Closing Bell - Closing Bell Overtime: Soft Landing Back in Play? 1/6/23

Episode Date: January 6, 2023

Stocks surging today on the back of a strong jobs report. So, did a soft landing just become more likely? Virtus Investment’s Joe Terranova gives his take on the matter. Plus, the big case for small caps from Bank of America’s Jill Carey Hall. And, Former Dallas Fed President Richard Fisher gives his forecast for the fed.

All right, Sarah, thank you very much, and welcome everybody to Overtime. I'm Scott Walkney. You just heard the bells. We're just getting started on this Friday from Post 9 at the New York Stock Exchange. In just a little bit, former Dallas Fed President Richard Fisher on whether today's jobs report and that big news on wages is a game changer for the Fed and your money. He'll tell us. We begin, though, with our talk of the tape. This surge in stocks, as some say, a soft landing just became more likely. Is that right? Let's ask Virtus Investment Partners chief market strategist Joe Terranova. He is also, of course, a CNBC contributor, sits next to me here right now at Post 9. Big move. Nice to see you. Big move lower in yields today, especially the two year stocks, obviously surging. And that's part of the narrative. landing, more likely. Is that legit or not?

Okay, so when did that happen? Let's remember something. At 9.45 this morning, the market was basically unchanged. When yields broke down, 10-year went from 372 down to 355, was when the services figure came out. Which was weak. Which was weak. It went into contraction territory. I understand there's weather issues, but you're below 50 at 49.6. That's the lowest level since May of 2020. It's signaling weaknesses in the economy. All right. So let's tackle the soft landing premise for a second. Soft landing? Really? NASDAQ down 30 percent. High yield down 15 percent. Investment grade down 11 percent in 2022. Municipal bonds down 8 percent. Emerging markets down 22 percent. Investment grade down 11 percent in 2022. Municipal bonds down 8 percent. Emerging markets down 22 percent.

Mega caps down in excess of 35, 40 percent. That's a soft landing. I don't know. That doesn't sound like a soft landing to me. How about REITs down 29 percent on the year in 2022? Scott, that's a hard landing. That's what that is. If we're talking about a soft landing.

You said we've already had a hard landing in risk assets. You've made that point. The problem is some would suggest that an S&P down just 20%, that's not a hard landing priced in at just down 20%. If you get a real recession and a deep one, the true hard landing, stocks are going to be down more than that, no? We are trading stocks. We're trading bonds.

We're not trading nail salons. We're not trading barber shops. We want Main Street to do well. If there's going to be significant economic contraction, what's the problem for stocks? The problem for stocks is earnings. Exactly. So for anyone to come out and to assert today that they know that this is going to be a soft landing for the economy or hard landing without knowing what the earnings are going to be in the next several weeks. I think that's a foolish assertion. That is in part why Citi today downgraded U.S. equities to underweight. They're like, OK, the good news. All right. Rates have

peaked. Inflation has obviously peaked. The wages number, which came out after this report had come out, is all great. The problem, they say, is that earnings are still going to suffer because of what the Fed's already done. I have a problem with that, too, because I don't want to universally downgrade equities. Tell me which equities. You want to downgrade the Dow Jones Industrial? I don't. The Dow Jones Industrial, for me, looks like it's bottomed and it's in an uptrend. You want to downgrade NASDAQ stocks? Sure.

Go right ahead and do it. You want to downgrade the S&P, which is basically moving sideways. Look at the S&P 500. Since December 16th. Well, it was. It was until today. Since December 16th, it's been in a sideways range. Yes, it has. 3,800 anchored there.

You have all the critical moving averages stepping on each other, which is signaling zero trend right now. So tell me what type of equities you want to downgrade. Do you want to downgrade old economy stocks? I don't think you want to do that. I think that's actually what you want to upgrade. What's today about? What's this move in the market about? That the bond market's right? The bond market is right. Bond market's usually right, isn't it? The bond market is right. Whether the Federal Reserve wants to push the terminal rate

towards 5%, I don't know the answer to that. I'm sorry. No one knows the answer to that. Well, they want to. They suggest they're not only going to push it there, they're going to push it further than there, and they're going to stay there. The evidence would suggest that they shouldn't push it there. That's what the evidence should. They shouldn't push it there. Will they push it there? We don't know the answer to that.

