Closing Bell - Closing Bell Overtime: What Rep. Kevin McCarthy’s Ouster Means For Markets 10/3/23

Episode Date: October 3, 2023

Stocks tumbled during trading hours today. But the drama continued in Overtime as House Speaker Kevin McCarthy was ousted. Moody’s Analytics Chief Economist Mark Zandi on what it means for credit markets while Strategas’ Dan Clifton breaks down the policy implications. Fundstrat’s Tom Lee and JPMorgan Asset Management’s David Kelly talk the impact on equities. Plus, RBC’s Gerard Cassidy on how to navigate bank stocks in this era of higher rates. 

A lot of red on your screen with the Dow having its worst day since March and the 10-year Treasury yield hitting a fresh high going back 16 years. That is the scorecard on Wall Street. The action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. We'll be all over today's sell-off throughout the show. In just a moment, Fundstrat's Tom Lee breaks down the storm clouds that are growing in the market and if he thinks the highs are in for the show. In just a moment, Fundstrat's Tom Lee breaks down the storm clouds that are growing in

the market and if he thinks the highs are in for the year. And later on, Moody's chief economist Mark Zandi gives us his forecast for rates as yields get another significant pop. Plus, we are watching the drama unfolding in Washington as Kevin McCarthy's speakership hangs in the balance. We're going to talk about how that uncertainty might be hitting the market. We begin, though, with this sell-off, the relentless push higher for yields, the 10-year getting closer to 5%. That is putting significant pressure on the major averages. Why go to stocks when you can get that safe yield there? The Dow falling more than 400 points, the volatility index at its

highest level since May, but still pretty low. Senior markets commentator Mike Santoli is with us from the New York Stock Exchange. Mike, even underneath the covers, the major indices ugly. Underneath the covers in the S&P, I'm looking at the consumer discretionary, tech and communication services sectors because they haven't fared that badly. I'm going to interrupt you right there because we are getting the votes on the House floor right now. And we're going to continue to monitor that. Are we going to D.C. right now? OK, we're monitoring it. We're going to watch it just like we're watching these major averages and the sectors underneath. Mike, I'm wondering how important are perhaps

consumer discretionary, tech and communication services to whether this market rebounds because they haven't done so poorly overall to this point? Yeah, I mean, look, they definitely were the leadership parts of this market going into this correction phase that we're in right now. So therefore, they still maintain a little bit of the benefit of the doubt, and they're not having really severe downdrafts. Things like financials definitely getting worse. I thought I was looking at industrials. They're also kind of losing a little bit of that leadership profile.

So there's not too many areas of this market that are being fully spared. That's normal as we get one of these relatively deep 5% to 10% pullbacks, down 8% in the S&P. What I do find interesting is it's the bond market that really is the prime mover of everything that's going on and just testing the market and the economy with higher and higher yields until we see what the real blowback is going to be on things like consumer cyclicals and industrial actual real economic activity. We don't know yet. The economy seems OK for now. And therefore, the bond market feels like it's got room to go higher in yield.

Wanted to point out where we settled today on the S&P. Forty two twenty one was the close on June 1st of this year. We are a few points above that. We went below that for a little bit earlier today. That takes us to that June 1st level before we got a big celebration of the soft economic landing data that was coming through the following day. So we're just sort of testing the entire hypothesis that the economy can remain resilient in the face of what's being thrown at it. Yeah, the S&P finishing at 42.29 today, to your point, and also hovering above that 200-day moving average that we've been talking about day in and day out. Mike Santola, you had the VIX finally trading above $20. I think a lot of traders looking for that to see whether you're seeing signs of a broader washout here. And to your point, utilities actually were the sole sector in the green. I mean, we were talking

about how hard they were hit yesterday, but seeing a bounce there kind of speaks to this oversold dynamic in the market in general. A little bit of relief in the most bombed out sector of the market, which would be utilities. It's sort of a mixed message coming off of that. I do think volatility index at 20. All these things are almost like the minimal standards you would want to see before you decided things are lining up. I know just spoke at some data today about the 10-day decliners over advancers line from the S&P 500 at super extremes. They usually show up in the vicinity of a decent relief bounce. Now, you don't get it on the button, but it's sort of the prerequisite for one of those types of moves.

Okay. Mike, stay close. We're going to see in just a few moments. We're going to continue to monitor the House floor as well down in D.C. as that vote gets started. But in the meantime, let's continue this market conversation with Fundstrat Global Advisors co-founder and CNBC contributor Tom Lee. Tom, it's great to have you on. You're constructive on stocks right now. The fact that we do see the VIX hitting that 20 level, the fact that we have seen stocks trading lower and back at the beginning of the summer levels as well. Do you see this as a time to buy? And if so, why and what? Well, there is going to be a time to buy between now and year end. I mean, you're just you're describing it perfectly.

We're in a period where fear is mounting. I mean, the VIX is capturing that investors are afraid to be in front of the freight train of higher rates. But at the same time, we know that the PMI's have bottomed. There's a ton of cash on the sidelines. Earnings are recovering. And the Fed is that much closer to sort of reaching the end of its tightening cycle. So to me, it's a formula that when the selling ends, and I wouldn't be able to tell you if we're at that turning point,

but that recovery in markets could be very violent, higher, in the sense that the PE compression that we're seeing, I think, is excessive. And the pessimism is excessive. I mean, the economy actually is holding up really well. So I think investors should just remember the best opportunities to really make money have all come during periods of fear, whether that was March 2023 or it was October 2022. So, yes, I think it still makes sense to be constructive, but it does feel terrible out there. It sounds like if I'm reading between the lines correctly here, that while rates could go higher, yields could go higher here, at least in the near term, that you don't believe, Tom, that they're going to stay at these levels. I mean, Morgan Stanley's Michael Wilson saying again, and I realize he's a consummate bear,

but basically saying that the correlation between real rates and equity returns has fallen deeper into negative territory. I mean, if you're valuing equities off of off of the bond market right now, how how how much opportunity is there actually? Well, I mean, here's some simple math. You know, the long-term average of the 10-year is, I don't know, it's probably around 4.8. I mean, we're probably right there. So someone buys 10-year and says, I'll earn 4.8 or 5% forever. Well, the average S&P nominal return is 8%. And actually, after a drawdown, it's probably 10% a year. So someone could invest their money today in the S&P and earn double the return over the next decade,

or they can earn half of that owning a treasury bond. I mean, I know if someone thinks 5% is with equities, it's not even competitive with the long-term return of stock. So I don't know where yields are going to go. I don't think we're going to be a juggernaut higher. But if they're flat here at 4.8, since 1932, whenever you're at 4.8%, the average S&P PE is close to 19.5 times. I mean, there'd be multiple expansion coming in that range of yields. But if yields fall, then I think multiples go up. Of course, the TLT is a huge buy, but that would bring mortgage rates down. It would be a pretty big stimulus to the economy. So I think the only risk is if rates go to seven. I don't know if they're going to go to seven, but that is not what I expect.

