta. If you have high yield bonds and you have equities, you just have a different part of the capital structure. And I'm not sure that the bondholders are actually safer, because if we look at the recent blow up with Credit Suisse, equity holders got something, wasn't a lot, 3 billion. Bondholders got zip, zero. So, you know, it's the new normal. But not senior bondholders. Not senior bondholders.

The AT1s. Over AT1 bonds. Those are very special bonds. There are a lot of mutual funds and other regular portfolios. So they're all over the place. Well, Nancy, David, we got to leave it there. Thank you. Thank you. The Credit Suisse situation was unusual. Now let's bring in another voice on the Fed decision. Former Council of Economic Advisors Chair Jason Furman joins us. Jason, so you thought initially that 50 basis points would have been the way to go, but that was before the bank situation. Now you say what the Fed did here makes sense. So how much uncertainty does this situation bring in now that we've gone from a target rate near zero

like a year ago to near five percent now? How are those lag effects going to hit over the next few quarters? I don't know. And the Fed doesn't know. Sometimes the Fed is a cause of the uncertainty. Right now, the Fed is being affected by the uncertainty, just like the rest of us. I thought Chair Powell was admirably clear about that during his press conference today. OK, and so what are you watching next for your sense of, hey, what the Fed should do and what kind of economy we're going to have by the time we get to Q4? Yeah, so two things. One is just the same macro data I was looking at before. Things like unemployment rate, job openings, inflation rate, wage growth, but then also financial conditions.

And the tricky thing with financial conditions is the market-based measures just aren't that useful right now. What you're worried about is lending standards at banks. And a lot of that is sort of impressionistic rumors and the occasional survey coming out of the Fed to judge that aspect of financial conditions. And of course, that's the area where we're focused now, given everything we've seen play out with some of these bank runs and the crisis within that sector. I think it raises the question, and certainly this came up, or otherwise in the press conference today. I mean, has the banking turmoil actually done the Fed's job for it? When will we know that? I don't know. I think it's probably done part of its job. Three weeks ago, I thought we should do

50 basis points. The macro data was completely consistent with that. But one of those hikes was done by the banking turmoil, and the other hike was done by the Fed. We're going to have to see over the next couple months how much more work is done by the banking turmoil. Personally, I think there's more upside risk in rates this year. I think the Fed is still being on the optimistic sanguine side on inflation coming down. I think it's going to be more stubborn. I think it's going to take a lot to bring it down. So I think they're going to need to bring the Fed funds rate up into the mid fives. But, you know, not at all confident in that view, given just the real uncertainty in the

banking sector right now. And I realize that we did get a forecast today that suggests that we could get another 25 basis point hike at the next meeting. But you could also argue on the flip side that Powell kind of opened the door for a pause. It sounds like you think that's less likely. Look, might there be a pause at the next meeting? I think the market has it at about 50-50. I don't think that's a crazy view. But I'm looking forward six months. If three, four months from now, inflation is still really stubborn, even if they pause at the next meeting, they're going to have to go back to hikes. I think the most likely scenario, the modal scenario, would have about three more hikes this year, unless there's some real financial disruption that gets worse going forward. Jason, I don't know if you subscribe to the rule of thumb that these hikes take about a year to have their effect, about a one-year lag effect. But if that's the case, it sort of makes sense that SVB happened about a year from when the hike started. And then we had those 75 basis point hikes in a row, does that mean we're going to start feeling those over the next few months? And if so, I mean, does that make it even harder to gauge what the next

couple of quarters are going to look like? I think the pass-through for monetary policy is a little bit faster than that, especially if you're looking at growth rates. It takes a while for the full level effect to play out, but the growth rate effect is a bit earlier than that. But yeah, Silicon Valley Bank delayed that timetable. They say long and variable lags for a reason. Silicon Valley Bank is a variable part. Do I think another shoe will drop? I don't think so. I think they have this contained with the financial tools they have. Long rates have been high for a while and have eased off some since Silicon Valley Bank. But you never know what pools of leverage are out there and will make themselves known. Yeah. I mean, in the midst of the Powell press conference, we also had testimony from Treasury Secretary Yellen.