The bond market is saying that they're not going to push it there, right? And this services report that you, as we correctly point to, says they're not going to be able to push it there because the economy is weaker than some people think. Take a victory lap, say that you did your job, you pushed out. The peak, peak inflation's priced in already. Who doesn't know that the spring of last year in Q2, there was peak inflation. OK, that's priced in. What the market is trying to price in right now, to your point, is if there's going to be a significant economic contraction that is going to take earnings from levels of 225, in some cases 230 for really optimistic bulls,

down to 205, down to 210. That's going to matter. Maybe the Labenthal's of the world are right, who Jim Labenthal, obviously I'm referring to, reiterated his view today on the Halftime Report and says, this is evidence. This is the evidence that I've been looking for, that the economy is still strong,

the labor market is still strong, and therefore we're going to be able to withstand. And I mean, by we, I'm thinking earnings are going to be able to withstand whatever the Fed's done thus far. Sure, they had to come down, but they're not going to go off a cliff like some still suggest that they have to. So that's a blue sky scenario. And let's say that scenario is correct. Let's say that this is the perfect landing. And, you know, I heard Bryn say that the Fed is basically not even going to land the plane. They're going to miss the airport. That's right. That's what she said. You have this this extreme bearishness and then you have this uber bullishness. If you are of the belief that there is going to be

blue skies ahead, you know what? Go buy CrowdStrike. Go buy Datadog. Go buy Twilio. Go buy all these stocks that have been absolutely decimated because there is going to be a recovery there. Am I willing to do it? No, I'm not. Well, why can't I just buy an Amazon? Why can't I buy an Apple? Why do you have to go to the extreme? Why can't you just say, well, the apples of the world just had their worst year since 08. If I think that there's going to be blue skies, why shouldn't I just go back and buy those stocks? Like, by the way, Bill Miller loading up, I don't know, loading up, buying Amazon on the dip as it just had its worst year and was cut in half. Bill Miller just now with Sarah bought more personally. One of the easiest names in the market, I'm quoting, will easily beat the

market over the next three years. AWS will grow 25% for the next three years. Basically, you're getting the rest of the business for free. I think that's a pretty easy one, is what he said. Amazon is a much different business model than a lot of the non-profitable technology companies, whether they're semiconductors or software. Let's remember, Amazon has done a lot of the right things in managing the balance sheet in the last couple of weeks. It's fine. The stock was still down 50 percent. OK, they just secured an $8 billion loan that allows them the flexibility on the strength of the balance sheet. Can some of those

emerging software companies do something similar to that? I don't think so. So I just think it falls back upon the premise of there's this extreme bearishness, there's uber bullishness. And I think there's a place that's right down the middle of the fairway, right? Right down the middle that keeps you invested. What is that place? Well, I think that place is where you're looking. Let's use semis as an example, okay? You know that I sold out of NVIDIA.

I sold out of AMD. Why? I'm focused on beta. I want lower beta. Texas Instruments. It's working just fine for me. I'd rather be in Texas Instruments right now than I would be in NVIDIA or in AMD. And some of the technology names I pointed out,

GLW, Corning. Remember Corning? We used to talk about Corning 15 years ago, one of the best performing stocks most recently in technology, doing well. So I think those are the areas of the market that you want to be in right now. It offers you the ability to be invested in somewhat of a conservative and a defensive way. And I think areas like the financial sector, another source of opportunity, taking advantage of the valuation discount in the same way that you were able to take away the valuation discount last year for health care. You just hate it on the economy, though, right? Do I really want to buy the banks in that sort of environment? Banks have cleaned up their balance sheet. They don't have the concerns related to inflation. They don't have the wage pressure that other industries do. All great fundamentally for the banks themselves.

Not necessarily a layup for the stocks, though. It's a different story. You can't just say, well, the balance sheets are the best they've been since the financial crisis. Thus, the stocks are going to do great because the fact of the matter is they haven't done great despite the fact that the balance sheets are as good as they've been in more than a decade. Relative performance is so critical in investing. Can they offer me better relative performance than some of the so significantly damaged area of the NASDAQ? I think the answer is yes, they can.

Can they offer me a stronger relative performance than some of the sectors like consumer discretionary and communication services in which I'm not ready to say the evidence is there to accept the risk and the higher beta assumption in those sectors. I believe they can. It's about relative performance. All right, let's expand the conversation now and bring in Keith Lerner. He's with us today, Truist Wealth and Emily Rowland of John Hancock Investment Management. It's great to see both of you. Emily, I go to you first. Big day, obviously. Dow closes up better than 700 points. What's the message here?