Yeah, seven's a long way off, Tom. But I wonder, I mean, your year-end target for the S&P is still quite a bit higher from here, but it seems like you might be hedging a little bit, to use the term. You say equities, you believe equities can rally into the end of 2023, but you say you acknowledge that the near-term visibility is hurt by actually labor issues, the ongoing strike. Are you feeling more confident that we're going to be higher maybe six to nine months from now than three months from now at the end of the year? That's certainly correct, John. I mean, it's probably better for the forecast window to be six to 12 months. You know, three months is a lot could happen. But as I said, I do think that what the speed of this decline historically is symmetric with the speed of the recovery. So I think when we reach that apex of, or the nadir, really, of fear, and, you know, maybe it's going to be when people start to say 7% tenure, then we know yields have peaked.

I think there's going to be a pretty violent upside rally. I just don't know if it's now. And you're correct. We could have another week or two more misery. And the 10-year bond is a hot potato. No one's really buying it. So it is a hard situation for now. I just think people have to look beyond the near term. So if you're feeling less certain about the next three months, it's a crucial three months, certainly for the economy, particularly driven by the consumer. We got the holidays coming up. Consumer discretionary

as a sector has been performing really well for the market relative to everything else in 2023. How important is a strong consumer through the end of the year to A, your S&P price target for the end of 2023, and then B, your thesis that we are going to be higher in six to nine months? It's really important. I mean, if you think about the world economy, it's pretty much driven by the U.S. consumer. You know, it's not some consumer in Europe and it's not Asia. The U.S. consumer, particularly those 30 to 50, literally drive the global economy. Now, they're benefiting from a good jobs market.

They're benefiting from wages that are still growing, and they don't have a leverage issue yet. You know, it is a misnomer to think that mortgage rates here are costing everybody more money. A very small percentage of housing stocks turns over every year. And as you know, like 33% of homes are bought for cash anyways. So I think the consumer is in good shape. And if the Fed starts to get the data that, hey, inflation is tracking lower, and I think a lot of forward indicators show that. I mean, jolts to me seems anomalous in a way.

Then the Fed might signal they're getting closer to the end. That would be a huge signal to the bond market. So I don't think a lack of catalysts is there, but it is, like you're pointing out, three months is a tough window. I'm very confident we're going to have a nice rally into year end, much higher from where we are now, but it may not start. I don't know when it starts. Maybe next week, it might start. Tomorrow could start in three weeks. But, you know, we're in a rocky period. Yeah. And to your point, I mean, ISM manufacturing prices paid fell yesterday. That's going to be something to watch in the services component tomorrow, too. You made a

lot of news in early July, Tom, when you came on CNBC and you said your price target was $48.25. I mean, that would represent 14 percent upside from here. Is that what you're sticking with? I think it's still in the realm of possibility, yes. That would represent the market pinning back to its original highs. And I think it would be consistent with an inflation picture that is tracking better. So, you know, our view is that by as we get to December, instead of inflation sort of on the real components reaccelerating, I think it's glide path lower. That's going to change the minds of both those who are looking at rates and real rates and higher for longer. And I think that would justify a big move. OK, Tom Lee, thanks for kicking off the hour with us.

Good to have you on a day like today. With every major average down more than 1%, with the exception of the Dow Transports, although even the Dow Transports fell below its 200-day moving average today. Let's get back to Mike Santoli with a look at the damage done to the S&P 500 in the sell-off. A little more detail. Mike. Morgan, it's taken the index to kind of a busy crossroads. A lot of things coming together in terms of, you know, trend changes potentially. Anyway, the 200 day average for the S&P 500, as you mentioned, is right there. We basically stopped just short of it. It's around around 4200.

The other interesting thing about 4200 is it had capped the market for quite some time before we did break out in June. I was pointing out that June 1st level. That's where we took off from right there. The other piece of it is this sort of uptrend from the October lows of last year. You know, we're kind of playing with it depending on how you draw it in terms of the intraday numbers. You're also right about there. So in theory, this could be a support level.

The market's starting to look oversold. We're testing and testing. Bank of America pointing out years where you have seen two significant sort of touches or breaches of the 200-day average when it was going higher, like 2012, like 2016, like 2019. You know, it was successful in the second attempt. We'll see if that plays out. Now, a real hard-hit area of the market all year and today as well is regional banks. Take a look at the KRE ETF. It's not quite back to those springtime lows, but today's losses did take us to this point of, you know,

sort of this higher zone out of the depths of the SVB crisis. Obviously, bond market creating paper losses on the balance sheets of these banks. They're down something like 15 percent just in the last couple of months. So clearly people are positioned for more erosion of the fundamental story right there. Also, they're absent in terms of big buyers of Treasury bonds. Their yields help go, their health yields go higher still. And in theory should be providing less credit to the economy, although we haven't really seen that in stark relief just yet, Morgan.