And so we had Powell on the one hand saying essentially that depositors' savings are safe. And on the other, you had Secretary Yellen saying that they're not considering broad increase in deposit insurance. And that does seem to be the moment that kind of tipped the equity market into a fall. And you saw it certainly with regional banks, the KRE dropping on those headlines as well. How crucial is it, some sort of, I guess, template, regulation, playbook around deposits to be able to actually stave off this banking crisis from becoming something bigger? I really hope that they take whatever steps are needed to prevent a run on deposits. And if that is doing ad hoc guarantees on banks as they pop up or a blanket guarantee for some temporary period of time, I think that's worth doing. Ideally, you'd accompany that with tougher regulation and supervision.

Doing that, locking it in legislatively would be the best. There's some flexibility they may have to do it administratively. But ultimately, I think it's important that they do whatever they need to to give depositors confidence in the banks. I think Jay Powell did that today. I think Janet Yellen did that yesterday. As to today's words, I'm not sure how to interpret them. Okay. Jason Furman, we appreciate you coming on on this Fed Day. It's amazing what a difference three weeks makes. KB Home earnings are out. Meantime, Pippa Stevens has the numbers.

Hi, Pippa. Hey, Morgan. Well, the stock is up about 3% here after KB Home beat on the top and bottom line during Q1. EPS coming in at 145 per share. That was 30 cents ahead of estimates. Revenue at 1.38 billion versus expectations of $1.31 billion. Now, the company did say that the first quarter saw significantly more challenging housing market conditions, but that as we entered the spring, the selling season did start to see an increase in demand.

They said part of that is thanks to a stabilizing mortgage interest rate environment. The company also announcing a 500 million share buyback program. That's stock up 3 percent. Guys, back to you. All right. Pippa Stevens, thank you. After the break, Evercore founder Roger Altman on today's late session sell off and reaction to comments this afternoon. We just touched on them from Treasury Secretary Yellen saying she's not considering a broad increase in deposit insurance. We have so much more to this show coming up after the break. Welcome back to Overtime. Markets falling sharply in the last half hour of trading today, closing at the lows.

The major average is all down more than 1.5%. Investors keying in on the Fed decision, but also Secretary Yellen's comments to a Senate committee saying there are no plans for a broad increase in deposit insurance. So check out regional banks, some of the worst performers in the S&P 500 today, with the KRE ending down about five and a half percent. Let's bring in Evercore founder and senior chairman Roger Altman. Roger, so much to get to with you today. But I do want to start with what has been seen at least this afternoon as a little bit of mixed messaging between what we heard from the Fed chair and from the Treasury secretary where deposits are concerned, knowing what we know about this

crisis of confidence in recent weeks in the banking sector? Well, Secretary Yellen is in a tough spot, because on the one hand, the impact of protecting all deposits at Silicon Valley Bank really means in practice that any deposits that are jeopardized in this banking crisis will be similarly protected. So de facto, it's a broad deposit guarantee. But to do that explicitly would require legislation, and that could be hard to do. So I interpreted her comments as referring to whether she would seek broad legislation to reform the deposit insurance system now. And her comment seemed to suggest because it's not possible, on the one hand, to say to Silicon Valley bank depositors, we're taking care of you. And on the other hand, to say to folks at First Republic or PacWest or whatever the example is, you're not taken care of. Of course they would do that. So at this moment, deposits are de facto guaranteed. back west or whatever the example is, you're not taken care of. Of course they would do that.