Yeah, it was definitely a big day, Scott. And you saw really three factors contributing to it. First, we saw that softer than expected wage growth data coming in and big downward revisions to the month of November, which essentially investors are interpreting as giving the Fed cover to slow the pace of tightening into this year. Next, I think the bigger story from an economic data standpoint today was that ISM services data that you all have hit on contracting for the first time since May of 2020. And the underlying data, not great, suggesting new orders fell, the employment component fell. Businesses are saying that they're going to slow down hiring. And then the final factor that hasn't been brought up yet is that the dollar weakened today. And really, to us, that's a play on the fact that the Federal Reserve might be the first to slow the pace of rate hikes versus other central banks globally. And a weaker dollar, that is the ticket to ride for investors in terms of

taking on risk. Really notable today to us, though, was the cross-asset performance. Yes, bonds got a bid. That makes sense to us in this environment, as Joe just talked about. But notably, more cyclical parts of the market rallied, whether it was U.S. sectors like materials, international equities, Europe, China even rallying today. Not the type of cross-asset performance you would expect with an ISM data coming in below 50. So is it justified, Keith? That's what we need to know. Is this move something to build on? As Joe said, we've been in this range. We've been anchored to 3800 on the S&P. Can we get out of it? Is today the start of that? Yeah. Well, first, Scott, great to be with you. I think the answer is on a short term basis,

this likely has a bit further to go, but it doesn't change our intermediate outlook, which would be, you know, if we get up to like forty one hundred in that area, we would be using that to fade strength and to take a step back. Scott, you know, at the end of December, we saw massive fund outflows, right? The biggest outflows of the year. There's a lot of tax laws selling. We've seen sentiment numbers this week, very depressed. So the market was caught off size into this number. And now we're seeing a bit of a rally. So we think that likely has further to go. But again, you know, even if you don't buy into the recession, we think recession risk is still elevated later in the year. You're trading at a 17 multiple today. If you give it an 18

multiple, which is the high end of the pre-pandemic range with current consensus earnings, which we think are too high, that brings you to about 41, 41.50. So we think that's the top end of the range. And the last point, if the Fed does pivot, that is not a cure all. Look back at 2007 or 2000. The Fed was cutting the entire time. Now, I'm not saying this is the same type of economic environment. But what I am saying is that, you know, if the Fed stays, you know, at a high level for a period of time and the economy weakens, we don't think that's necessarily a great environment for risk assets. Joe, the most popular view, I think, that's been out there is first half going to be challenging. Second half is when you could put something together. What if we got it backwards? What if the first half is actually pretty good and the second half

is not as good because we are waiting for a pivot and we're waiting for a cut and we're waiting for this and that and it never materializes. So then reality comes home to roost later on once earnings actually do start to take a hit from what the Fed's already done. Right. So just relying on historical statistics, midterm election years, you know, the subsequent to that June 30th of the following year, you've never had a down year going all the way back to World War II. So it would make sense that the beginning of the year would be stronger. I am of the belief that the beginning of the year can be stronger built upon one thing, the extreme pessimism. I mean, there's just remarkable, overwhelming pessimism prevailing

through the markets. Which Cooperman cited yesterday, too, is like one of the reasons why he's afraid to be as negative as he's been, because like literally everybody is negative. But what concerns me is getting falling into the camp and believing the uber bullishness in the first half of the year and that all has passed and then putting yourself in an excessive risk position for the second half of the year. Because I just don't think in the totality of 2023, we're going to be able to go clearly beyond the concerns that we're seeing surrounding the tightening of not only interest rates, but the balance sheet,

and also the restriction on consumers and corporations because of that tight policy that I think is going to linger throughout the year. Emily, how do you see that issue of maybe we've gotten it backwards? Maybe we've got some runway now and then we're going to figure it out. I mean, the bond market is obviously casting its vote on what it thinks the Fed is going to do. The bond market typically wins. Yeah, I don't think sentiment or negative sentiment is going to be enough of a catalyst or a driver to push stocks higher. Now, when we look at the data, our favorite indicators, the conference board's leading economic indicators index. And what we saw last month was that it came

in at about negative four and a half percent. And that was the fifth consecutive month of negative readings. And it is decelerating quickly. Now, typically, if you look back, the LEI bottoms are right around 10%. If you do the math, we get there about six months from now. And I can show you an incredible chart that basically gives you the answer. The market bottoms, the S&P 500 bottoms when the leading economic indicators bottom. And because Fed policy works with long and variable lag, something that we think is underappreciated by investors today, we expect