Yeah, I mean, it's going to be key to watch when earnings season kicks off the end of next week as well, because to your point, I mean, it is you see higher Treasury yields and that means potentially for some banks, balance sheets, higher unrealized losses in their investment portfolios, not to mention the fact that they may have to pay out a higher yield to the folks that have their money parked in savings accounts and the like. But it's not just the KRE, is it? I mean, Bank of America and Citi both retesting their spring regional bank failure lows. So going back to March, I guess, is there a sense that maybe the contagion is, I don't want to say contagion, that the trading weakness is broader than just the regionals? It is. I mean, Bank of America, just in terms of portfolio composition, I think looks a little more like a regional than than some of the other very large banks,

because it does have a pretty significant Treasury portfolio that has been underwater. Now, what it really means is it's just going to hurt book value growth. It's going to blunt their profitability, maybe some of their the net interest isn't what you'd want because of competitive deposit dynamics. But it's not necessarily at a place of saying, you know, credit losses are piling up or they can't handle the losses. It's just about it being just a very difficult operating environment to navigate through. And they're going to have to show the effects in their unrealized loss portfolio. But again, maybe the market is exactly prepared for that. And we'll see how the numbers come through eventually when they do in a couple of weeks. I do want to just ask you, Mike, about the dollar index highest level since November.

It's something you've been charting for us on this show for months. The fact that we've seen this move to those levels, how I guess how how key is it as we get into earnings season and as we do look at this trifecta of dollar oil, treasury yields and negative impact on stocks? Yeah. In the immediate term, I just see it as another gauge or another form of financial tightening. So this sense out there that it's going to be a restraint on growth. Obviously, it flows through to profitability and competitiveness of U.S. companies in terms of exports. I always feel like that's a little bit of a secondary effect that comes through over the matter of quarters. You know, not every product reprices. Demand isn't always that elastic. But I do think it shows you that we're braced for a situation here where

the Fed's going to be higher for longer. It's part of that story as well. We're not back to the highs of of last year on the dollar index, but you are kind of breaking away from the range we've been in for most of 2023. All right. Mike Santoli, thank you. And we'll see you a little bit later in the show. Right now, we want to get back to D.C., to CNBC's Emily Wilkins for the latest on the vote to oust House Speaker Kevin McCarthy. Emily. Well, right now, what is happening in this building right next to me is something that we have not seen in more than a century, a vote on potentially ousting the Speaker of the House, Kevin McCarthy. We've already seen about six Republicans so far

vote against him. They're doing that roll call vote. So everyone's got to go in alphabetical order. But remember, there was a vote today, basically a vote to decide if they would take this vote, which is a good test for how this vote would go. And how it went was very poorly for McCarthy. You had 11 Republicans and all Democrats basically vote to oust McCarthy. And so now that official vote is taking place. And if McCarthy is ousted, there's a huge question for what comes next, because it's not clear that anyone else has the support currently to become Speaker of the House. So Republicans are going to have to start debating, start figuring out a path forward. Of course, Democrats want to see Hakeem Jeffries become Speaker, their leader.

A lot of questions about what this looks like. But the fact of the matter is that we're going to see action in the House come to a halt. And this at a time where they've got less than 50 days before the government funding runs out again. They said they wanted to pass more funding. It's going to be very hard for them to have the time to do that initially. It's going to be very hard if they spend the next week or more stuck trying to figure out who the leader of the House is. All right. Emily Wilkins, thank you. And this might not help the

bond yield situation, higher bond yields pressuring stocks because, you know, instability in the U.S. federal government has been cited by credit rating agencies as a reason for credit downgrades. All right. Right now, we've also got breaking news on Intel. Intel announcing the intent to spin out the programmable solutions group, PSG. As of January 1st, that stock is up a little more than 2 percent after hours. You can think of this in part as a smaller piece of Intel, not the main group, but the ability to program chips. Intel purchased Altera for this capability. FPGA's field programmable gate arrays. Intel saying that Sandra Rivera, executive vice president there, will lead that group right now. She has been leading the data center group, which is an

important part of Intel. We'll look through to see what other shuffles will be necessary internally to make this happen. But that stock higher right now, Intel saying that there's an intent to IPO with this group at some point down the line. Not immediately, but this company, Morgan, that has been in the midst of an attempted turnaround, announcing yet another spinoff. Of course, it spun off Mobileye, and that's been one of the few IPOs to perform well over 2023. That's exactly where I was going with this, and it's this idea of, and we've seen this with industrial companies in recent years, and even with some consumer goods companies as well, look no further than Kellogg, although we know that that has been a kind of ugly stock chart.

Both of those have been an ugly stock chart this year, I mean this week. But is this just, is the way to think about this, that this is a simplification of the portfolio and this idea of realizing more value for the sum of the parts as some of those parts are spun off and as Gelsinger does look to realize this major turnaround strategy for core Intel? It might be generous to frame this as a simplification. FPGAs are kind of important. Now, we don't know how much of this Intel is going to spin off. They say that the businesses will remain aligned when it comes to manufacturing and using Intel's manufacturing capability.

I think this is just a necessary move, given the cost of capital, the difficulty of this turnaround, Pat Gelsinger being adamant that keeping design and manufacturing together, you know, five nodes in four years and keeping that design piece, he's making some choices here, I think, and giving a little something to investors at the same time to keep this turnaround going. So I think it's the turnaround attempt of the decade.

We'll see if he gets it done. You've been covering it so closely, and we know you'll continue to. To your point, stock is higher. So the initial reaction is a positive one to this news. We'll see where it goes. And we're going to stay on the story of the day. The markets, Treasury yields spiking this morning following the release of the job openings and labor turnover survey. It sparked a wider sell-off in equities.

Job openings in August came in hotter than expected. The labor market tighter than expected, reporting more than 9 million openings. On Friday, we're going to get the September jobs report. Let's bring in Mark Zandi from Moody's Analytics. Mark, what does this signal about the state of the overall economy when you've got this number of job openings still? People have been hoping that this number was coming down. Yeah, John, you know, I had a different interpretation of the JOLTS numbers. I mean, I don't pay much attention to job openings numbers because, you know, businesses, you know, once they, there's no cost to keeping those positions open. So I really don't think they measure what we think they do and aren't really

important. The statistic that matters the most in that report is the quit rate. That's the percent of folks that are quitting their jobs. And that's come way back in and it's back to where it was pre-pandemic. And that gives you the best window on wage growth, because it's when people quit jobs and switch jobs that they get these big pay increases and wage growth is juiced. And of course, that's key to inflation, that's key to monetary policy and interest rates. So, you know, I look at that report and I say, hey, that felt pretty good to me. I mean, the quit rate was as low as it was. So I'm a little perplexed by the market reaction. I think lots of stuff going on, a lot of momentum, speculation, technical factors

