Closing Bell - Closing Bell Overtime: Worst week of the year for stocks, ServiceNow CEO on software demand, Richard Haass on 1-year into Russia-Ukraine war 2/24/23

Episode Date: February 24, 2023

Stocks closed out their worst week of the year on a sour note, as another inflation read came in hot. Needham’s Chris Retzler and Meghan Shue from Wilmington Trust break down the action and where they’re looking for opportunities. Afsaneh Beschloss from RockCreek explains why she’s forecasting a “choppy few months” ahead for stocks. ServiceNow CEO Bill McDermott gives his outlook for software spending following a brutal week for the tech space. Council on Foreign Relations President Richard Haass discusses the 1-year mark of the war in Ukraine, and the impact on the global economy. Plus a lookahead to the key reads on the consumer coming next week. 

Thanks, Scott. That's it. Worst week of the year for the major averages. This is the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort coming up on today's show. We'll break down the sell-off and the opportunities ahead with Rock Creek founder and former Carlisle partner, Afsana Beschloss. Plus, we're going to discuss tech's rough week and the setup for software demand with ServiceNow CEO Bill McDermott. But let's get straight into our market panel. Joining us now are Chris Retzler from Needham and Megan Hsu from Wilmington Trust. Good afternoon to you both. Dow turned negative on the year as well.

We're starting to see this 2023 rally that got started a few weeks ago really begin to lose steam. Megan, is this as good as it gets for stocks? Well, I think in the short term, we could be in for more headwinds. And our view is that the developments of the last couple of weeks pertaining to inflation are not encouraging. Seeing CPI, PCE, PPI all start to get sticky at these levels rather than continuing that straight line that I think the markets have been extrapolating and driving the markets higher for the first few weeks. Also, when you consider the revisions to CPI that occurred for 2022, we're in a very different place than we thought we were at the end of last year. So I

think the market taking some of the edge off is necessary. I think what's happening is interesting. The stronger data doesn't necessarily put away the case for recession. I think it puts it off. And I think in that case, we're likely to see markets trade at least range bound, if not a bit lower. So being a little bit more defensive, I think, is a smart move here. OK, Chris, you watch the small caps closely. So after this PCE print, are small caps potentially in trouble with this idea that rates might have to go higher than some people expected and certainly stay there longer than some were hoping? Certainly a day like today is painful. But I think this is where long term investors need to, you know, dip in, you know, buy the things that you've been doing

research on. I totally agree that inflation, you know, is is more prolonged here and the Fed is going to have to do more work, which is going to put pressure on risk assets. But, you know, is more prolonged here and the Fed is going to have to do more work, which is going to put pressure on risk assets. But, you know, we're finding opportunities today where, you know, we're seeing companies that are having earnings. The market is not patient and we're seeing them down 20, 30 percent. We see those as opportunities to buy stock when people don't want to own them. But there is caution needed. But I think it's really a stock pickers market out there. And that's where we do our job is doing diligence and buying good companies for the long term. Sounds like we have a little bit of a bull bear debate here. I'll call you cautiously optimistic, Chris.

What would you be buying right now? You know, I think things that have really missed their earnings but have a story, right, that they're either in a restructuring, they're turning around. You know, if you can look more than, you know, six months out, I think that there is good opportunity. You know, whether we're going to have a recession, a rolling recession, whatever you want to call it, you know, there is a slowdown in front of us. And that has to happen to bring down inflation, which ultimately gets us to the end of this cycle. And then I think equities are going to do well. But I don't think you can just buy the overall indexes and hope that they just go up. You have to be out there looking at stocks.

And so, you know, we like technology. Obviously, we've always been tech investors. Semiconductors have been under pressure. We think that there will be some better times ahead to deploy capital in semis and semi-cap equipment. But we also like software. Private equity is very active in that area where they're taking them private and doing the restructuring. So those are areas that, you know, I think investors should be doing their diligence and pick their opportunities to put money to work. OK. And Megan, tell me about credit fixed income. How do you play there? Because, I mean, yields are looking more attractive all of a sudden.