some more pain in the economy to come. That services ISM reading today is probably just the beginning of it. And as we watch the economic data decelerating, we're going to wait for that bottoming process to play out. Maybe it is the middle part of this year. And that's going to be our catalyst for adding risk to portfolios. So, Keith, if we're too early, OK, to sound all clear, and I don't think anybody here is suggesting that it's time to do that. You know, neither myself nor nor anybody else. But where do I want to be right now? Do I stay with where I was last year? Energy. I mean, some say that some of these staples, for example, have gotten too expensive to be. What's your thought there? You gave me a hard time last in December when I still said we like some of those areas. But we still like energy and health in staples. But I will say, Scott, look look what's working even on a day like today um the

equal weighted s&p right the average stock is making you know a fresh multi-year high relative to the s&p so go below lower in cap and then the other area that we like a lot that's really showing strength during the kind of the weakness and um the strength of the market is industrials that's making a fresh relative high today it's got reshoring it's got defense spending and and also potentially more spending from the fiscal side as well. So stick with those areas that are working. We think at this point, it's premature for tech. We're still underweight in that area. That just made a fresh relative low early in the week. It's bouncing today, but we think that's more medium

reversion. So again, stick with those other areas of the market below the top heavy part of the market. Area you like, Joe, is something like, you know, materials, FCX, the lower dollar. Lower dollar. That has already been discussed in the program to this point. Yeah, I think that's kind of low hanging fruit. More recently, I've added precious metals exposure. I own the GLD. GLD recently, right? I think that's signaling something also within the economy and the potential change in monetary policy.

If you go back and remember the turn from 18 into 19, gold began to build significant appreciation in 2019 on a change in monetary policy. So gold likes that change in the policy. Gold likes the change in the economy itself. It's one of the reasons why I'm there. But the materials, I think it broadens out that exposure where you've seemed to have been concentrated towards energy the last couple of years as an investor. This allows you to diversify a little bit more, play the lower dollar, get the commodity material exposure. But again, widen the lens. Emily, you're the one who pointed to the dollar today as being one of the catalysts out there. Interesting note today from Bank of America, Michael Hartnett. I mean, he's been right on it all year long last year for the better part of that year for certain. He says by the world, right, global stocks are going to outperform U.S. stocks this year. And I'm thinking of, you know, weaker dollar. It's like the Gundlach play was looking at emerging markets once the dollar actually started to weaken, which it has.

Is this the better place to be if like you, you know, we're concerned about what's happening in the United States for returns, at least for the first half of this year? Yeah, certainly the weaker dollar has been a catalyst for international equities. And it has been amazing to watch how quickly we've seen this just face ripping rally in European equities and Chinese equities. And it has been amazing to watch how quickly we've seen this just face-ripping rally in European equities and Chinese equities. And it's really been on the back of this China reopening narrative. We keep saying to ourselves every morning we wake up, there's another headline about China reopening. How many times can China reopen, prompting this move higher? It's also been driven, I think, by a short covering rally that's basically turned into momentum strategies picking it up. We've seen stimulus

playing out in Europe, better weather in Europe also helping that market, reducing fears of an energy crisis there. So there have been some big macro overhangs that have kind of worked the other way, helping international equities to start the year. But at the end of the day, these are highly cyclical markets. If you look at relative sector composition, there's big exposure there to areas like financials, consumer discretionary. That is not the stuff that we want to own in a global economic recession, which we think is where we're headed. Look, if the U.S. is going into a recession, the rest of the world is going into a recession. We want to own higher quality stuff, more defensive assets, and just hang tight and wait this period out before we add more risk. We're not there yet. Joe, one of the leading indicators to know if blue skies are ahead

is M&A. Do we have any M&A right now? No. No, I don't think we do. But that's your indicator to know when blue skies are ahead. Keith, give me 20 seconds and we'll wrap it up for the weekend. Yeah, listen, I think this is going to be another year where there's going to be tactical opportunities. The short-term move likely has a little bit further to go. I think we're going to see a lot of sector rotation this year. And, you know, keep it simple. Focus on the relative leaders, what I mentioned before. Especially, I'll leave it on the equal-weight weighted S&P as one of our favorite areas.

You guys are great. I appreciate the conversation very much. Be well, Keith and Emily. We'll see you soon. Joe's going to be back in just a bit. Let's get to our Twitter question of the day. We want to know what should the Fed do now post jobs report? Should they go 50? Should they go 25? Should they do nothing at the next meeting? You can head to at CNBC overtime on Twitter to vote. Remember, it's not what they will do. It's what should they do nothing at the next meeting? You can head to at CNBC overtime on Twitter to vote. Remember, it's not what they will do. It's what should they do vote. We'll show you what happens later on. We're just getting started, though, here in overtime.