at work here. But the fundamentals don't argue for much higher long term interest rates. OK, interesting. How do you weigh in what's happening with unions and strikes for higher wages and stronger benefits along with this report? If you want to focus on the quits part, are you also relying on some kind of compromise that isn't weighted so much toward the unions wage-wise going through? Yeah, and don't get me wrong, John. I mean, the labor market's strong. It's tight, no doubt about it. I mean, we're sub 4% unemployment rate. We've been there for a long time, and that's a tight labor market, and that would be consistent with, you know, labor flexing its muscles here, UAW strike being the latest

example. But, you know, in the grand scheme of things, the labor market actions are pretty modest. And I don't think that's going to drive the train on wage growth more broadly. In wage growth more broadly, you know, no matter how you measure, whatever measure you want to use, feels like it's moving in the right direction, at least to be consistent with the Federal Reserve's inflation target. So the UAW strike is indicative of that strong, tight labor market. But I don't think it's suggestive that we're not going to get wage growth back to something that's more consistent with the Fed's inflation target.

Mark, can you have a recession if employment continues to be robust? No, you can't. And that's the second best indicator. So I can rank order all those indicators in the JOLTS report for you from most important to least, most being quit. The second most important is layoffs. They remain very low. And that's just not you know, that's just not consistent with recession. I mean, at the end of the day, you need layoffs because to generate recession, because it's the layoffs that spook consumers when they then pull back on their spending, run for the bunker. And that's when you get recession, because it's the consumer that drives the train. And they're not going to pull back to a significant degree if we don't see a pickup in the layoff. And I just don't see it. So another good reason why it felt like to me that JOLTS report was kind of sort of where you want it to be. Yeah. I mean, does that still is that still

the scenario, though, when you have student loan repayments kicking in, you have this child care cliff that's taken effect this week, you have higher gas prices and and higher rates, or is that a real risk to this entire conversation? Well, those things are going to weigh on the economy. It's going to slow growth. I mean, the third quarter that just ended, third quarter, that was really strong. I mean, we'll get the GDP number in a few weeks, and it's going to show growth no less than 3%, could be as high as 5%. I mean, that's a strong quarter. Q4 is going to be a lot workier, the current quarter, for all the reasons you just articulated. And by the way, I think once that becomes evident, once it becomes clear that growth is slowing and you're going to see slower job growth numbers,

that's when bond yields will start to come back in. People feel a little bit more relaxed that, well, that Q3 growth is not sustainable. We're back to something that's more consistent with lower long-term interest rates. So I don't think it's enough to push us into recession under most reasonable assumptions about how these things are going to play out here. But I think it's going to be enough to kind of calm the nerves in the bond market, which are obviously people pretty nervous at this point. So, Mark, what does that mean for a consumer-driven Q4? If you're looking for a slowdown, you know, we just heard from Tom Lee, his expectation,

he's still optimistic, but the consumer is going to have to really show up in Q4. What does a slowdown mean still within the context of a healthy economy? What sort of numbers will you be watching? John, you know, they just need to do what they've been doing. You know, 2% real growth. This whole shooting match, all consumer spending, good spending, services spending, all together, everything together, 2% on a real after inflation basis. That's what they've been doing for a year, year and a half. That's what they're doing now. And all the trend lines suggest that's what they're going to continue to do. We've got jobs. We've got low unemployment. We've got sturdy wage growth that's now above inflation. You've got a lot of excess savings, particularly among high and middle income households.

Debt service is low, at least in aggregate. People have locked in these low interest rates. And even though the stock market is down, house prices are flat, people are a lot wealthier than they were when the pandemic began just a few years ago. So you add it all up, I think the consumer is going to hang in there, hang tough. And as long as businesses don't lay off workers, and I don't see why they would, and there's reasons why they wouldn't given the tight labor market and their need to, their concern about finding workers and retaining workers, it just feels like to me this economy is going to remain very resilient. It would take an awful lot to push it off track. Okay. I wonder how

the D.C. dysfunction factors into all of this, Mark, because as you're speaking right now, you've got the House voting to potentially remove Kevin McCarthy as speaker of the House right now. This would be an unprecedented move, something we've never seen in American history, if that were in fact to be the outcome, his removal. Just what? Last week, your place of employment, Moody, saying that a shutdown could hurt credit ratings. How do you factor this in to the fiscal picture and questions about the U.S.'s ability where fiscal lawmaking is concerned? Well, you make a good point. So on the shutdown, you know, I think the odds of that happening now, given the extension out to mid-November, they're still way too high and still could happen. But I

think it's much less likely that's going to happen now, even given all this dysfunction we're seeing, you know, play out in Washington, you know, today and we'll see over the next few days. I just don't see lawmakers shutting the government down right before Thanksgiving. I just don't see it. So I think they'll figure it out. But having said that, Morgan, I do worry about our long term fiscal situation. I mean, we got a problem. I mean, if you just look at current law, tax spending policy, under reasonable economic assumptions, and with interest rates, not nearly as high as they are, you know, currently, they have to come back in, you still get pretty ugly, you know, deficits and debt down the road here, it's unsustainable, we're gonna have to change that. And, you know, it's one thing when interest rates

are low, the government can run deficits and run up debt and it still can manage through. But when interest rates are high, they can no longer do that. So I think the pressure is now intensifying for lawmakers. On the other side, this government shutdown, you know, hopefully after the next election, we can, the lawmakers can get it together and, you know, address this. But that, you know, having said that, that doesn't roll off the tongue and is the reason for concern longer run. All right. Mark Zandi from Moody's. Thank you. Egg producer CalMain Foods just reporting earnings.

Our Pippa Stevens has the numbers. Pippa. Hey, John, the stock is really under pressure here after CalMain reported a 30 percent drop in revenue year over year, coming in at four hundred and fifty nine million dollars, with the company earning two cents per share. CalMain said that egg prices have returned to more normalized levels after spiking to record highs during fiscal 2023. In the latest quarter, a dozen eggs averaged $1.59, down from $2.28 last year. The company did say, though, that conventional egg volumes are higher than a year ago. That's stock Morgan down 12 percent. All right. Pippa Stevens, thank you. As we continue to monitor things like food inflation, or in this case, disinflation. Now, we're watching the historic vote in Washington happening right now as Kevin McCarthy's speakership hangs in the balance.