Yes. So we are, as I all of a sudden. Yes. So we are, as I said, a little bit more defensive. And actually, just to comment on the small cap, we just took small cap down because we see it as being more rate sensitive and recession risks are just too high for comfort. I would say on the fixed income side, stay high quality. Investment grade is where we're looking specifically in municipal bonds, where there's very, it's a very inefficient asset class. We do think that there's some opportunity there. And I'd be careful with credit spreads. I think they're going wider. The senior loan officer survey indicated significant tightening of credit. And to see the significant tightening of credit conditions there, but not reflected in high yield spreads, makes me a little nervous.

So that's where we're focusing on investment grade. John is like all in on munibonds. He's fascinated by munibonds. I'm a tech guy, but the flip side of that is munibonds. You've got to be broad. Yeah. Okay, so flip side of that, Chris. The fact that we've seen the dollar strengthen in recent days

in the midst of yields strengthening or increasing as well, and the sense that the Fed is going to be higher for longer, can stocks find traction if the dollar continues to strengthen? Look, with the dollar strengthening, you know, we started raising some cash back in early February. We were concerned that this is what was going to happen with the dollar. It does put a headwind for a lot of companies to be able to sell overseas. But to the point on credit and interest rates, a lot of technology doesn't have debt. In fact, they've got a lot of cash. So that's where if we were in small cap, which is where we would lean,

if it's small cap energy or those with a lot of leverage real estate, I would probably be avoiding those areas of the small cap world. But again, it's a choppy, volatile market out there that there's no doubt. And, you know, I think you have to pick your points. So I'm not saying go all in, but we do have a lot of dry powder and we will be deploying that over the coming months. All right. Final question, Megan. Just to go back to, I guess, the cautiousness, the fact that you've been paring back and putting more money to work in cash, putting more money to work in credit right now. What would it take to change your mind on your investment thesis as we move into what is such an uncertain year? Yeah, that's a great question. And it's always about what is our view and what is priced into markets. So I think to your question about what it would take to get us

more optimistic, I think it would either take a repricing of the market, you know, 17 and a half, 18 times multiple on earnings that are probably too optimistic, along with our view that we're probably going to have a recession. It's just not an appealing combination. But if we got a reset in prices and valuations and, you know, got a little bit more of that negative news baked in, I think then we'd be in a position to lean in to the market. Conversely, if we did start to see inflation reset lower, obviously, the market's going to bounce off of that. But I think that would give us a little bit more comfort that maybe we can get that soft landing. But in the meantime, I think it's just too uncertain.

It's too much of a of a coin flip, really, at this point in terms of recession. We think we're probably going there. We're leaning towards that recession as our base case. And so being a little bit more defensive until the market's properly priced in a degree of pessimism and improved the risk reward for equity investors. All right. Megan Hsu and Chris Wetzler, thanks for joining us. With the S&P closing down 1 percent, 39.70 today and down 2.6% on the week. From munis to small caps, I mean, we got everything in there right now.

Sexy conversation. It sure is. Let's bring in, for more sexy conversation, let's bring in Senior Markets Commentator Michael Santoli at the New York Stock Exchange. Mike, what's got your eye on this Friday afternoon? Well, John, with visual aids, you know, obviously a rough week, as you said, but also a rough three weeks. And this is where it has taken the S&P 500. It's a fairly interesting spot. You know, I always find the spots interesting.

But this one actually is. This goes back to right before the ultimate market peak in January of 2021. So you see we've rolled over a little bit after that rally off the October low. And here's the reason that people are kind of pointed right here. It's because if you draw those lines, the longer term trend lower and this uptrend right here coming together right where we are. It's also, as I've been talking about, 200 day average for the S&P 500, 3940. So we're right in this area where a lot of kind of money and focus is clustered. And so therefore, you have a little bit of a decision point. This is just if you're

looking at the charts, you don't know what the Fed's talking about. You don't know what yields are doing. Clearly, the market has been absorbing just a lot of challenges in the last few weeks, huge repricing in the bond market. Morgan's been talking about the dollar. So we've tightened up, but we're down 5% off the highs. I do think we've kind of had a rough earning season, but one that was absorbed better than you might have anticipated just because nobody was expecting. Great thing. So this is where I think it leaves us right now. Again, you have 5% available in six and 12-month Treasury bills. For a lot of people, that's going to be appealing.