Up next, searching for safety. Why one top strategist makes the big case for small caps amid Wall Street's recession worries. She makes her case after the break. We're live from the New York Stock Exchange this Friday. Overtime's back right after this. Investors looking to ride out volatility and an uncertain economic environment don't usually look to small caps for safety. That is exactly, though, what our next guest is suggesting, saying those stocks are already discounting a steep recession. Here to make that case, B of A Securities head of U.S. Smidcap Strategy, Jill Carey-Hall. Welcome. Happy New Year.

Good to have you on the program today. Thanks. Happy New Year. Is the principal question, right? Why would I want to own smaller mid-cap stocks if I think the economy is about to take a serious downturn? Right. Typically, you wouldn't want to own small caps into a downturn. But we think this time it's a different backdrop for a couple of reasons. For one, they're already discounting the recession. So when you look at valuation multiples, the forward P.E. ratio of the Russell 2000 is trading at lowest levels it's ever traded relative to the large cap index that we've hardly ever seen historically. The only other time small caps were this relatively cheap versus large caps was in 99 to 2001. And if you had bought small caps then, that ended up being a really great decade to own

them relative to large caps. They were up like 100% over the next seven to eight years, large caps were flat. So valuations know, valuations today are very compelling. The size segment on a standalone basis is cheap, not the same as true of large caps. And, you know, if you look at what happened in the 70s to early 80s, which was another backdrop, the Fed was trying to tame high inflation. Small caps were the best performing asset class from the mid 70s to the early 80s. They did well even during downturns during that period. So, you know, given the parallels to today, we think this high segment's well positioned. I just feel like cheap can obviously get cheaper and they may be if they're

pricing in, you know, a recession. I'm not necessarily sure they're pricing in a more dramatic downturn or a steeper recession. I mean, I do think they are when you look at, you know, one of the most correlated indicators with equities and in particular small caps, the ISM. When you look at the relationship between what small caps are pricing in and the ISM index, they're pricing in about 35 on the ISM. The foreign PE multiple of the Russell is trading, you know, below COVID levels. It's trading similar to global financial crisis levels. The earnings decline that multiples would be suggesting for small caps is a global financial crisis-like earnings decline.

So I think a pretty severe recession may actually be in the numbers at this point. And then when you think about fundamentally what's going on, we think CapEx is going to remain more resilient during this recession. Corporates have underinvested for decades. You have a lot of reasons companies are spending on CapEx, reshoring, which we're seeing evidence of, ESG-related spending. So small caps typically benefit from CapEx cycles in the U.S., you know, and they've had better pricing power than large caps, surprisingly, in environments where inflations remain sticky. So, you know, we do see more downside risk to U.S. equities overall near-term, given our view that we will have a mild U.S. recession. But we do think that large caps may

actually have more downside risk than small caps near term. And then once the market bottoms, that obviously tends to be the best time to own small caps in that recovery. You know, utilities, consumer staples, two areas that, you know, you like. To those who say, and I know that we've, you know, on the program brought this point up already, that that's a great defensive place to hide out in the storm thus far, but now they're pricey. Why do I still want to be there? So I think, you know, within small caps, you want to focus on a mix of some cyclical and defensive areas and also focus on quality. So, you know, stocks that have earnings rather than no earnings. That's been one of the reasons the S&P 600 small cap index has held up much better than the Russell 2000. It has, you know, less exposure to non-profitable companies and biotech and areas like that.

So we think for defensive sectors rather than health care within small cap utilities and staples look well-positioned. Obviously, these sectors do tend to get pricier heading into a downturn. But we also think energy, you know, for a value sector still looks very attractive within small caps, still very inexpensive, under-owned, you know, holds up well in these backdrops. So, you know, finance as well also screens well in our small cap work. You know, obviously, the macro environment is challenging, but it's actually become much higher quality than it was heading into prior downturns. Hey, Jill, bear with me for two seconds. I want to show everybody Macy's chart here in overtime because the company is out right now warning that its fourth quarter net sales are going to be at the lower end of the

previous guidance range, certainly a lot of focus on the strength of the consumer here. You can see a dip lower in overtime right now by a little steeper than 3%. I should read you a comment as well from the CEO, Jeff Gannett, in that filing, which happened just a short time ago, quote, based on current macroeconomic indicators and our proprietary credit card data, we believe the consumer will continue to be pressured in 2023, particularly in the first half, and have planned inventory mix and depth of initial buys accordingly. So that's from the Macy CEO. Again, they are warning about sales being at the lower end of their range. Stocks down. You don't like, Jill, consumer discretionary stocks, do you?