So at this moment, deposits are de facto guaranteed. It's just that I think she's concluding that it would be hard to make that explicit and permanent. Some key context there. Meantime, with the Fed chair in the press conference, he did talk about deposit flows in the banking system stabilizing in the past week. The fact that the vote to rate hikes was a unanimous one among all the FOMC members. I wonder if you think that despite the hike today, that his commentary opened the door on a pause from here, given the fact that the Fed is walking this tightrope between still stubbornly high inflation and what are now the rooting effects of an aggressive tightening path that we've seen over the past year? I think, of course, Morgan, the Fed can pause after today's action. But I don't think

the message was one of wanting to pause. I think the glide path, so to speak, that the Fed is on would involve a rate hike at the May meeting. But in terms of their flexibility, Chairman Powell referred to the open market tightening of financial conditions. And that may have been one of the factors in the market's decline in the last couple of hours. And that's right, because there are various financial conditions indices like the Goldman Sachs one, and they show substantial tightening. So what's going on in the markets is having the effect of cooling growth and ultimately cooling inflation on its own. And that could end up giving the Fed a basis for pausing. In other words, open market events are cooling inflation for us because they're

slowing everything down. But I think the signal was more that we expect another rate hike even if we could roger piece of this one of the many pieces that's a puzzle for me is the job market is still so strong but we seem to be an economy where all kinds of things including bank runs happen faster than in the past. So how do we get to a recession unless unemployment spikes? In your sense, from talking to CEOs who you talk to, are they sort of on a nice edge when it comes to feeling like they need to cut costs given these conditions? Well, you're right about labor markets. They are continuously surprising us with how tight they are, whether it's the unemployment rate or the ratio of job openings

to unemployed workers or other measures. And I think there may be a labor hoarding factor going on there where so many employers went through a hard time, went through a period of finding it hard to get workers, and therefore they are reluctant, with the economy still pretty resilient, to let anyone go with the exception of the tech sector, although I don't think those layoffs by standards of the whole economy are all that meaningful. Now, the Fed, as you know, is forecasting substantially higher unemployment rates. And Powell has consistently said that the Fed can't meet its 2 percent goal for inflation, long-term inflation, without a softer labor market. He's been very explicit

about that. So the Fed is expecting labor market conditions to soften, but they've been expecting that for some time and it hasn't happened so far, which is one reason that the economy has continued to surprise on the side of resilience and not on weakness. So, Roger, given the fact that you are the founder and senior chairman at Evercore, when we talk about things like tightening credit conditions, are you starting to see that in some of your conversations and some of the work that the bank is doing right now with clients? Not yet. In fact, leveraged finance markets, which are important to the things that we often do, have improved somewhat in the past few weeks, at least in the United States. So not yet, but these things operate with a lag, as was just discussed with Jason Furman,

and perhaps we will, but we haven't yet. Okay. Roger Altman, we appreciate you coming on and sharing your insights on this key day for the markets. Thank you, Claudia. All right. Now let's get to Christina Parts- Nevelis with a CNBC News update. Christina. Good afternoon, John. A crypto entrepreneur who paid almost five million dollars in a charity auction so that he could share a meal with Warren Buffett three years ago is now charged by the SEC with selling an unregistered security. Justin Sun is also accused of fraudulently manipulating the secondary market for his Tron token.

In addition to that, eight celebrities, including Lindsay Lohan and Jake Paul, are charged with illegally promoting Tron without disclosing they were paid to do so. An Ocean Research ship once owned by Paul Allen, the late co-founder of Microsoft, tipped over while dry docked in Scotland, injuring 25 people. The BBC reports it's been anchored since 2020 due to the COVID pandemic. And residents of a Brooklyn neighbourhood are hoping a four-month-old calf will be spared after it escaped from a slaughterhouse. That's the calf that you're seeing on your screen. He ran through the streets avoiding cars and the dozens of people trying to chase it until it was finally corralled.