On the other hand, I also think it enables you or you want to buy your munis at even a better tax equivalent yield. It allows you to use that as a bit of ballast in a portfolio and say, let's see if the market can actually give us something here. If it's actually the uptrend off the October low was telling us that things might be improving and the economy maybe is a little sturdier than we thought. It is pretty incredible to see this chart going back to late 2021, Mike, and and knowing where we are with rates, knowing where we are with yields on the front end of the curve. Now, you don't you don't expect it to be lower. That being said, do we know yet how much seasonality is factoring into the chop that we're seeing here in recent days? You never know exactly what's causing it and what's actually being defied in the market action. But it's worth noting that the second half of February is often a rougher part of the calendar. So, yes, you would not be surprised to see the market hit some chop

around this time. And you know what? In terms of where you think the market ought to be based on rates, I think it's a good lesson in how rates are not really the pure, clean driver of what stocks do. Because we're at an S&P level we were actually just about exactly at two years ago. I think the market's up like 2% over the past 24 months. And 24 months ago, the 10-year Treasury year was at like 1.7. So clearly, there's more going on than just what the cost of Treasury debt is. All right. I'm working on a chart idea for you for next week, and it's going to have to do with valuations.

Yeah. So there we go. Let's do it. Mike, we'll talk to you more later this hour. I look forward to it. See you later. Let's bring in another market voice, shall we? Bob Elliott from Unlimited Funds.

He is also a former member of Bridgewater's investment committee. Bob, good afternoon to you. I want to get your thoughts on stocks at these levels, especially given the fact that we did get that hotter than expected PCE reading this morning. And we do have yields, especially at the front end of the curve, moving to retest fall highs, essentially. Well, I think the most important thing was what you just talked about, which is that stocks today are about where they were two years ago, and bond yields have risen considerably. And in that context, stocks today are more expensive than they were at the beginning of 2022 when you take into

consideration this relatively substantial shift in discount rates. And so you put that together, and this really is not a great time to get into the stock market on a forward-looking basis. So what about, Bob, bonds, though? If you're not looking to trade, if you're just looking for the capital preservation, and if you're looking for yield, how do're not looking to trade, if you're just looking for the capital preservation and if you're looking for yield, how do those look relative to equities right now? Well, there's nothing wrong with cash, right? It's often seems a little too boring for many investors. But when you think about yielding five percent in a way that is risk free when it comes to price and gives you all that option value to come into

the market as new opportunities emerge. Cash really is the best asset in the book these days. It's just, it's not as exciting at the cocktail parties as finding particular nooks and crannies in the market. Just in terms of the Fed speak we've gotten today and in general this week, it continues to be, we need need we have more work to do. The Fed has more work to do in terms of inflation, but that they're not ruling out the possibility of a soft landing. You take that and you factor it against the fact that we've basically seen M2 collapse. You've got this two decade high in rates. I mean, how realistic is it to believe that we're going to get a soft landing here? There will be no soft landing. And anyone who tells you that is hoping rather than looking either at the data that's coming in or at previous experiences. And the reason why that is, is that when we look at the data that's

happened, particularly today's data, what it suggests is durable, entrenched inflation. And what has to happen in order to break that inflation is a significant tightening of monetary policy, and with that, a slowdown in the overall economy. And so soft landing was a hope a few weeks ago, a small possibility, but it's totally off the table when we see the dynamics of what's going on. The Fed will need to tighten and it will need to get that slack in the labor market in order to achieve its mandate. So what does that mean in terms of how you put your money to work right now? Because I'm just reading your notes and it seems like you think both stocks and bonds are likely to underperform the rest of the year. So what would you be doing? Well, just take a look at today. I mean,

it's a perfect example of how you get this higher than expected inflation, this more durable inflation dynamic, and both stocks and bonds are underperforming. And so you either have to look for assets outside of stocks and bonds that can help protect you against inflation, things like oil, which actually did all right today in context, or you need to de-risk the portfolio, go defensive, hold cash, and frankly, wait for this macroeconomic slowdown to pass by before starting to deploy more capital. All right, Bob, thank you for joining us. Yeah, thanks for having me. Great take. You know, cold shower there for the markets. Speaking of, it's been a rough week for the tech space with the Nasdaq shedding more than 3% as investors pared back on risk.