No, I mean, it's still ranked relatively weakly in our work. Consumer tends to be more of an early cycle sector once the Fed is easing. It's very labor intensive. So, you know, high ratio of employees relative to sales. We've still obviously seen, you know, high labor costs, even though they are easing. But currently, that sector is one we've been more cautious on. But, you know, look, we think this is a good backdrop for stock pickers and active management. There's obviously a lot of opportunity for that within small caps, you know, and our analysts cover over 800 small and mid cap U.S. stocks. And we think that, you know, this is a backdrop where active managers are starting to

do better. Small and mid cap managers have had a good successful, you know, two years, really. And the backdrop for stock picking tends to be better also in these, you know, late cycle, downturn periods. So, you know, so we think active management extends, you know, focusing on select stocks, focusing on quality. We still like values, the stocks that have, you know, focusing on select stocks, focusing on quality. We still like values as stocks that have, you know, attractive free cash flow in particular in this environment rather than just deep value per se. Yeah. Last question. Then I got to run. When do you start to like technology and com services again? Well, I think the risk right now is that tech overall has been the leadership this cycle.

Typically, what's the old leadership is not the new leadership. And there's obviously regulatory risks for tech. It's been a largely unregulated sector. We also just see the fundamentals starting to deteriorate. Obviously, tech did well during COVID, and that was sort of a different recession than we've typically seen. But now, after many decades of NASDAQ earnings revisions outpacing S&P 500, the opposite is true. You're seeing fundamentally tech seeing downward revisions relative to the overall market.

Many of these stocks, then if you look down into small caps, are unprofitable. One of the areas that we saw kind of an IPO boom several years ago. So know, one of the areas that we saw kind of an IPO boom several years ago. So, you know, that's one of the sectors that in both our large and small cap work we've been relatively more cautious on, you know, in this backdrop heading into this recession. We'll leave it there. Jill Carey-Hall, appreciate your time very much. Good weekend to you. We'll see you soon. Thanks, you too. All right. It's time for a CNBC News update now with Contessa Brewer. Hi, Contessa. Well, hello there, Scott. Two years ago, we were watching an attack on the Capitol unfold. Today, President Biden marked that moment with a ceremony at the White House. Biden honored more than a dozen people with the Presidential Citizens Medal

for their bravery during the January 6th insurrection. America owes you, owes you all. I really mean this. A debt, a debt of gratitude, one we can never fully repay unless we live up to what you did. U.S. health officials approved an Alzheimer's drug that modestly slows the disease. Lekembe is the first drug that has convincingly demonstrated effectiveness at slowing the decline in memory and thinking. The FDA specifically approved that drug for those with mild or early stage Alzheimer's. And New York City hospitals are scrambling

to put emergency contingency plans in place as 10,000 nurses prepare to walk off the job Monday. Hospitals will begin moving babies out of the NICU to other hospitals and cancel elective surgeries. The New York State Nurses Association says it is fighting for better wages, staffing and benefits. But New Yorkers, of course, Scott, will be bracing for that. Yeah. All right, Contessa, thank you. That's Contessa Brewer with our news update. Up next, stocks rallying on the back of this morning's jobs report.

So is today's number a game changer for the Fed? Former Dallas Fed President Richard Fisher joins us with his take. OT is right back. Stocks rallying today on the upbeat December jobs report showing signs of inflation may be cooling further. So what does that mean for Fed policy with the next FOMC meeting less than a month away? Let's bring in Richard Fisher. He's the former Dallas Fed president, a CNBC contributor. Happy New Year. Welcome to Overtime. It's good to see you again. It's great to see you. And I'm wearing my TCU sweater, fingers crossed, for the ninth.

What a great little football team. They've already proven a lot of people wrong. So we'll see what they do against Georgia when it matters most. So let me ask you about that jobs report today. What does it mean now for the Fed? Well, I think that and the fact that we have the services PMI turning over is showing that the medicine they're applying here to the economy is working. It's slowing things down.

I'm not sure that means they back off of their intention to really squeeze inflation completely out of the system. There was a great op-ed today in the Wall Street Journal about where inflation is actually running. But the conclusion was that they're likely to continue. And I think what's really driving them, Scott, is the fear of creating two errors in a short period. The first was embracing the transitory inflation argument, which was a mistake. They let that horse out of the barn. They're corralling it, bringing it back. And to do two mistakes in a row would diminish Powell into not being a greatly respected Fed chairman, more in the direction of Arthur Burns. I know strongly that he does not want to be put in that