As we await the outcome, let's bring in Dan Clifton, Strategist Head of Policy Research. Dan, it's great to have you on. I'm basically going to ask you a similar question to what I just asked Mark Zandi, and that is, from a market standpoint, from an investor standpoint, from a business standpoint, how do you factor in the possibility of this happening? Because we have no other point in history, I mean, maybe 1910 with an unsuccessful ouster, where we've seen something like this transpire. Well, that's right. The precedent is very different than anything we're used to. But I look at it less about Speaker McCarthy and whether he gets removed as speaker and what this means for the overall level of political dysfunction at a time when the rising net interest cost is going up. And I would disagree

respectfully with Mark Zandi. He's talking about the long-term fiscal trajectory. The future is now. The debt servicing cost is rising for the first time in 35 years. The number of foreign buyers of U.S. debt are going down. That means that the debt has to be purchased at the retail level and through bank reserves, and that drains liquidity. That's why the dollar's up. That's why bond yields are rising. That's why stocks tied to illiquidity are outperforming stocks that do liquidity. And so this is a major point, even if we weren't removing the speaker. Today, we're going to be faced with a vote, and it looks like the speaker is possibly going to get removed. Morgan, that means that there is no speaker of the House until another vote comes in. That means there's no action on the House floor.

And I think investors are going to be watching to see if Moody's, the third rating agency, comes in and puts the U.S. on credit watch. So there was a great degree of nervousness amongst institutional investors today going into the vote and the possibility of having no speaker for the next couple of days. Now, that will resolve itself. And ultimately, we're going to have to get the budget under control. But you can see how you can have a series of tail risks here because of this level of dysfunction that's happening right now. And investors around the world are watching Washington. So so if we were to see the ouster of McCarthy, or even if we weren't, how much does this elongate that process of getting the budget

under control? And to your point, what does it mean for the liquidity situation in something like the bond market at a time where investors are looking at the possibility of 5% on the 10-year Treasury? Yeah, well, we expect liquidity to continue to be drained. That means that bond yields are going to go higher. Now you've got to add an uncertainty premium on top of that. And obviously, when bond yields go up, that's bad for valuations of stocks, and the stocks are going to be under pressure. But you ask the key question, when are we going to get this under control? We're literally having a conversation about keeping government spending at 23% of GDP, way above the

historical average and more in line with a crisis when the unemployment rate is 3.8 percent. There's just no cushion left if there is a recession coming as consumer spending begins to slow into next year. And so at some point, we're going to need a catalyst to get Washington to start saying we need to get the budget under control. And to some people in Washington, that's why they want to have a government shutdown. But you can't have the brinksmanship and you got to get government, you got to get government spending under control. And both of those are at loggerheads right now with an election approaching. And that's why I think investors don't think that much of this is going to get resolved until after the 2024 election. And that means that there's just going to be a higher premium on bonds.

And that's why this isn't something like, you know, the economy slows, the bonds come in. You have massive amounts of Treasury supply coming onto the market. And now it's coming in on the long end of the market, which that is increasing for the first time in three years. That's going to have to come out of bank reserves. And that's going to drain more liquidity from the market. So at some point, you'll see a response from the Fed and Treasury. But they were probably two months away from that. Dan, help us game this out because I can't figure it out. Even if Speaker McCarthy survives this vote, doesn't get removed. It seems to me like he's in a historically weak position as a speaker.

He was already weakened by having to take 15 votes to get the job in the first place. If he if he barely survives this and we're heading into a potential shutdown when this continuing resolution wears off, isn't there still so much uncertainty in who the Democrats, the White House even have to bargain with? And if they speak for the full GOP, I mean, at what point does this become clear? And perhaps does does this uncertainty that's pushing bond yields higher and perhaps pushing equities lower? At what point does that get relieved? Yeah. So first, let me say, if you get a new speaker, it could break the fever, could have a contrarian effect. This is what we saw when John Boehner left the House and

Paul Ryan came in. He was able to get a budget passed because his political capital was high. But that's by no means guaranteed to actually happen. You have the same set of players here. You have the same set of excuses for why they don't want to move forward on appropriation bills or the continuing resolution. And it's going to make it what I call budget trench warfare that we're going to be in until we get some sort of resolution on this over the next couple of months. And by choosing not to go into a government shutdown, all we did was delay this by 45 to 47 days, which hung the uncertainty out there. But ultimately, we're going to have to have a new speaker. Right before we went live, McCarthy had about seven no votes. So the only way McCarthy could survive at that point is if Democrats go in there and rescue him. The Democrats were making

it very clear today that they had no incentive to rescue him, particularly because the Republicans had moved forward on impeachment and some other issues that were associated with that. And that means that we're likely going to have to choose a new speaker. The way I see this process working is that there's going to be a letter or continuity of speaker, and that person will then have to hold votes on who the next speaker is. And John, just to make it even more confusing, there's a chance that Kevin McCarthy could be in the round for voting for the next speaker, even if he is removed today. So this is going to be an uncertain process. I would urge people to buckle up and watch it. Normally, this is political drama, but it is now directly related to the ability of the U.S. government to pay its finances, and it's having financial market

implications. Okay. Dan, stay close, because we're going to check back in with you a little bit later in the show. We're going to continue to in with you a little bit later in the show. We're going to continue to monitor that voting process. In the meantime, and this kind of gets back to the whole higher yields conversation, what we're seeing in the Treasury market with a huge wave of issuance, bank stocks getting hit hard in today's sell-off as higher rates put pressure on that sector. Let's bring in RBC head of U.S. Bank Equity Strategy, Gerard Cassidy. Gerard, it's great to have you on. We've been talking about the KRE, which broke below $40 in trading

today. Certainly a lot of weakness inflicted by investors on the regional banks. But we are seeing some cracks in some of the bigger names, too. I guess just walk me through why the concerns and how prolonged they could be, especially as we await earnings season. Morgan, I think what we're seeing with the bank stocks is that with the rise in the long end of the curve being so rapid and now high, there is a it's weighing on bank stock investors, particularly when it comes to the unrealized bond losses that these banks have in their available-for-sale portfolios. The largest banks have to take those unrealized losses

through their regulatory capital in addition to their gap capital, where the capital you see in their 10-Qs and 10-Ks. The regional banks do that through the 10-Ks and 10-Qs, but not through regulatory capital. The concern might be, though, that the new Basel III endgame regulations that are proposed and are likely to be finalized next summer with implementation beginning in middle of 2025, that that's going to require more of the regional banks to include that in their regulatory capital, the unrealized losses. But we have to remember, the bond losses will burn off. These are not credit losses. These are duration issues. And over time, the bonds pay off and they will come back into capital.