Up next, ServiceNow CEO Bill McDermott lays out his view on the tech landscape and the demand he sees for software. And we're going to hear from the top gainer on the NASDAQ 100 today, Intuit, and the top loser, Autodesk, on how they see the economy. We're back in two. Welcome back. Cloud ETF WCLD has posted its best start to a year since its creation in 2019, up over 12 percent. And one of the names helping boost that fund is ServiceNow, up about 10 percent so far this year. But should investors worry about the impact from rising rates and a slowing economy on software? Let's talk more about the macro environment for this sector with ServiceNow CEO Bill McDermott. Bill, welcome. Good to see you. Thank you, John.

You've got a long history in enterprise tech in software. You've seen a lot of economic cycles. Intuit, the top gainer in the NASDAQ 100 today after earnings on its results serving small business. And I talked to CEO Sasan Gidarsi this morning about what those smaller software companies, those customers are dealing with. Listen to what he said. If I paint the bigger picture, you know, a year plus ago, small businesses had a major issue being able to hire who they wanted. They were not only paying more for the labor that they had, but they actually it was a constraint on growing their business. If I forward it to where we are today, they're actually on our platform still hiring. And when

we reported our results, one of the things we talked about is the number of companies running payroll and the number of employees getting paid on our payroll platform is actually quite strong. And so now they're actually having an easier time hiring and they're continuing to hire. With that said, that's an aggregate sort of perspective. If I were to double click on it, there are industries that have been hard hit in small businesses that we serve. For instance, financial services, real estate and auto. So things are coming into some balance for small business. Bill, tell me what kinds of software pitches right now are small businesses saying no to that they might have said yes to a year ago? Well, John, there's a big reprioritization taking place where there's a move away from operating systems and databases and on-prem applications to cloud platforms.

Businesses today, whether they're small, medium, or large, they can't consolidate the past and get enough economic value out of that to move the needle on their margins or their revenue growth. So they're really looking for a new way to accelerate, go faster, augment, change processes, and ultimately win in the marketplace. So I think we're on the edge of an entirely new frontier in enterprise computing. And if you want to look back in time, if you remember 2008 and the financial crisis, that was the crisis that drove innovation. It really was the light of fluid on the bonfire of innovation, if you think about the cloud, because that's when the cloud became mainstream. Okay. Now, talk to me about the impact of rates here. I also talked to Autodesk CEO Andrew Ananose this morning after earnings. That stock was the biggest loser on the Nasdaq 100, probably because of their

switch to annual billing. But I asked him about inflation and the impact on enterprise software in the construction industry. He said it's important for policymakers to get this under control. Listen. Any situation like what we're seeing right now extends for a long period of time. It affects everyone. We were not immune. Nobody would be immune. Here's what's a little bit different in our industry and why you continue to see companies similar to us reporting fairly good growth, giving fairly good guides into the future is our software's mission critical. They needed to do

their job. And almost all of these customers for now are working through backlogs of work. Now, if the inflationary environment continues for six, 12, you know, more months, and it's continued large, large rate increases, obviously, the future backlog is going to get impacted. We have to wait and see how that happens. But right now, people are working through a backlog. Bill, you guys at ServiceNow have been kind of defying gravity with your growth. As you look at what's happening with inflation, though, is there a concern about policymakers' ability to get that under control and what its effect might eventually be? Well, I think we've all, you know, grown accustomed to a really challenging environment when you think about monetary policy, supply chain dislocation driven by COVID, wars, and other things that have been adjacent to business, but somehow business has continued to figure it out and

continue to move forward. And that's what I see now. I see now that we're in a world of value realization. And if you can make sense of the multi-cloud world, if you can drive migration and consumption in a way that accelerates cost out, productivity in, or entirely new experiences in how you supply your employees with information and knowledge, or you go direct to your customers and give them a whole new experience, a whole new way of consuming your innovation or your story, or you even get to the creators out there that have to build applications and new ideas for a new world. These are the things that customers will continue to invest in. And that's why I feel so strongly about ServiceNow's strategy as the end-to-end

platform for digital transformation. Because I know you have to improve margins and get costs out, but you also have to do work in a world where you might even have less people doing it. So automation is going to be the key and obviously building experiences and keeping your company moving forward through all these challenges is something that every CEO is grappling with and we're proud to say I really feel like we're one of the unique companies out there because we're in the mix of cost out, productivity in, and growth when you can find it. So in light of that, Bill, we were just

having a debate about whether a recession is on the horizon this year or maybe even into next year with our market panel to kick off the hour. What are you seeing? And given the value proposition you just laid out, is that why you feel so confident in your strong guidance for the year? I think our feeling about our guidance is much more about our customers and helping them serve their employees and their customers. And there's a strong demand for doing that with or without a soft landing in terms of the recessionary environment. Is it going to happen? Isn't it going to happen?

