Closing Bell - Closing Bell: Positioning Your 2024 Portfolio 01/03/24

Episode Date: January 3, 2024

As the Santa Claus rally ends, investors are positioning for whatever a new year could bring. Josh Brown of Ritholtz Wealth Management and iCapital’s Anastasia Amoroso break down their playbook for 2024. Plus, Evercore’s Roger Altman reveals the two headwinds that he thinks could derail a strong year for stocks. And, we break down the swarm of activist action surrounding Disney. CNBC’s Leslie Picker has all the details and what it could mean for the stock in the long run. 

Welcome to Closing Bell. I'm Scott Wapner, live from Post 9 here at the New York Stock Exchange. This make or break hour begins with buying the dip in tech because it's happening as we speak. And we're going to ask our experts over this final stretch if now is the time to step in to some of those stocks or whether you should wait a little bit more. In the meantime, here's your scorecard with 60 minutes to go in regulation. NASDAQ is still lower. I do want to show you intraday charts, though, both Microsoft and Alphabet, because they started to see some buying around noon. And we're going to watch both of those closely here on out.

There they are in the green. I also see Meta was toeing the line, too. So we're going to watch all of those over the final stretch. Elsewhere, stocks mostly lower. Energy, health care, a couple of bright spots and an otherwise red day for equities. We are watching interest rates, too. The 10-year hit 4 percent much earlier today, then slipped back down after some economic data came in a little light. It was just about an hour ago as well when the Fed minutes showed most members agreed a lower target range would be appropriate this year. Still, obviously, a good amount of uncertainty around that. In other words, the debate over rate cuts continues for another day, another week and probably for many months.

It does take us to our talk of the tape. How to play the markets right now as the Santa Claus rally ends and investors position for whatever a new year might bring. Let's ask Josh Brown, CEO and co-founder of Ritholtz Wealth Management. He is with me here at Post 9. All right. So two days of red in a row. I said we had some buying of mega caps. You have to believe at some point investors are going to look at declines in those stocks and say enough is enough. Enough is enough. The best stories in the market. And those are the best

plays still. So I agree. And we talked yesterday on the half about just like why are people selling? Obviously, nothing fundamentally changed. People have massive gains in these stocks, especially if they held them through the fourth quarter. And if they did that and they were waiting for an opportunity to take the profit, I'm on the wealth management side. So I already know the way financial advisors think, the way high net worth investors think is, all right, we're going to take 10 percent off the table. But why would we do it in this fiscal year and owe the taxes in April? Let's push that decision. Let's push that tax liability a little bit further out without taking significant risk. This first week of January, after a massive, very sector

specific rally in the market, makes perfect sense to see profit taking. I also think there's a lot of rebalance activity. You combine those two things on the scale of trillions of dollars. That's how you get these stocks start the year looking like they're stumbling. But really, fundamentally, their businesses are not stumbling. Let's talk. Let's talk about this a little bit deeper, because Tony Pasquarello of Goldman Sachs, head of hedge fund client coverage on this program, a lot just sent a note out before we came on the air. And it plays right into that story. And the question that all of you want answered, right, because he's thinking the same thing all of us are. Yeah. Is mega cap tech a consensus position?

Of course. Is that a problem? Not necessarily. Here's what he says, quote, a set of stocks that are very well owned and dearly valued. Okay. Now, I would argue these are the best balance sheets on planet Earth. They are generating and returning an immense amount of capital.

They have the most direct leverage to the most attractive new theme. Where I come out, continuing to quote, these stocks are not cheap and they are widely held. So one should be a little choosy on adding length up here. Bigger picture, however, I'm inclined to keep my eye on the ball and would look to add on meaningful dips. Now, one day or a day and a half doesn't make a meaningful dip, obviously. However, the point is clear. These stocks went up the way they did for a reason, and they're going to remain in favor for a reason. Look, I happen to think Alphabet and Amazon are two of the best stocks to own for this year. I don't love the valuation. Do I wish they were 10 turns cheaper on PE? Of course I do. But these are the cards in front of us, right? We don't always get to pick. I think these stocks will be very stable this year. I don't know that they'll outperform everything in the way that we saw big cap tech last year outperform everything. But I think they can work because they are two of the biggest beneficiaries of AI. This is the year that AI goes from a concept to an actual product.

Microsoft's got an early lead, but I think when you look at the ownership of Anthropic, you look at Amazon now using their own chips to train large language models. You look at Alphabet's opportunity to incorporate these tools into all of their existing products for literally hundreds of millions of people on day one. These are companies that are going to benefit, and I don't think they're so expensive that we have to look past them on a valuation basis. So maybe it's not as great of a setup as it was last year. I still want to be there, but I want to be in other places too. And I think you don't have to choose.