position, neither does the FOMC. So I think there's a risk here that they will overdo it just to make sure that inflation doesn't raise its ugly head again. And given the employment numbers which they hew to and the so-called core, core inflation number they're hewing to, I don't think it deters them for a few more 25 basis point movements. This is what the head of the Atlanta Fed just said the other day, another 75. I don't know if that's going to happen or not, but I think they're on that course, Scott. And this number is great, but one day does not make or one data point does not make a trend. But that's a dangerous motive, though. Is it not, Richard, to be so hung up on the fact that you blew it once so that you're going to risk overdoing it now to make good for the past? That doesn't make much sense to me. No, but I think there is a good sense of

history. If you go back to 1920s, 1930s, what was called a rediscount rate, they had kept it low at three and a half percent. Speculation ran rampant, as it has here when we had rates at zero. And then they overdid it. And they raised the rediscount rate in quick order into 1930, actually 1929, as I recall, to 6%. So not quite doubling the real rate net of inflation was actually 7%. So doubling what they had before. That brought about a panic. They're well aware of that history and other intervals in recent history. So but the worst thing that could happen, Scott, would be not to bring inflation down to a manageable level. And the target is still two percent. And to have that go up and not happen would be a terrible mistake. Right. So it's interesting because I wanted to ask you about that.

The level. Right. You used the manageable level. And then you said two percent. And I wonder if we gave, you know, J-PAL a truth serum right now, and you feel free to say the quiet part out loud, that do you really believe that 2% is the goal right now? I think that's where they want to be and where every central bank in the world wants to be. By the way, I argued for 1% at the table for a while. I lost that argument when I was there. Paul Volcker wanted to have zero as a target. These numbers are very squishy. So I think 2% definitely, anything above that, would create business operating patterns that might lead to still further inflationary impulses.

So yes, I think 2% is still the target. The question is, do they feel they're moving that direction significantly so that it doesn't stop at 3 or 4 percent? What do you make of the bond market, Richard? Bond market's saying they're not going to get there. It's not going to happen. And the bond market, as you know, is typically right. I'm not sure it's typically right. Short term, it's often volatile, just as economists are rarely right when they issue their forecasts at the beginning of the year um so we see what the bond market's doing we can

watch the shape of the yield curve but scott all through the last year and a half those indicators have not proven to be terribly reliable who saw other than yours truly, by the way, on this show, that the 10-year would go to 4% plus? It did. And the markets were indicating that wasn't going to happen at the beginning of last year, beginning of 2022. So, Scott, I would just suggest that we be careful not to read too much into the shape of the yield curve or the bond markets right now. And we just watch what's going to happen. I have this question. We are going to have a huge flood of treasuries coming on the market, not just a spinoff for the balance sheet, but deficit coverage. Every major country in the world, and we've seen Japan now double their defense spending,

we know what's going on in Germany and Europe, all are going to have to float more paper just to finance their defense needs and their fiscal policy. There are only two ways to do it. Raise taxes to slow their economies or issue more paper. Who's going to buy that paper and at what price? I think that's what the market should be focused on. I want to finish with, you know, let's sort of finish kind of where we started. You mentioned the medicine that the Fed has already applied to the situation. Are they going to know, are they going to be skilled enough doctors to know when they've given enough medicine or should they wait and let the medicine take its effect? Because,

you know, their history would suggest that they got their medical degrees perhaps through the mail. So are they going to know when they've given enough medicine or not? I don't think you ever really know, Scott, but I think that they are well aware of the time lags that take place to affect the real economy. We're seeing the real economy being affected right now or impacted right now. We're seeing businesses pulling their horns. I can see it, by the way, in the media business where advertising revenues are declining across the board for Disney, et cetera, and other firms. And businesses are pulling in. And so that's what they're beginning to see. That should also quell the inflationary

pressure, although the employment stats, despite the most recent report, are still pretty strong. And that seems to be what's driving their greatest concern. Richard, we'll leave it there. Until next time, be well. Have a good weekend. OTCU. All right. We'll see how that all transpires. That's Richard Fisher. He's the former Dallas Fed president. Up next, it's Meta versus the mega caps. One halftime committee member getting bullish on that big tech name. We debate that call in today's halftime overtime when we come back. In today's halftime overtime, making the case for Meta, the stock has been underperforming its mega cap peers over the past two months, gaining more than 40 percent. Despite lingering headwinds, new edge wealth's Rob Seachin sees more upside ahead.

He made it one of his 2023 stock summit picks. Listen. Meadows forecast was cut 45 percent and its free cash flow forecast cuts 66 percent. And I think it's very dangerous in that space to be so underweight that stock when there's so much upside associated with potential surprises like a reacceleration in their core business. All right, that's Rob Seachin. Joe Terranova is back with us now. Is he right? I like what Rob said there. And I think Rob is offering a fresh perspective. And I think that's what you have to have with Meta. Now, if you have carried Meta for multiple years from the long side, OK, I think you're biased.