If it does happen, will it be short? Will it be soft? All of those things are very important. But in terms of the customers and the C-level executives we're operating with, they know they still got to run a business no matter what happens. And that's where we are front and center. And I look at this intelligent workflow platform in every market to automate, augment and accelerate the way work is done. You know, we made a commitment, Morgan, to rise up with service now because we know

employees need to be retooled by 2025. Half the employees and companies today will not be competitive unless they're completely retooled. So we committed to creating a million new capable digital citizens in this enterprise software world. Already we have 225,000 with Rise Up with ServiceNow. So what I'm basically saying is companies will run their business. They will weather this storm. I don't see anything that's tremendously scary out there on the horizon. And execution is what it's all about. Last, at SAP, what's the impact on software operators who are perhaps less used to dealing with those activists? Well, I think the main thing is we should all want the same thing. Shareholders want companies that grow, but they also want them to grow profitably. So in the event there's less revenue, you have to have a business

model that can adjust to the circumstances and still perform on the margin. So I think companies that don't run a tight ship and somehow that gets a little out of sync, they become prime targets for margin improvement consistent with a peer group and then obviously growth consistent with a peer group. And I think that's what you see going on. So I would really say that this is probably a time where you'll see companies adjust to growth and profitability, not just one or the other. All right. Bill McDermott, CEO of Service service now thanks for joining us on our first week here on overtime honor to be with you john and morgan thank you for having me i'm still wrapping my head around half of employees will need to be retooled won't be competitive unless they're re-skilled by 2025.

that's an incredible stat chat gpt tell us that it's coming for us morgan enter the matrix all right after the, we're going to talk with Rock Creek founder Afsena Beshlos, who has held key jobs at Carlyle, the World Bank, JP Morgan about today's hot inflation print and why she says investors should be bracing for, quote, a few choppy months of trading ahead. That's coming up next. Stay with us. Welcome back to Overtime. Time now for CNBC News Update with Seema Modi. Hi, Seema. Hey, Morgan. Here's your news update at this hour. The U.S. military planes on patrol above the South China Sea are increasingly having close encounters with Chinese jet fighters as tensions escalate over Beijing's disputed territorial claims in the area.

NBC News was on board a U.S. Navy plane today as a Chinese J-11 fighter flew alongside about 500 feet away for well over an hour. U.S. officials say the encounters have been professional, but experts worry that what starts as a minor incident could escalate. NBC Nightly News will have an exclusive report tonight. Even as China calls for peace talks, the U.S. believes it is considering providing artillery and drones to Russia's military. That, according to the Wall Street Journal, which says the Biden administration may declassify some of the intelligence that has led to that conclusion. And two Australian scientists have found strong evidence that there is a 400-mile thick solid metallic ball at the center of the Earth's inner core.

That could help explain how the planet's magnetic field evolved over time. How about that? John, back to you. How about that? How do you find that? Seema, thanks. Good data. Stocks, meanwhile, pulling back today after a hotter than expected inflation report.

Major averages turning in their worst week of the year. Now let's bring in Rock Creek CEO and former World Bank chief investment officer, Asana Beshlas. Asana, great to have you. Thanks for joining us. It seems to me as I look at this week, the low and middle income consumer, both domestically and globally, coming more and more into play, not just from an economic perspective, but also how companies, how markets are being affected. What do you see? John, great to be with you on this first week. I think we saw the numbers that came out this morning and consumers seem to be in general stronger. When you look at the U.S., obviously the consumer numbers that came out were stronger than two years ago even. And so that has caused a lot of concern. And I think