John? All right. I don't know what to say about that. Well, you've got to hope it keeps moving. Christina, thank you. Boom! All right. Tesla falling sharply along with the rest of the market into the close,

but one other mega cap growth name held on to the gains. Mike Santoli is going to break down the charts on a potential changing of the guard next. Welcome back to Overtime. CNBC Senior Markets Commentator Mike Santoli joins us now from the New York Stock Exchange, and he is looking at the potential change in leadership between two mega caps. Mike? Yeah, John, NVIDIA and Tesla have observed a bunch of times in recent years that the stocks tend to move together. And it's not really because they're serving the same end markets or really are direct competitors, but they are feeding off of a similar energy of this sort of world changing just mega trend that both companies are riding. Also a bit of a similar energy of this sort of world changing, just mega trend that both companies are riding. Also a bit of a cult following on Wall Street. So what you see here is the market

cap of NVIDIA recently for the first time since Tesla was public exceeded Tesla's recently. Now, both are above six hundred billion dollars. Both are huge. But you do see a big catch up move here on all the excitement around NVIDIA, even though NVIDIA shares are not at their former peak. Now, it's also been the case on a valuation basis that NVIDIA has recently eclipsed Tesla in terms of being the more expensive of the two. And they both have very premium valuations for any tech stock. I mean, just the S&P 500 is call it 17, 18 times earnings. The Nasdaq 100 is somewhere around in the low to mid 20s. And you have NVIDIA and Tesla are in the almost 60 times forward earnings range. You can take a look at that as well.

Now, again, this isn't because they're exactly the same in the same business or even have the same growth rates. I just do think it's interesting that NVIDIA here, you see, has much more of a gradual climb, whereas Tesla's valuation is naturally kind of come down significantly from those peaks back in 2021. Mike, what's also interesting with these mega caps, expanding it out even beyond Tesla and Nvidia into, say, Apple and Microsoft, is how big of an influence they have over so many indices now. I mean, Apple and Microsoft's waiting in the S&P at or near an all time high. These two, I imagine, are also pretty important to the triple Q's. Yeah. Top five. Well, yeah, exactly. Triple Q's. It's actually interesting. I mean,

if you look at the top of the S&P 500, it's almost exactly the top of the Nasdaq, except for Berkshire Hathaway, which gets in this in this zone a little bit. So without a doubt, they are really kind of huge contributors to whatever happens in the market. Now, in terms of Apple and Microsoft, a lot of folks pointing this out. Strategas, I think, has been spotlighting this. Over one eighth of S&P 500 market cap is just those two stocks. So you've got seven eighths with the other four hundred ninety eight. OK, Mike Santoli, thank you. Up next, we're going to talk more about the tech sector and if it's poised to take off, So you've got seven eights with the other 498. Okay. Mike Santoli, thank you.

Up next, we're going to talk more about the tech sector and if it's poised to take off, as the Fed hints, it may be nearing the end of its rate hike cycle. Stay with us. Welcome back to Overtime. The NASDAQ sinking along with the broader market in the late-day sell-off, but tech has been something of a safe haven since the banking turmoil broke out. The Nasdaq 100 is up more than 4% this month. So is there more upside ahead for tech?

Let's bring in Brad Slingelin from investment firm NZS Capital, also the former portfolio manager of the Janus Henderson Global Tech and Innovation Fund. Brad, so we're used to thinking of high rates being bad for growth tech, but is it necessarily a good thing for tech if the reason that hikes stop is that credit availability is drying up? Yeah, you've got to look at it, obviously, with that sort of nuance to it. But do you think what the market is, putting the move aside today, what the market is adapting to is that we're much closer to the end of a rate hike cycle

than the beginning of one, which means we're much closer to potential decrease in interest rates. And typically, irrespective of the circumstance that that is happening, if you look at the valuations on growth equities, in particular, the technology sector, the TMT sector, which was one of the worst performing sectors in the recent past. The starting point here is actually quite good in terms of valuation. So it's still pricing at a relatively high rate scenario, and it may come in under that. There are things that happen in what we're seeing with the credit cycle that are actually good for the large public incumbents. So if we see a less risk-taking environment, if we see less venture capital available, less venture debt available, less

risk-taking behavior by employees who may have been thinking about leaving a big tech company to start their own business, they may not find the funding, it tends to favor the incumbents. And some of the things I think you're seeing in the market today demonstrate that, that the big companies are getting bigger and they may benefit from this turmoil that's happening in the credit markets. Brad, I hear that. And certainly we were just talking with Mike Santoli about how some of the mega caps are even a bigger weighting in the major indices than they used to be. But so many of those, their valuations are also quite high. And I wonder, is there more potential upside to picking stocks that are a bit smaller that perhaps are in a good position when it comes to data and this AI revolution that we're seeing take hold? Is winning in the AI revolution already priced into a stock like an NVIDIA or Microsoft?