You can do both things at once. Energy got off to a great start this year. This is the third worst performing sector last year. This year it's in the lead, XLE plus 3%. There's no reason why that couldn't continue, and actually crude caught a bid today. So there are other things to do. It's not Amazon or energy, in my view. It's Amazon and energy. I think you want to look all over the world, quite frankly. There's a lot of value elsewhere. We see for another day that the small caps, the Russell 2000, how it's represented, obviously, in the markets, down one and two-thirds percent.

Of that, Tony's looking at this, too. Again, he speaks to everybody. So I pay attention to his notes when he puts them out. Here's the take. Does strength in spaces like small cap make sense given positioning and the seasonals? Yes. Is it more favorable climate for the stuff that was most under the hammer when the Fed was draining liquidity? Yes.

However, I don't want to abandon ship and tech. And it's not obvious to me that the squeeze in truly low quality exposure will persist beyond a quarter or two. As my father would quip, he says, buy cheap, get cheap. Look, I think there was a catch-up trade, to Tony's point. There was a catch-up trade that started sometime around November. Small caps had an absolute gangbusters December. It makes sense that they did. There were a lot of people that needed to make up for everything they missed in the market.

It's easy to go down in cap size as a strategy to compete with the S&P 500 seasonally in that time of year. We see it a lot. It doesn't mean it will continue throughout the course of this year. You have to ask yourself, is there going to be earnings momentum to match stock price momentum in the first half? Again, I think it's a sector-by-sector story. It's hard for me to make the case that you're going to see more consistent growth out of the Russell 2000 than you will out of the Russell 1000 and certainly the S&P 500. I'm not sure where you can come up with that thesis. So in the absence of that fundamental momentum, he's probably right. This has probably got some weeks or some months to it, probably not

a full year's worth of gas, especially compared to companies where we know the earnings consistency already is. So the minutes of the Fed came out an hour and seven, just about seven minutes ago, and the market gyrated a little bit trying to figure out what's going on. Six cuts, which the market was pricing in, always seemed a little bit of a stretch, don't you think? I mean, but the bottom line is that they're obviously talking about when they're going to lower the target rate. There's no big consensus on a date target. However, obviously, the market seems to be taking some level of comfort in the fact that it thinks that cuts are coming, even if six was a little aggressive

to get, you know, way over your skis on to begin with. So thank God we don't make these kind of like macro predictions and then invest based on them, because I was very wrong on what I thought the Fed would do last year versus what they actually did. I was not expecting 75 basis point rate hikes, four of them consecutively. And I thought the Fed would have said on the heels of the mini banking panic that probably they had done enough and they could wait and see, but they didn't wait and see. They kept going. Now they're going to give us those hikes back. In my opinion, they didn't need to do them in the first place. But again, I don't work there. Bigger picture, I don't think that we need six or seven rate cuts in order for the market to find

stability. I think a better story, we get enough rate cuts where the yield curve uninverts. We're now, I think, at negative 35 basis points, twos and tens. If that uninverts, we don't have any kind of major issue in the labor market. I think stocks remain bid. I think they remain competitive, even with elevated money market rates. And my bigger prediction for the Fed is that we say goodbye to Jerome Powell this summer. That's a more interesting story to me than anything they might do in an FOMC meeting. That's something that I think happens, especially given where Trump is in the national polls. I don't think he wants to work for the same boss again. And for me, that's the big market moving event if and when we get some kind of inkling that

that's going to happen okay so let's bring in steve leaseman our senior economics reporter who was watching the release of the minutes with all of us so steve it's good to see you again i'm looking at a 10-year yield which is at the lows of the session looks like to me 390 so we went down 10 basis points today because it seems to me, and you can opine better than me, obviously, that the most important part that the market's hanging on is a lower target range would be appropriate later this year. Those words are important. Six, as I said to Josh, cuts always seemed a little aggressive anyway. But the idea alone that they're talking about cutting, who cares exactly when?