that's why we saw the kind of correction we saw today. Also, the Fed number, the Fed minutes that came out this week and earlier in February were showing that the Fed is serious. Now, Chairman Powell has been saying all along to the markets that he does mean it when he says 2 percent is the objective of the Federal Reserve. But somehow in January, the markets were not believing him. And in February, finally, particularly this week, I think the markets have come to believe him and expect another 75 basis points of increase because the consumers, as you said, remain strong. And that is the same thing if you go to China,

as the Chinese who were saving over the last many, many months in lockdown are starting very much to spend that money. But here's what I wonder, though, Afsaneh, is there a difference between a consumer who is spending and a consumer who is strong? Because while the consumer is spending, we also see so much debt expanding. We also see the savings rate coming down. So I worry about a vice, you know, between the higher rates affecting them at the same time as that ability to spend might get pulled in. I think you're so right, because we're starting to see across markets. You're so right. In the U.S., for example, you're seeing that debt numbers are climbing across different areas and different sectors. We see housing starting to get affected.

And we see that the same thing, by the way, you talked about a little bit internationally, low income across the globe. For example, if you look at emerging markets, they have a hundred trillion, almost just under a trillion, you know, of debt when you look across households, governments, etc. These are very large numbers to come back from. And so in the U.S. at this moment, while the debt numbers are not the way they were, they are certainly climbing up. And consumers have spent the savings that were accumulated over the last couple of years, no question about it. But there is a tale of two cities. U.S., the consumers have kind of spent that saving that they accumulated over the last few years,

and the government programs that helped to increase that saving rate and the fact that we had our own version of lockdown. And for example, in parts of Asia and particularly in China and then also that was under lockdown where consumers are spending and reducing their savings. So shifting gears here a little bit, but staying with more of a global lens on this. I mean, we're at a key juncture right now in terms of the power competition between the U.S. and China. Obviously, we're marking the one-year anniversary

of the Russia-Ukraine war. And then, of course, now you're starting to get nominations for the World Bank with A.J. Banga nominated by President Biden just yesterday. It seems to be a real key juncture for multilateral institutions. It's something you've written about this week.

Break it down. Morgan, so right. I did have an op-ed piece in the Financial Times, and I think we are very, very fortunate that President Biden has nominated A.J. Banga, who is a true finance leader, but also I think he will play a very major role on future climate finance, especially. And he has a really strong record on inequality, on bringing finance to different classes of populations, low income and high income. So I think he is an excellent choice.

And the fact that he has ran complex organizations, I think will also be very important as being not just successful in running the bank, but going earlier to the points that you made, which is that we are working, we are really dealing with the world, which is much more divided. The Ukraine reconstruction, as you said earlier, is going to cost more than 350 billion, and it has to come from someplace. You are going to have all the other issues with emerging markets that are going on with a number of countries that are going into default that need to be resolved. And all of them are also going through some version of dealing with what

you said also, which is the China and Russia conflict. China is trying to play its role on these countries. And I think what the World Bank and U.S. and and its new nominee at the World Bank will do will be very important. Afsaneh, thank you for setting the stage for our viewers as well as for readers this week. Afsaneh Beshlas. Thank you very much. Nice to be with you. Well, the dollar index has cooled significantly from its highs of last year, but it's picked up some steam over the past month and the gains have perhaps unsurprisingly accelerated this week. We're going to talk about what that means for your investments in the U.S. and abroad next. Welcome back to Overtime Senior Mark markets commentator Michael Santoli is back with a look at the dollar, which has strengthened this week. Mike.

It has, Morgan, strengthened this week, up off the lows over the last few weeks, as a matter of fact. Here's how it looks over the last year. So you see pretty pronounced bounce that we've gotten here. It also bounced right off those areas that it first got to back in the spring of last year. But this is where financial conditions were the tightest. Back in the fall when the stock market was making its lows into mid-October, we were a good deal higher. So still a few percent of room to play with here before maybe you had the currency component of financial conditions getting as onerous as it was back then. Now, definitely some impact on relative equity performance around the world.