Well, it's certainly more priced in. And what we would argue is when there's this much disruption and churn happening like there is with AI, which we think is going to have far greater impacts to many industries, is you want to move your investing down the stack to the infrastructure layer of the economy. The infrastructure layer for AI is semiconductors. This is a group that, although it is up and recovered some off the lows, still doesn't reflect the full potential of this concept of AI pushing far deeper into all aspects of the economy. So there's many stocks that were invested in there, whether it's cadence design, which is used to design the semiconductors themselves, ASM lithography, LAM research, the companies that make them themselves or that sell them, AMD, NVIDIA. We think there's a lot of opportunities in this infrastructure layer of AI

that aren't perhaps as hyped as some of the name brand stocks that are out there. How likely is it that some names that you currently think of as application providers, in fact, become more tool makers for AI? And I'm thinking about Adobe's announcement yesterday of Firefly AI. They're also planning to open up APIs for Firefly, which is potentially a whole new category for them if it works.

Yeah, so this is something I think when you see the power of a network effect or a business that has a large user base, whether it's Microsoft with their office productivity tools or Adobe with their creator productivity tools, the ability to add on AI to actually enhance the network effect or the power of that business is something that I think we'll see repeatedly. And the flip side, you want to be very careful with a company that is late to adopt or faces some kind of innovator's dilemma where AI might just be too disruptive to their business. So they're slow or they don't fully adopt it because then they end up losing the customers to some disruptive startup that is sort of an AI first mentality. Okay. We'll keep an eye out. Brad Slingerland, thank you.

Thanks. Well, KB Home getting a pop in the overtime session, but real estate was the worst performer in the late day sell-off. We're going to talk to an analyst about the impact of higher rates on the sector. That's next. Welcome back. Check out KB Home. Just posting Q1 numbers that beat on the top and bottom lines. Stocks up 3% right now in the after-hours trade in response to those results.

But during the regular session, real estate was the worst sector today. It was dragged down by names like Boston Properties and Digital Realty. Joining us now to break it all down is Zellman & Associates' Alan Ratner. Alan, great to have you on the show. I do want to start with KB Home because we did see orders drop, net orders drop 49 percent. Sounds like a really big number. But compared to last quarter and compared to some of the expectations on the street, maybe not as bad as expected. Yeah, that's right. And thanks for having me, Morgan. Yeah. So on the surface, an order drop of 50 percent or close to it definitely raises some eyebrows. And I think it's representative of how challenging the market remains. I think relative to expectations,

perhaps, it's a bit better. KB Home is a builder that focuses on the entry-level price point. They're overly exposed to some of the Western markets that have been hit harder, such as California and Phoenix. And I think the expectations coming into the quarter were pretty conservative. So the fact that they did see a little bit of an improvement in trends through the quarter, which ended in February, and they signaled March has remained pretty strong overall, I think is why you're seeing the stock react somewhat positively here. But it's still a very challenging environment for them. So when Fed Chair Powell comes out, as he did earlier today, and says activity in the housing sector remains weak, you'd say that's the case? Or do you see signs of stabilization?