But the fact that they're talking about it is far different than what they were talking about a year ago or a couple of months ago or even a few weeks ago. Yeah. So I'm not sure I completely agree with that assessment, Scott. And I'll get to that in a second. I want to just point out, I think Josh has his eye on the right prize, why all this matters. The guys in the financial departments on Wall Street are really focused on when and how this curve might disinvert. And that's a pretty important moment for the market this year. If you have a situation where short-term yields are lower than longer-term yields. It brings back things like floating rate notes and all kinds of things that can happen that normally happen when you have a yield curve

that's in a normal position. Maybe that's a discussion for another day. I just thought it's important to point out, I really think Josh has his eye on the right prize here, why we're talking about this, because the guys I'm talking to want to know when this happens, how this happens. The steepener is the biggest trade right now, I think, or one of the bigger trades in the fixed

income market. We'll come back to that in a second. I really don't think the minutes provided more information than the markets previously had, Scott, when it comes to the issue of rate cuts. The paragraph you read, it referred back to the Fed officials' projections. And to the extent that there was a discussion there about rate cuts, it was really hard to find in these minutes other than the noting of the projections. I think what happened here is the Fed did decide they were done cutting rates. They did decide last year that this year, as in the year we're in right now, would probably be a year for lowering rates. But did decide last year that this year, as in the year we're in right now, would probably be a year for lowering rates. But there was no discussion of the magnitude

or the timing. I guess my overall point is that the minutes don't upset, I don't think, in any way the story that the market was telling itself, Steve. Now, I'm not talking about the number of cuts, but the mere fact that the market thinks there are going to be cuts. It's pretty confident of it. It's confident that the Fed's done hiking. And I don't feel like the minutes really threw water on any of that. It didn't unless you were looking in the minutes for how deep or broad or persistent the discussion was about rate cuts, because there wasn't much there. I was very much kind of doing a double take when I read it. OK, where is this discussion? What is this discussion? It's a simple notation,

really, that rates are going to come down this year because that's what's in the projections. Also, some discussion that the inflation outlook is more balanced, also very uncertain. You probably need to also mention, Scott, that in there is this notion of the possibility of rates also going higher. I do not think there's much support in there for the most bullish or most dovish standpoint of the Fed cutting six times. That's not to say it's wrong. It's just to say that that's not where the Fed is at. To the extent the market has this projection, they do so, I believe, on their own with their own forecast. You can't be wrong at the end of this year and go back and say the Fed told me six rate cuts beginning in March

because that's not in this document. Do you want to comment on what Josh said about the big wild card is Jay Powell leaving before the end of 2024. I mean, if you don't mind, Scott, I'd like to hear more about that. The Jay Powell I know will stay through the end of his term if he's physically capable. And I have no information that he is not physically capable. It looks pretty fit to me. Maybe Josh has a thesis that would be convincing. I'll let Josh say what he was saying a few moments ago.

Let me give you the other side. And I don't know anything more than you do, and you're more well-sourced than I am. Just thinking out loud as a person who has managed to literally bring about the exact right amount of disinflation needed without raising the unemployment rate one iota. Granted, he missed inflation. No one's going to pin a medal to him. But this is probably the absolute best case scenario ending to the inflation battle that anyone in their wildest dreams could have envisioned. Who the hell would stay after that? It's like Belichick staying after Brady left. What is possibly the way to win post this recovery that we're now having?

Does he want to stick around for the next recession or does he want to be tweeted at by Donald Trump every day during the next period of time where we need to bring rates higher? I mean, I think that's not a bad a bad idea there, Josh. But but I you're talking about like a summertime inflation mic drop from the Fed chair. Jackson Hole mic drop, just saying, could happen. Tell me where the polls are in August. I'll tell you how likely. Let me tell you what I think I know of Jay Powell. I think he is a proud individual.

I don't think he's prideful. I don't think he stays on because of his pride. But I think he stays on through the term in order to complete the term. He's mindful of his legacy. It's why he has been so persistent about bringing inflation down and getting it back down to 2%. I don't think he walks away in the middle of a term. All right. We'll make that the last word there. Steve, thank you. I appreciate that very much. Anastasia, what do you make of all this? Well, I think the most important sentence that you sourced from the Fed Minutes is that they

are talking about rate cuts. And that was not the case. And so the markets may be interpreting the statement initially interpreted as a little bit hawkish. But I think the only reason why that's the case is because the soft landing scenario right now is price to perfection. I mean, whether you look at yields and how much those yields were traced, whether you look at equities and how much they rallied. So I think the bar is set pretty high for the Fed to surprise positively, for the economic data to surprise positively. And, Scott, you know, that's kind of what's happening today. Job openings are lower.