The non-U.S. stocks have actually been outperforming coming into this year. The S&P 500, in part due to that tailwind from a weaker dollar. But look at how that's changed. This is now a year-to-date look. This is all stocks in the world except for the United States. And you see nice outperformance we got until right into February. That's when the dollar bottomed, rebounded, and that has created some pressure. So still pretty much the same performance, but some give back from non-U.S. stocks due to that dollar move, guys. You know how much

emerging markets perform where the dollar is concerned versus, say, something like China, given the fact that, like, how do we factor in the China reopening, I guess, is the question I'm getting to. Right. You have had some offsetting issues. It seems as if I mean, the dollar absolutely matters for the emerging markets as an asset class that's never changed. Although right now we have a little bit of a mismatched cyclical forces because of what's happening with China. The thing is, China reopening hasn't necessarily registered as strongly as you might have expected. So emerging markets, similar to this ACWX, had a good run of outperformance, comeback really after multiple

years of underperformance. But it's sort of flagged at this point. So it's hit some static as we've gotten to this level, both because, as we say, the reopening hasn't necessarily been as aggressive and the currency moves create some pressure. Guess that's why you got to diversify, huh, Mike? All around the world, intergalactically, whatever you can do. All right, Mike Santoli, thank you. Like the space reference there. Yeah. Very clever.

Today marks one year since the start of the Russia-Ukraine war, and the geopolitical landscape has seen significant changes since the initial invasion. Up next, counts on foreign relations president Richard Haass on the impact of the war on trade, sanctions, defense spending, the global economy. We'll be right back. Welcome back. Russia's invasion of Ukraine one year ago today has so far resulted in hundreds of thousands of casualties, millions of refugees and fundamental shifts to the world economy from banking to trade flows to commodity sourcing. It's also fueled record levels of defense spending, $858 billion in the U.S. this year, which is up 10 percent year on year and $2 trillion in counting globally. That has sent,

perhaps unsurprisingly, defense stocks higher over the past 12 months. You can see the ITA still up about 10.5 percent over that time period. Lockheed Martin and Raytheon, for example, received record orders in 2022 as the U.S. and NATO supplied Javelin and Stinger missiles, HIMARS rocket launchers, and ever more sophisticated weapons in recent months and recent weeks, like the Patriot missile defense system and General Dynamics-made Abrams tanks. Also seeing more software on the battlefield, thanks to Palantir and privately held Andral. But the war has spurred more demand from allies across the globe, too, with U.S. foreign military sales jumping 49 percent to more than $205 billion last year. And the Pentagon has been accelerating efforts to replenish stockpiles now, too, with some $3.4 billion in new contracts awarded and counting.

It's also exposed to those supply chain issues, denting contractors' quarterly sales last year amid struggles to ramp production, something we will discuss in more detail on Monday. But all of it raises the question about what it will take to end this war and how it shapes the geopolitical landscape for the future. So for more on that, let's bring in President of the Council on Foreign Relations, Richard Haass. He's also the author of the Bill of Obligations, The Ten Habits of Good Citizens. Richard, thanks so much for joining us today. Great to be with you. So we've seen a flurry of diplomatic initiatives over the past week pushing for some sort of peace talk to happen in Ukraine with Russia. How realistic is it to believe that there could potentially be an end to this war in sight? Well, one day there will be, but it's not in sight as yet. Wars only end really one of two

ways. Either one side dominates and prevails on the battlefield, or one or both sides ultimately are prepared to compromise for peace. I don't see either potential in place right now. I don't think either Russia or Ukraine is in a position to rout the other. Even if we were to give Ukraine a lot of the more advanced weapons they want, Russia is pretty dug in. And we don't know how much China might be prepared to help Russia. And then diplomatically, Mr. Putin feels the time is on his side. The West will lose its staying power. So he's not inclined to compromise. And the war is hardened or increased.

Ukrainian war aims, they want Russians off their land. They want reparations. They want war crimes accountability. So, again, there's very little disposition to compromise. Just today, we saw another sweeping round of sanctions applied towards Russia, towards individuals in Russia. Companies are seeing export controls put in place, as well as some more trade tariffs. It's now a historic number of sanctions. And there also seems to be this sense from Treasury that those could extend.

You mentioned China could extend to China, too, if it continues to help and its companies continue to help Russia's efforts as well. Just your sense on whether these sanctions have actually worked so far and and whether this creates a new template for any kind of conflict moving forward? I'll be honest with you, and sorry to be negative, but sanctions tend to be the most used or overused instrument of national security policy in the toolkit bag. They work in the sense that they have some effect, but they rarely work in the sense of bringing about a significant change in policy. So Russia continues to sell its oil, sell arms. It's got all sorts of relations with China, with India, with dozens of countries around the world.