But that's what I think is weighing on all the banks right now. Yeah. I mean, but this unrealized bond losses, I mean, this is so key because this is what triggered quite literally a run on the bank for SVB. And of course, we've seen this in the era of mobile technology and people being able to make their transfers so quickly, so rapidly. So when we talk about unrealized losses, which investors are clearly very focused on right now, who has the most? Who should investors be steering clear of? Where is the pain overdone? I think it's overdone for all the banks, to be frank. You look at where they're trading relative to book value at today's close. You know, the top 20 banks are averaging around 80 to 85 percent

of book. And remember, book value includes the unrealized bond losses. So we're trading at valuations that we haven't seen even during the financial crisis in terms on a relative basis, relative to the market. And so what's interesting is, you know, you brought up the Silicon Valley situation, which, of course, was disastrous. But we have to remember that was a really episodic one-off event because 95% of their deposits at Silicon Valley were not insured. Nobody, not a single bank is even close to that today. So there's no funding issues at the banks. So it's really, you got to write it out. Now it's painful. Don't get me wrong. This is not fun, but there's no risk of funding losses or funding crisis or anything like that. But you do have to write it out.

The stocks are cheap, a fifth third, super cheap, very well run. PNC, very strong, another good name. But these rising rates do worry investors. I understand that. Yeah, I mean, the KRE, Gerard, is under 40 right now, which, I mean, that's the levels where it was near the worst of this. So how will we know that enough of these banks are healthy? I mean, we've been talking about the possibility or likelihood of consolidation within the regional banks. Rates are high right now, which is going to put pressure on those that have a lot of commercial real estate in their portfolios.

But, you know, from the reaction, the KRE, it seems like somebody thinks some sort of disaster is coming. When will we know that it's not? It's a very good question. And when you take a look at it, you know, we're testing those main lows. Fortunately, we haven't violated them yet, to your point, with the KRE and other bank indices. And what's interesting is it's really all about the economy and the health of the economy. And fortunately, it's very healthy. And to your point, what's happened in our view, when we talk to institutional investors, you know, when we turn back the clock to March, that was a shocking event.

When you think about it, on March 6th, the beginning of that week, Silicon Valley was a healthy bank. And by Friday, it was out of business. Shocking. Never seen that before. So the long-only investors community. But at these valuations, if you don't think the U.S. economy is going into a hard landing in 24 on a recession, these are the opportunities you're going to find to be able to pick off names that are very attractively priced. But I do, you know, we have to recognize this long end of the yield curve has got people frightened in how quickly it's moving. You say the health of the economy is going to be the signal that some of these smaller banks, I guess the banks in general, but especially the smaller banks, are OK. How do you measure health in a situation where good news is bad news so often? What are the key measures of health? If it's macro data, what is it that you want to see that investors should be looking for? John, good point. When you take a look at the good news is bad news. The key number for us is

all about inflation, because the moment the Federal Reserve hits the terminal rate on Fed funds, we go back the last four tightening cycles. And every time they hit the terminal rate, that was the catalyst to bring long onlys back into the banks. And every time they hit the terminal rate, that was the catalyst to bring long onlys back into the banks. And if we're at the terminal rate today, then we would suggest that the bank stocks are going to have a very good 2024. But if inflation is not under control, and we're heading into the spring of next year, and we're still sitting at four, four and a half percent inflation, and the Fed has to take the Fed funds rate even higher, then that's going to be even more challenging for the banks. So I think economically

speaking, inflation, employment are two key metrics everybody should keep their eyes on for the bank stocks. And then what the Fed does with the terminal rate is critical. OK, so so in light of this conversation, in light of the big moves lower, we've seen really across the financial sector, ahead of earnings, what do you buy? Where is there an opportunity here? What has been unfairly punished? I think when you take a look at some of the names, PNC comes to mind. They're going to have, we think, a solid quarter. They announced today purchasing some loans from the FDIC, from the old signature bank. It's going to be accreted to earnings immediately in the fourth quarter. Really, anytime you buy an asset from the FDIC, you do well. I would also say Fifth Third.

Fifth Third is one of the best managed regional banks. They have a very strong management team, a very strong franchise in the Midwest, as well as the Southeast is another name that can be looked at. And we also have to remember in the downturn, the names, the stocks that could hit hard, like a fifth third or Regions or Key Corp, et cetera, they're all going to try to prove to us, and I think they will, that this credit cycle, whenever it comes, it's not going to be the same for them as it was in the last one. And this is the opportunity to buy these stocks on the cheap. And then the big names, I would point people to Bank of America. That's the risk on name, if you will, because of the big unrealized loss in the health and maturity portfolio. It has people worried. But that name, I think, is another name people can

look to going into the quarter. Gerard, I also want to ask you about the hire for longer situation that we seem to be in, combined with these loans rolling over, particularly in commercial and the timing of that. When does hire for longer become kind of a tidal wave, right, that ends up causing a lot of pain to the banks? Is there a particular date on the calendar that you're looking for that investors should be aware of? It's interesting, John, because higher for longer at the front end of the curve is actually quite positive for margins, because what you're going to see happen is should we hit the terminal rate? And let's say the Fed keeps it there through all of 2024. You're going to see deposit rates stop going up around five to six months after the terminal rate is reached.

However, the asset betas, these are the yields on the assets as the cash flows come off, Deposit rates stop going up around five to six months after the terminal rate is reached. However, the asset betas, these are the yields on the assets. As the cash flows come off a securities portfolio yielding 2.5%, 3% and is reinvested at 5%, the margins start to widen. But to your point, to your question specifically about commercial real estate, as you were going to find, banks have created waves of refinancing real estate. As you were going to find, banks have created waves of refinancing real estate. The downtown office, you know, real estate market, you know, our big urban markets is very stressed, no doubt about it. But the thing about the medical office outside of Nashville that's fully leased up, cash flows are very good. Now the owner has to refinance in a 7% fixed rate market rather than a 3.5%, 4%. The banks, they're not going to foreclose on a property like that. They'll refinance it.