Your view of the company is clouded. But if you're now looking at Meta as a new position, this is a good entry point. It is? A 130? Yeah. It's not a value trap. No, I don't. I don't think it is. I think that they're beginning to do the right things. Their cash level is down 30 percent over the last several years. Right. Cash levels down. They're going to approach the debt market. I mentioned that before. Let's remember something. A lot of

these mega cap technology companies are going to rebuild their balance sheet through the debt market. They're not going to be afraid of the higher interest rate. They're going to want to have that cash at hand to buy back their stock. I think Meta is an example of a company that's going to say, OK, our cash level's down 30 percent. We're going to step in and do this. Now, you've had a dramatic valuation compression. We just showed it on the screen, right, from 23 down to 16 currently. Right. So I think it comes down to do you have the position flexibility to establish a new position right here, right now in the stock? If the answer to that is yes, then I think that's OK. If you've been in the stock for a while, I think you just kind of I mean, you feel like junk. You just kind of sit

back and just say, OK, I hope this company turns it around. The one thing I will say is the company has now of all the mega caps. It is it's initiated the most positive momentum of the collective universe of mega caps because it was obliterated more than the others. Yeah, but you have to pay attention to the momentum in the near term. Momentum is a factor in the market and it clearly has a lot of positive momentum since November. All right, good weekend to you. There it is right there, 43% in two months. That's Joe Terranova.

Coming up, we're wrapping up a busy first week of 2023. Christina Parsonevila standing by with our Friday Rapid Recap. Christina. Well, markets broke the losing streak. Scott, Chinese tech and travel name soared while new C-suite comments spooked solar investors. I'll break down the movers and shakers after this short break. We're wrapping up a very busy week, the first week of 2023. Christina Parts and Nevelos is here with our rapid recap. Christina. Bad news is good news, I guess, today. Softer U.S. wage data, an inverted yield curve,

and a contraction in the service industry helped all indices close above 2% today and positive on the week. Energy and healthcare were the weakest S&P sectors. You can debate energy was in the red, but, you know, pretty much flat. You can see zero on your screen. Enphase Energy, though, the weakest stock this week,

following comments from SolarEdge's CFO, who said the industry would slow down in the United States this year. It was another bad week for Tesla. Shares were down 8% on the week after we heard comments on weaker demand. And then you've got Chinese technology names that soared on signs that the tough regulatory environment in China may be improving. So investors jumped back into Alibaba. Look at that, up 20, almost 22 percent on the week. JD.com, Baidu, some of the biggest winners on the Nasdaq. Also, a great week for travel names like United American Airlines, given holiday travel surges this past week or so. The exception, though, Southwest, given all the flight cancellations. But even that stock closed almost or over four percent higher on the week. Scott. All right. Christina, have a great weekend. That's Christina Preston Nevelis. Still ahead. Thank you.

Santoli's last word over time is right back. The Twitter question we asked, what should the Fed do now post jobs report? Pause has the largest percentage of the vote. It's tight, though, but that wins. Santoli's next. All right, the last word. The last word of the week with Mike Santoli is what? Soft, I guess. I mean, the market, there's a limit to how much the market's going

to rally on very weak economic news like we got with the ISM services. But to me, the rally today was a little bit more of a measure of just how tightly wound we had gotten. Remember the poll yesterday? Yeah. Said two thirds of all people said we're going to sell off on the jobs number. So that really reflected the positioning. Where it leaves us. I mean, this market tends to just kind of pop right up to its next test. It closed the S&P at the 50 day average, two and a half percent up to the to the 200. So that'll tell us whether we've gone too far, let's say, for the for the Fed's tastes right now in terms of loosening financial conditions. The next big test is next week, right? Exactly. CPI?

Exactly. Thursday. I think right now you're starting to get a lot of people more confident that inflation has some downside momentum. Clearly, that could be either proven correct or not next Thursday. And I do think the Fed has to say at some point, turn people's sights to, look, we're just going to keep rates here for a while. We might be close. And, you know, that might be palatable. I think if, in fact, the S&P still, you know, hasn't run away by that. Fed says yes. Bond market says no. That's going to be part of the story. Well, that's the whole thing. Bond market says inflation is going to be no problem down the road, but it could happen the hard way. All right. Good stuff. You have

a great weekend. You too. Thanks. I'll see you next week for your last words. All of you have a great weekend as well. It does it for us. Fast Money is right now.