The Fed maybe is hinting at rate cuts. And the market is still selling off. So, you know, back, I think, to Tony's note, you've got positioning, you've got sentiment. All of that is pretty stretched. And I think after this really strong finish to the year that we've had, we're just due for some of the give back. You think so? We pulled some forward. But do you think that the you think the bull case is mostly intact for stocks for this year? I mean, I mentioned Tony's. No, they have 5100 does Goldman. And there are some forecasts that are a little bit higher than that. You know, maybe a couple that are a little bit even more aggressive. But what do you think?

Well, I think near term, we do need to see a pullback and we just need to see this rotation. But I do think the bull case is intact, because speaking of keeping an eye on the prize, we should keep an eye on prize knowing that the Fed is likely to cut rates. And by the way, it's not just the Federal Reserve. It's the European Central Bank that may cut rates as soon as April is the Bank of England. And in fact, I think it's not just the Federal Reserve. It's the European Central Bank that may cut rates as soon as April. It's the Bank of England. And in fact, I think it's Bank of America that's forecasting this 152 rate cuts this year. So this tidal change is pretty massive.

We went from three years of tightening of monetary policy globally to now loosening policy this year. So I think that's really bullish for stocks. And then the other reason, Scott, why I think the bull case is intact, some people will say, well, we're bumping into the swallow 4,700 or 4,800 on the S&P because you do the math and it's 244 and you apply a multiple to it. But the reality is, as the year progresses, earnings estimates should bleed higher because the next year's earnings estimates count into the picture. So I think the bullish case is intact, and I would be looking to buy the dips across a variety of sectors. See, Tony says when he lays out what's the bull case for equities, Josh, he says, look, to get there, you're taking the over on 19 times as a P.E.,

or you're taking the over on the consensus earnings estimate, to Anastasia's point, of $244, or you're taking the over on both. I mean, at this point, because we ran up so much at the end of 2023, I mean, now you've got to believe you can have it all. You can have these elevated historical multiples, and you can have earnings outpace expectations in the kind of environment that we think we're in, which is still a slowing economic environment, just not a crashing economic environment. It's a slowing economic environment. But importantly, the input costs are slowing even faster. And this is really the key thing. You're not investing in the economy when you buy the stock market. You're investing essentially in the income and the revenue prospects of the 500 best companies on planet Earth. It's not the same thing.

You wouldn't necessarily look at small businesses and say they're doing great. But it's inarguable that the 500 largest publicly traded companies are by and large doing great. Margins never took that hit. We were supposed to see mean reversion in profit margins since 2012. That's on everyone's lips every year. Here's my prediction. This is the year profit margins revert to the norm. They're not going back to 1975.

I'm sorry. This is a new plateau where profit margins have been for 10 years. You can keep making that bet every year, maybe one year you'll be right. I don't think it's going to be in 2024 if the labor market's cooling off. And if we have some relative stability in commodity prices, the dollar's a wild card. Fine. I stipulate that. So if you're not betting on some sort of massive re-rating because of some sort of like earnings event or profit, then why would you make the opposite bet? What is the catalyst that's all of a sudden going to make

people decide they don't want to be invested in these companies? I don't know what it is. But I still have to believe that the economy is going to do well to invest in things I would think like materials or at least think that they'd outperform industrials, materials, things that are more sensitive to the strength of the economy, wouldn't you? Yeah. And by the way, some of those sectors have been outperforming, obviously, very early this year. But you see this big rotation out of tech, given how much it's rallied. But you look at financials, you look at real estate,

you look at utilities, you look across the board. In fact, the thing that's really catching my attention is the S&P 500 Equal Weight Index is down just barely, even though parts of the tech sector are down two or three percent or in some cases seven percent. And I think that goes to show that this should be the year where the investment opportunity set broadens out. And Scott, the reason why so many things could not work in 2023 is because the Fed was hiking rates and that was hard. It was hard to carry that higher cost of leverage. But if all of a sudden the cost of leverage goes down and maybe the lower rates do actually spur an uptick in economic activity, that's a lot of other things that can participate in that. So that equal weight portfolio,

you know, if you look at the market cap rated S&P versus the equal weight, it outperformed by 13 percentage points. That's the largest since 98. I think that's due to. I want to jump on. I want to jump on the end of your sentence because not only do I agree with you, I want to take it a little bit further. Internationally, a lot of stocks worked overseas this year. Not many people know about it. We almost never talk about it on television. But there were some huge gains in different markets last year that not a lot of people were predicting. There's no reason to think that that couldn't continue as a theme into this year. I want you to consider the fact the All Country World Index, XUS, right now is trading at a 34% discount to the S&P 500. Over the last 20 years, the average