Well, we've definitely seen signs of stabilization. And I think if you go back a couple of months, what happened was rates did pull back in the fourth quarter, late last year. And right around the turn of the new year, builders became a lot more aggressive in terms of incentivizing, discounting, reducing prices in order to bring some buyers back into the market. And that definitely did have a stabilizing effect on the order numbers. In addition, the resale market remains pretty tight from an inventory perspective. So some of the buyers out there that otherwise would have looked at a resale home are being kind of forced into the new home market. So things have stabilized. But obviously, the more recent headlines about the bank failures and economic headwinds, I don't think that's fully reflected in the numbers we're seeing yet today. So it

remains to be seen whether this stabilization continues. Yeah, we did see that pop in existing home sales from NAR yesterday. And of course, we saw prices coming off a little bit. We saw mortgage rates coming off a little bit in that report as well. How does this set us up for new home sales tomorrow? And I guess looking forward to the point you just made, is this a one-off situation or could we potentially see more of a pattern in future data? Yeah, so we'll get new home sales for February tomorrow from the Census Bureau. And we're expecting a pretty decent print right around 700,000, which would be above consensus. And remember, that's reflective of the market momentum that we saw before the more recent headlines. So

the real question is the sustainability of that strength. And I think that's where we're a little bit more cautious because, for starters, rates have climbed back up, even though there's a lot of volatility. We're about 25, 30 basis points higher than we were to start the year. And on top of that, you know, there's a lot more economic concerns beginning to crop up here. So while February should be a pretty solid report, you know, we're a bit more dubious that that's going to be sustained. All right. Well, we'll have to we'll have to keep an eye on all of these data points as we get them over the coming weeks. We know that you'll be watching them closely, too. We look forward to having you on to break it down for us. Alan, thanks for joining us today. Appreciate it. Thank you. Up next,

Mike Santoli is back with us, going to set up trading tomorrow. We'll be right back. Welcome back. Stocks closing at the lows of the day, falling sharply following the Fed news conference and comments from Treasury Secretary Yellen on deposit insurance. Let's bring back Mike Santoli. Mike, what's the setup for tomorrow? And maybe even, I mean, we've got a week left, plus a day or so, in the quarter. Inflation data next week. What is there left to watch for? All those things. We have an additional thing now on Thursdays, I guess.

We want to look at the ins and outs of the Fed's balance sheet for what banks might be borrowing. I do think, though, it requires a bit of a disclaimer around Fed Day reactions and the next day. I mean, often the market does whip in both directions. And even the next day is sometimes a little bit of a reevaluation because all it's doing is kind of swinging around trying to find somebody with conviction about what this all means to take a bet. Yeah, it's such a key point, Mike. And I know you had this conversation with Josh Brown in the three o'clock hour as well. The fact that Fed days tend to be very volatile days in terms of the moves for equities and that at least for the first half of the three o'clock hour, it was looking like volatility was pretty muted. And then all of a sudden,

kablooey into the final 30 minutes of trading. And I do wonder how that sets us up for tomorrow, given the fact that we did have such a strong sell-off in those final moments into the close. It's a matter of what we're more afraid of, Morgan, I guess. Now, clearly, any signs of further disorder in the banking system, you're going to see deposit flight, anything like that, markets are going to be really sensitive to it. You go another day without any of that or without some policy comments about how we're not really going to be able to backstop all deposits. Maybe

that's an excuse for backing off. I do want to emphasize the S&P, even though that was a pretty ugly reversal, kind of a trapdoor move into the close. We just went back to where we were trading two days ago. So we have been kind of mired in this range as we try to sort out, yeah, the Fed's closer to being finished than we thought it was going to be, let's say, six weeks ago. But is that good news or is it because of potentially threatening things on the horizon? So, again, that's the equation. I didn't think we should have expected Powell to definitively say we're pausing. He'll never say we're going to pause because that just starts the clock on the first cut and he doesn't want to do

that. But I do think it's it sort of reminds us that we're still in suspense. We're still waiting for a lot of things to get ameliorated, including inflation, of course, which has been enemy number one and maybe is maybe backing down that list a little bit. All right. Well, Santoli, we appreciate your thoughts. And it is worth noting that the S&P earlier in the session did move above and trade above that 50-day moving average, which is a key technical level as well. That's going to do it for us here at Overtime. Fast Money starts now.