So when we think about real estate, we have to make sure we focus on the real estate that's really not a real issue versus the stuff that is. And the downtown office is a problem. But the good news for the banks or silver lining is most of that's in the CMBS market. The banks have exposure, but it's quite low. And we think it's manageable. OK. I mean, just going back to your picks, you didn't mention banks that have have a big investment bank or, you know, trading exposure either. Why is that? Yeah, no, Morgan, I would say that this quarter's numbers for the, you know,

the Goleman's and the Morgan Stanley's, you know, we've all kind of lowered our estimates in anticipation of lower numbers. But if the green shoes are real, I'm glad you brought this up, Morgan. If the green shoes are real and people really believe. I'm going to interrupt you because we we're going to D.C. right now to the House floor for this vote, which is which is happening right now. The vote and the results of the vote, I think, right there on your screen, happening in real time. We're going to toss to Emily Wilkins, who has the results of this potentially historic moment.

Emily. Well, Morgan, Speaker Kevin McCarthy has now officially been removed as Speaker of the House. This is really a vote that we have not seen in more than a century and has come not because a lot of Republicans were frustrated with McCarthy, but because a very small group of Republicans were really frustrated with the speaker. I mean, a big turning point was what we saw just this past weekend when McCarthy teamed up with Democrats to move that stopgap bill and funding the government. That was something that really pushed a lot of members over the edge. So right now, it's a huge question of what actually comes next, because it's not clear who, if anyone, can get the amount of support needed to become the next speaker of the House.

I talked with a couple members today who said that they're still planning on supporting Kevin McCarthy as they go into potential votes for speaker. But at the same point, members have floated other names. Congressman Matt Gaetz told us Steve Scalise last night as a potential name, but Scalise just voted in support of McCarthy on the floor. So I think a lot of questions about what happens next. But at this point, the House has to halt most of its legislative work. So all of those spending bills they were working on, all of the things to reauthorize the FAA, farm bills, agriculture, that was a huge bill that they're working on. All of that is going to brine to a halt as Congress or the House in particular tries to figure out who the next leader will be, if it will be McCarthy again. Just a lot of

unknowns here and a lot of really unprecedented territory today. Yeah, along those lines, and you just mentioned some, I guess, possible names that some lawmakers have floated here. But if you have somebody who steps in as an interim speaker on an interim speaker basis, how long can they hold that post? Is there a certain time frame here in terms of when these decisions need to be made, or could it be infinite? Well, we're learning right now that Patrick McHenry, he is an ally of Kevin McCarthy. He's currently the chair of the Financial Services Committee. You might know him as the guy who tends to wear a bow tie. He will be the interim speaker. But how long it lasts is really a big question. I mean, we saw back in January, it took about a week for them to figure out who the

speaker would be. Now, of course, there's a lot more baggage. There's a lot more angst. And it's not clear how long these types of votes could take. Really, I think there are lots of question marks here about what's going to be done, what this is going to look like. But there were many Republicans and Democrats who said that this would not be a good outcome. Even for the Democrats who voted against McCarthy, they recognize there's a lot of work that needs to get done. And now that's going to be grinding to a stop. All right. CNBC's

Emily Wilkins. Thank you. And now let's bring back Dan Clifton, head of policy research at Strategas. Dan, this has turned out as you sort of telegraphed. Speaker McCarthy is no longer Speaker McCarthy. And we've been talking about this within the context of bond yields and basically the degree to which investors are willing to take on risk of loaning to the U.S. government, which appears now to be at a historic level of dysfunction. If Speaker McCarthy had survived this vote, might it have been more instable than what we're heading toward now? Yeah. So, you know, he could have said, I'm the comeback kid. I thought I was going to lose and rally the troops and be able to move a piece of legislation through Congress that would be with the support of the people who voted for him.

But what you are seeing here is a historic moment and a big congratulations to Emily to be able to report on real time, you will now have financial service chairman McHenry trying to corral the Republicans into some sort of consensus decision on where the party should go. And I would agree it would take some time to do it. I don't think McHenry will be the person. I think he wants to be financial service chairman. The names you're going to hear are Steve Scalise, Tom Emers, McHenry himself, maybe Garrett Graves, Tom Cole and Jim Jordan. I think those are going to be the names that are going to be bandied about as possible replacements. But if you go back and you think about where we were in January, Kevin McCarthy always had the most support out of anybody else. He always had a core support of 200. So it's like you are starting over from scratch.

And this is a bit of a pothole that we're going to have to work through politically and in the financial markets over the next couple of days. Dan does this. It seems to me it does create a bit of a leadership vacuum in the Republican Party. And how important is it what Donald Trump says now about who should be speaker, since he was a very strong voice with the people who wanted Speaker McCarthy, ex-Speaker McCarthy, removed? Yeah. So first, I would say that the President Trump or former President Trump has a very good influence on many of the House members. But even during the speaker vote in January, it seemed like some of these members weren't listening to what Trump's advice was.

We actually urged them to vote for Kevin McCarthy. So I do think these members are going to have their own independent view of where they should be headed. But very importantly, you have to think about it. Senator McConnell has been having some health issues in the Senate. Now you have no leader of the Republicans in the House. You're going to have a little bit of a fight over this. So you can feel the tension. You can feel the disorganization of the Republican Party. And somebody is going to need to emerge to be able to be the leader. And I don't think it's going to be the former President Trump that kind of pulls those people together. I think it's going to be somebody to be the leader. And I don't think it's going to be the former President Trump that kind of pulls those people together. I think it's going to be somebody from within the caucus that is going to have to unify him. That being said, you still have a Democratic Senate. You still have a Democratic White House. And the idea that you're going to get some

different result by changing the speaker from a policy perspective is ludicrous to me. And so much of this is just going through the motions, creating an unnecessary headache without any change in the actual policy result that some of these members are looking for. Dan, I just want to I just want to confirm, yes, this is going to like take a lot of time and energy and resources away from, you know, appropriations and getting a fiscal 2024 budget across the across the finish line. But can that actually still, in theory, happen even without a Speaker of the House? Or if it can't, can you at least get another continuing resolution across the finish line? We can't do anything in the House of Representatives until a Speaker is appointed or a Speaker is voted on. So the appointment of McHenry just allows to facilitate the process to have a vote to get a speaker.