discount has been 16%. I'm telling you, overseas developed market stocks are twice as cheap as they have been over the last two decades. Yes, you can give me all the reasons why it's 13 times versus 19 times. Yes, there are some good reasons. Yes, geopolitics. I'll take all of that. And I'll still tell you that if we're going into a rate cutting cycle, even if it's a modest one, these stocks can work and you're taking less risk because starting valuation is not just a little bit cheaper. It's a multi-decade level of discount that you're getting and you don't have to buy low quality. You could buy overseas high quality in Japan, Europe, and you could win. That's another, I think, smart thing that people are rebalancing toward and doing for 2024. All right. We'll leave it there. Guys,

thanks so much. Appreciate that. Josh Brown, Anastasia Amoroso. A little bit of green on the board. Not much, right? Microsoft, we mentioned top of the program. Alphabet as well. The VIX, too, is about 13 and a half. Not a big move there, but nonetheless, it is one area in positive territory today as we do head towards the close. Let's send it to Steve Kovac now for a look at the names that are moving right now. Steve. Hey, Scott. Yes. Let's look at Xerox shares plunging after announcing earlier today. It lay off 15 percent of its employees. That's about 3000 people as part of a broad restructuring. In

addition to the layoffs, Xerox saying it'll simplify its products within the core printing business, shares down more than 10 percent on that news. But pharma moving the other way, having a strong run so far in 2024. That includes Eli Lilly, which is up more than 4 percent today. Bank of America analysts calling it a top biopharma pick this year, thanks to optimism around ZipBound weight loss drug launch coming soon. Scott, send it back over to you. All right, Steve Kovach, we're just getting started. Josh was just leaving.

Up next, Evercore's Roger Altman is back, and he's flagging two key headwinds that could derail a strong 2024. He'll explain, break down his forecast for the Fed after this break. We are live from the New York Stock Exchange and you're watching Closing Bell on CNBC. Welcome back. Fed officials indicating 2024 will be the year of rate cuts. It's unclear, though, when those cuts might start. That's the big message from the December Fed minutes. The meeting minutes released this afternoon. Let's bring in Evercore's Roger Altman to discuss. Nice to see you again. Happy New Year. Hey, Scott. How are you? I'm good, thanks. So what's your takeaway on all of this? Are the markets and the Fed, are they too far apart?

No, I don't think so. First of all, the Fed statement is exactly what you would expect the Fed to have said if you or I or anybody else like us were responsible for that statement. Because the last thing the Fed can do is cut too soon and find out that inflation actually isn't under control. So they're sending a watch and wait message just as they should. And it should be reassuring to investors. And I think generally it is. But beyond that, look, the economic outlook is remarkably good. We're seeing stunning data. Look at the latest data on personal income, on consumer spending, on consumer confidence.

Look at the inflation data. Take the last six months on core PCE, annualize it, 1.9 percent. Remarkable. None of us six months ago or 12 months ago would have seen the growth data that we're seeing. Atlanta Fed tracker at 2.6 right now. Goldman Sachs just coming out, I think, a couple of hours ago, estimating high twos for the whole year on real growth, together with this inflation progress. As somebody said, it's the immaculate disinflation, and it's very positive. But I mean, the Fed doesn't sound like it's ready to cut as many times as the market is betting it will. How much does that matter? Not enormously. For example, we at Evercore, ISI, project that the Fed's first cut will come in the

middle of the year, June, and that there'll be five cuts before the end of 2024. But whether it's five or it's four or it's six, once the Fed begins to ease, it's going to continue to ease on a smooth, steady trajectory. And so whether there are four cuts in 2024 and two in 2025 or the reverse of that, I don't think it makes a lot of difference. Once the Fed starts to ease, it's going to continue to do so.

In other words, don't fight the Fed rules and reign supreme. But the Fed, look, the Fed deserves a lot of credit. Yes, as was said a few minutes ago, it misjudged inflation at the beginning. And that was a big mistake but it is engineering so far a remarkable outcome as paul himself said at his press conference we we think it's going to get harder but so far it hasn't i think that was the quote uh and you have to give them credit because to see 1.9 inflation and two and a5% real growth this late in the recovery, they should get a straight A for that. What about the makeup of the market right now?