So, yes, Russia's paid a price. Its deficit's going up. But it's not desperate. And in the case of China, China's a more economically integrated country in the world, obviously, as you all know. But my hunch is the Chinese are going to be careful, and they're going to be able to weather any additional sanctions, because, again, as you know, China's already the target of any number of sanctions for other reasons that have nothing to do with the war in Ukraine.

We've asked this question quite a number of times over the past year, but it's worth asking again, and that is, how has this war in Ukraine informed how China is thinking about Taiwan and how it's thinking about its future leverage on the world stage? It's a really good question. One thing it's done is it's led the Chinese to dramatically increase their nuclear weapons stockpile. They've concluded that because of Russian nuclear weapons, the United States has only been willing to help Ukraine indirectly.

There's no U.S. forces on the ground. So China's thinking just maybe if they were to double or triple the number of nuclear weapons that they have, the United States might be wary of helping Taiwan. I think there's that. I think the Chinese have been a little bit sobered by the sanctions because they are, at least in principle, somewhat more vulnerable. I think it's a reminder that war can be unpredictable. There's no Chinese general, think about it, no Chinese general who's experienced combat. China hasn't been in combat for nearly, what, 45 years or so. On the other end, Chinese ambitions towards Taiwan have not changed. So I think, again, there's nothing likely in the near term in terms of a major attack. But if you look out

five years, 10 years, you'd have to be an optimist if you didn't think there was a very good chance of significant Chinese coercive moves against Taiwan. As Jeff Sonnenfeld at Yale has pointed out and has chronicled pretty aggressively, pretty enthusiastically over the past year, we have seen hundreds, if not thousands, of companies from the U.S. and Europe pull out and stop their operations in Russia in the midst of this invasion a year ago. What would it look like, and how are companies now to game out those increasing tensions between the U.S. and China? And ask that on a day where you're seeing investment firm Sequoia basically say it's going to pare back some of its Chinese investments because of a national security risk.

I think you need to put it in two baskets. One is in the technology space, we're already seeing a lot of paring back across the board because technology flows, either Chinese access to technology here or exports of technology there. You've got to assume that they're going to be increasingly regulated and constrained. I think more general non-strategic trade, that's a different kettle of fish. But again, if there were to be a major crisis, say, over Taiwan, then all bets are off. So I think for a lot of companies, they've got to reduce their overall exposure to China, given the possibility of such a contingency to basically diversify

sources of supply or manufacturing. I sit on several investment committees of foundations, the one here, the Council on Foreign Relations and so forth. And I think the general mood of universities and others is to reduce the overall exposure to China. Richard Haass, appreciate your insights today. Thank you so much for joining us. President of Council on Foreign Relations. Thank you. And now coming up, why next week could prove to be a key gauge of the American consumer. We'll be right back.

Guidance from Walmart and Home Depot this week was a wet blanket on the outlook for the consumer. But we're getting more data next week when Target, Lowe's, Best Buy and Macy's report results. So we're going to preview what to watch from those names and what to watch for some key economic indicators when overtime comes right back. Well, this has been the worst week of the year for the major averages after some hot inflation data. Next week's focus for the market might turn to the consumer. We're getting a good read on that with earnings from several retail names and some important macro data. Some of the key companies reporting include Target, Lowe's, Macy's, Costco and Best Buy. Investors are going to be watching closely

for guidance. It's going to be a chance to hear how consumer spending might hold up in 23. We're also getting some macro data, durable goods and pending home sales on Monday. Consumer confidence in Case-Shiller index on Tuesday. Initial jobless claims on Thursday. Morgan, that's a lot. That's a lot. And you know what? So far, it seems the consumer is being somewhat resilient. But what we've seen just this week in terms of some of the earnings is that they're being very selective about where they're spending and inflation does seem to be taking a dent in terms of how they're how they're doling out the dollars right now. Yeah. And this data is going to give us not just the earnings, but also the data going to be key. That'll do it for overtime.

Fast money begins right now.