But until a speaker is elected, there will be no action on the House floor or in the House committees until this process gets resolved. So the House is shutting down until this gets resolved. And that's a very important point. Now, you can do work behind the scenes. Ultimately, you may be able to get an appropriation to continue resolution in 45 days because you have a new speaker. That speaker has more political capital. It's possible. But you're not really resolving anything if you're doing just another kick. And you would want to see a more substantive change that gets you out to the fiscal year? All right. A big question mark hanging over an important institution. Dan Clifton, thanks for coming back and bringing us through that. Thank you for having me. Appreciate it. Joining us now is David Kelly, J.P. Morgan,

Asset Management Chief Global Strategist, Head of the Global Market Insights. David, I got to start with you on Congress, on the House of Representatives, historic moment, Speaker Kevin McCarthy, no longer speaker. To what extent has this dysfunction, this instability in Congress been a force pushing bond yields higher? And what should we expect to happen with that from here? I don't really think that's the key thing in bond deals. We certainly have seen a situation that as we look to the budget numbers at the end of the year, as we think about where we're headed going forward, and we look at the interest costs that's piling up, it's clear that the government's going to have to raise a huge

amount of money going forward, something like $2.5 trillion this fiscal year, perhaps closer to $3 trillion next fiscal year from capital markets. And that's a lot for the bond market around the world to swallow. But we should have known that beforehand. Now, what I think is really going on here is we have seen somewhat stronger economic data. It looks like third quarter GDP is going to be strong. We got a good JOLTS report this morning. So it looks like the economy's got some resilience. And that, I think, is really what's been boosting bond deals. And then, of course, there are technical factors, which, you know, as people get sort of squeezed and have to reposition themselves, which are pushing those yields higher. But I think this is mostly about

a resilient economy rather than the chaos in Washington. Now, I think the problems in Washington are probably having a negative effect on the stock market. The stock market does not like uncertainty. But I don't really think that should be pushing bond deals higher. OK. Got to wonder if we have to dust off the term bond vigilantes here, though. With 4.8 percent or thereabouts on the 10-year, David, I mean, do you T-bill and chill to use, I think, Jeff Gundlach's term? No, you don't. Not if you're a long-term investor. I mean, two years ago, you could get a 30-year fixed-rate mortgage for less than 3%. And there are a whole pile of people who are kicking themselves today that they didn't do that.

And today you can buy a 10-year treasury bond that will pay you 4.8. You can buy a 30-year treasury that'll pay you almost 5 percent. And that's a good deal. And the reason it's a good deal is because we believe that recession or no recession, inflation is going to come back down to 2 percent by the end of next year. Once you get past a lot of the fiscal stimulus and the effects of Ukraine, this is fundamentally a disinflationary economy. And if that is right and if inflation does come back down to 2 percent, then today's bond deals are actually pretty good value for long-term investors. Of course, yields could go higher, but these yields are a pretty good investment, I'd say, today. Okay.

And you say long-term investors should be in long-term assets. To what degree do you mean equities there? And do you have specific sectors in mind? Well, I mean, both equities and fixed income. The real point is that at times like this, when you've got a lot of uncertainty, people tend to hide in cash. But what we found is that if we are close to peak CD yields, and I still think that's the case, even with some of the rhetoric coming out of Fed officials, I think, you know, if anything, the pressure on the economy is growing here, the deflationary pressure. So if we're close to peak C deals, what we found is you go back over

the last six interest rate cycles, every single time turned out there was a better thing to do with your money than just park it in CDs. You tend to get either a big rally in the bond market or you get a rally in the stock market or both. So long term investors should really try not to stick in cash just because they're scared. If you get into a diversified portfolio where the stocks and the bonds are zigging and zagging together, you will tend to get a better return. And people just need to remember that and not hide out until everything feels, you know, markets don't settle down. Markets settle up. And, you know, when all the uncertainty is gone, it turns out that the prices you have to pay are higher. So people shouldn't get derailed by this. I know Washington is looking a little chaotic right now, and this is scaring people, but they

should stick to the long-term plan. Okay. David Kelly of J.P. Morgan, thanks for joining us. Anytime. Let's get back to Mike Santoli to help us set up tomorrow. I mean, my God, what an hour we've had here, commercial free. Mike, what should we be watching? ISM services? Fed speak continues? Other things? I think actually we have a fair bit of macro numbers we want to watch tomorrow. ISM services, for sure.

Durable goods. Some of the, even the energy inventory stuff. And I say that because you want to see the bond market's reaction to it, just to see if it actually is paying attention to the current state of the economy. We're at a very dissonant moment right now when everyone is talking about the momentum the economy had in the third quarter. But so many headwinds that gathered together and are striking the economy right now as we head into the fourth quarter. Yes, the strikes, a little bit of the government shutdown, the student loans, all that stuff is now causing this. How much are we decelerating question at the same time. Yields are not acting in a way that you would expect

if anybody was bracing for an economic slowdown. So this is different world out there that macro markets are not really they don't have the same kind of reaction function, so to speak, as they have in the past, to those numbers. That investors would believe or not? I didn't catch the first part of that, John, but I mean, I have a feeling that what we're waiting to see is if the bond market finds a level of yield where people say, enough for now, I'm not going to sell anymore at this point,

whatever the economy is going to do, and if we do get some disinflationary forces, everything we're talking about, worried about are disinflationary. Then we'll see if we can settle out around this level in an oversold stock market. And by the way, crazy stuff and dysfunction in Washington, whether it's 2011 with the debt downgrade, whether it was the TARP vote that went down first. That happens when markets are already stressed. They don't cause the real stress in markets. Usually they're a clearing event. Yeah, it's key context there. Mike Santoli, thank you.

And, of course, Kevin McCarthy out as Speaker of the House. That's going to do it for us here at Overtime. Fast Money starts now.