It's like the clock struck midnight, right, figuratively and somewhat literally. And all of a sudden, mega cap stocks started to sell off. And, you know, the market seems to be going through a bit of a reshuffle. I look at it right now as I'm asking you this question. And we're about the lows of the day. Dow's down 250. Nasdaq's down more than 1 percent. Russell 2000, which surged to end 2023, is down almost two and a half percent. What should we make of that? What do you think about it? I don't think we should make much of it, Scott. After all, the market had a red-hot six-week run going through the end of 2023. And I just think the market's taking a breather,

as it so often does after a run like that. It's hard to say how good the 2024 outlook will be for stocks but my instinct is. The worst that happens is neutral. And probably somewhat better than that just because the growth and inflation outlook. Is so good now. There are two big risks. What is war. What is the U. S. election. Very hard to tell. How investors view those risks as the year goes on, in particular the Middle East risk, because we're awfully close to a wider war there. If you look at the events, for instance, of the past 24 hours, and that could be pretty negative. Hopefully we'll avoid it, but it's a big risk. And the election, it's going to be an ugly election, no matter how you think of it. And maybe investors will ignore it, and maybe they won't.

But other than that, I think it's going to be a good year. What do you think CEOs are thinking about in terms of those big risks that are sort of out there, one, a little bit closer, obviously, with the geopolitical tensions that we've already, you know, seen, you know, bubble over the surface in terms of the deal flow, which you care about a lot. Well, I think the biggest thing on the minds of CEOs is that six months ago, nine months ago, so many of them were concerned about the likelihood of a U.S. recession. And now that is increasingly off the table, which is obviously positive. And so I think CEO confidence today is quite a bit higher than it was six or nine months ago.

And that bodes well. Roger, we'll leave it there. Again, I wish you well. We'll see you soon. All right, Scott. Thank you. All right. Take care. Roger Altman joining us live on Closing Bell. Up next, your playback, your pullback playbook, I should say. Bank of America's Chris Heisey, he's back. He'll tell us where he sees stocks heading from here, how he's navigating the uncertainty as well. Closing Bell's right back.

We're back. Stocks facing some early January jitters. The major average is currently on track to snap that nine-week winning streak. But is this just a pause in the market's momentum or the start of a deeper pullback? Let's ask Chris Heise, CIO of Maryland Bank of America Private Bank. Happy New Year. Happy New Year, Scott. Great to be here. So what is your outlook? Because I think you were pretty cautious through much of 23. Now we've turned the calendar. Have you turned your view? Well, actually, no, not a big turn in view. We were so-called balanced. We were right on our

strategic targets the entire time. We thought that stocks and bonds would have a reasonably good year. Obviously, bonds didn't for most of it. And then stocks ultimately took off the last two months of the year or so. We basically had a year in two months, as you've widely discussed. We've been balanced. What does that mean? It's fully invested. We picked our spots here and there. Sectors didn't work too well for most people, including us. But certainly being dedicated to U.S. large caps for most of the year, if not all of the year, really helped. We haven't changed our tune. I think it's really important to know that going balanced into next year with still high unpredictability is really important, but also staying fully invested. And that's the key.

Most of the time, time in the markets is much better than timing the markets. And you and I talked a lot about this over the years. And I'll say this. If you know the wedge in the markets going into a year, you have a very good, reasonable chance of not just outperforming, but staying on goal. What's the wedge last year? Inflation. We got that out of the way. What's the wedge this year? It's probably fiscal restraint, not to mention geopolitics and politics. If we can get that at bay, then you're talking about high predictability in earnings, margins, real yields declining, yields have peaked, and the Fed is telling us what they're going to do. But I want to go back to something you just said and try and I think I'm

reading between the lines a little bit. You said sectors didn't work too well. I take that as you saying that you didn't have enough exposure to mega caps to really catch that powerful momentum that they had last year. Does that suggest, and you said your sort of playbook hasn't really changed that much. Does that suggest that you're still not well overweight those types of stocks? Yeah, that's correct. We were basically neutral tech for most of the year. We had a little slight overweight to start the year. But as the year progressed and they had a six-time outperformance, we maintained neutral exposure. We're still there at this point.

But when I said sectors didn't really work, you didn't have the defensives working in a year where most people thought we were going to recession. You didn't have the cyclicals really working. It was bifurcated very much so towards tech and communication services and a little bit of consumer discretionary. But sectors are so diversified nowadays that using your normal sector rotation when you're late cycle or early cycle is now moving more towards what is the factor that's working in the market? Earnings momentum and high interest coverage. And we see that being the areas that are going to outperform again heading into 24 or 23. Why aren't you more optimistic, though?

Right. If you if we if we've come for a pretty long way right from where the Fed was to where we are now and where they are, as we learned yet again from the minutes, right, the economy looks like it's progressing towards a soft landing. I mean, obviously not there yet, but that's the bet. And the big bet is that the Fed is going to cut multiple times this year. Who knows when that begins? So if rates are going to come down and the economy is going to be pretty decent, earnings, you would figure, would be pretty good, thus justifying a reasonably good multiple. What am I missing? Yeah, you're not missing anything. You've nailed the story. Now you've got to talk about what could actually come in that we're all worried about to balance out some

of that uber optimism to bring us back to earth a little bit and become more of a realist. What's a realist? 7%, 8% returns in stock returns. That's good. We'll take that every year. Bond returns, somewhere around what your yield to maturity is, we'll also take that. 60-40 working again, very much take that. But balancing out by high geopolitical risk, U.S. political diversion also could be there. And then ultimately, do we really know what's going to go on with the debt maturity refinancings, particularly in commercial real estate? We don't know yet. We think it's going to be contained. But these are balancing acts and wild cards that

could come and go throughout the year. But generally speaking for the year, yeah, I would say we're optimistic. What do I do? I'm looking squarely at the Russell because, you know, as our show has progressed here over this final stretch, the Russell's gotten uglier, right? So it was a huge winner over that stretch from November 1st till the end of the year. And now we've had a rollover. Right now it's down two and two thirds percent. It's down five percent in a week. And a lot of that's happened in a couple of days. Are you a believer in that broadening out trade or did that get too far ahead of itself? It's a tough type of dynamic to kind of dissect. I think that small caps in general, lower quality areas when you are in this long period between late and early, and there's optimism about Fed cuts and the next expansion, you can get a lot of head fakes in the lower quality areas. And I think that's what you're getting when you saw that big move up in addition to some of the other lower quality areas.

I don't think they're yet ripe for a full upgrade. I think they should be on the upgrade watch list as well. Same thing for emerging markets. Now, we don't want to try to time these things too much, but what do you need for small caps to actually have a sustainable rally? Not just a couple of months, but six, 12, 18 months or more. You need margins to expand again. And that's quite likely in 24 because input costs are coming down and you're seeing some sticky pricing power. And if you can get that, that's where the upgrade in small caps is much more sustainable. Well, rate cuts aren't enough, right? Because when rates started coming

down, small caps started going up. Right. It's not enough because generally speaking, if you're cutting rates now, our belief is you're cutting rates because real yields are still, are actually too wide. Not because you're going to have an economic hard landing. But the market's going to try to fuel that out, at least in our opinion. And at the initial stages of Fed cuts, usually the lower quality areas are not the ones that participate. It could be different this time, but the playbook is usually they don't participate. Same thing with emerging markets. And then after the third or so cut, you start to see that come back

because now the market begins to sniff out an expansion again, perhaps later in 24 into 25. Maybe we had to pull forward too. Chris, take care. We'll talk to you soon. Chris Heisey, Merrill Bank of America, joining us here. Up next, we are tracking the biggest movers as we head into the close.

Steve Kovach is standing by once again with that. Hey, Steve. Yeah, Scott, rough day out there for a couple of renewable energy names We are tracking the biggest movers as we head into the close. Steve Kovac is standing by once again with that. Hey, Steve. Yeah, Scott, rough day out there for a couple of renewable energy names and cloud security. We'll reveal which ones when Closing Bell comes back after this. We're less than 15 minutes from the Closing Bell. Let's get back to Steve Kovac now for a look at the key stocks he's watching. Steve. Hey, Scott.

Yeah, check out these renewable energy names. Shares of SolarEdge falling about 5% today and Enphase Energy down about 7%. Big reason? Well, these are growth stocks, especially solar energy names. They're typically hurt as those treasury yields ticked past 4%. Now let's move over to cybersecurity. Shares of SentinelOne down about 7% so far today, announcing it would acquire cloud security company PinkSfe in a cash

and stock deal. Sentinel One saying the deal will boost its offerings to provide security for cloud applications, but no valuation on the deal, Scott. All right, Steve, appreciate that. Steve Kovac up next. SoFi shares, they're tumbling today. The stock's down double digits. We're going to tell you what's behind that leg lower, what it might mean for the rest of the fintech space as well. That's just ahead. Closing bell right back. All right, we're now in the closing bell market zone. CNBC Senior Markets Commentator Mike Santoli here to break down the crucial moments of this trading day. Plus, Leslie Picker on the latest activist action around Disney.

And Kate Rooney on what's behind that sell-off in fintech stocks like SoFi. We'll get to that in a moment. But, Mike, we're at the lows of the day for the Dow. The 300-point loser. Russell's down 2.5%. NASDAQ's getting kind of ugly, too. The market's treating it as pretty routine. You're not seeing a lot of distress.

You're not seeing volatility blow out. And it seems a bit like just collective portfolio readjustments coming into a year when you've got a lot of things stretched. Now, it would still be routine if the S&P went down 3% in a straight line from here. It wouldn't feel that way. So I think that's the precipice we might be on here a little bit. When does it go into a little deeper of a gut check for now? Treasury market also treating the Fed minutes as net dovish, probably not for any specific reason except the absence of any incremental incremental hawkish yeah just expand on that i mean you sat down i looked at the 10 years the market was selling off i'm like maybe rates

ticked up a little bit no 10 years three no i look there was a comment in there about thinking about slowing the pace of balance sheet reduction for technical reasons they want to make sure there's going to be enough of a balance sheet for reserves to to all of that. And maybe the market is latching on to that. But bigger picture, I think you got some soft economic numbers today, the jolts in the ISM manufacturing. It has people alert to the idea that the Fed also seems to be paying more attention to the downside risk. It's seeing that actually maybe as more primary. So if I look at the implied Fed trajectory from here, based on Fed funds futures, it's nothing like a precise forecast. It's not about people really believing every bit

of it. What it is telling you, though, is optimism about how fast inflation can come down and the fact that easing cycles gain a momentum once they start if you see signs that the landing is becoming harder. I think all those things together explain what the markets are up to. OK, so we're watching Disney, Leslie Picker, and we learned today that we have some increased activist activity. What do we know? Yeah, they call it swarming, Scott. Disney shares up about one percent amid a slew of activist news. In this name in particular, the company inking a, quote, information sharing deal with activist investor Value Act. A person familiar with the matter tells me Value Act owns more than 5 million shares, representing about half a billion dollars at current levels. Under the terms of the agreement, Disney can share information with Value Act

and consult with the firm on strategic matters. But Value Act is not taking a board seat here. This news comes against the backdrop of dueling proxy battles at Disney. You've got Nelson Peltz, who's nominated himself and a former Disney executive to the board, marking Peltz's second fight at Disney in two years. And in yet another twist, Blackwell's, with a much, much smaller stake, launching another proxy fight this morning at Disney with three nominees. This campaign is largely supportive of Disney's strategy, but critical of Peltz's fight. Peltz told Jim Cramer this morning that he remains

undeterred. Neither is Blackwell's. As one source described it to me, Value Act is pro-Disney, pro-Iger. Tryon's campaign is anti-Disney, anti-Iger, and Blackwell's is anti-Peltz. Are you following that? As the world turns. Leslie, thank you. Leslie Picker with the latest on Disney. Then there's Kay Rooney, who's watching fintech stocks like SoFi, which is really weak. We're looking at it here, Kate, down near 14%. Yeah, Scott, so the weakness there in SoFi is thanks to this KBW downgrade we saw. Analysts there say that they're taking what they call a more cautious stance on the name after its recent run-up. They point to valuation in particular.

SoFi did see this relief rally last year. Like other fintech and growth names, that was thanks to some of the expectations of lower rates. But analysts over at KBW say lower rates could actually be a negative for SoFi. They say it has to do with SoFi's loan book. So it marked up the value of these loans to include the expected future sale price. KBW says that can be risky when borrowing costs start to fall. It's forecasting a drag there on revenue.

The firm is lowering its price target for SoFi to $6.50. That implies about a 33% downside in those shares. The stock has been trading at almost 28 times. This year's EBITDA, KBW calls that seemingly, quote, one of the highest valuations for any balance sheet financial in the KBW coverage universe. So valuation, a key part of that thesis there. SoFi is down double digits, as you mentioned, Scott. Competitor Upstart also falling there in sympathy. Back over to you. OK. OK, Rooney, appreciate that very much. I turn back to you. I mean, a lot of the stocks that really rip towards the end of the year

are the ones that are rolling at the beginning of the year. Yeah, I mean, high octane in both directions. SoFi goes up 80% a couple of months. It's very squeezy. Not that it was just short squeeze, but just this idea, stuff got under-owned, it got blasted, and they came back hard. And there's not a lot of long-term change of story involved in those moves. SoFi is a capital markets funded, largely capital markets funded bank that calls itself a

technology company. It trades like one or the other depending on the day. So yes, we are definitely seeing a little bit of a mini reckoning in some of those areas that ran pretty hot into the end of the year. If it's more than that, it remains to be seen. I think still the market is kind of absorbing it okay. I say $4,550, $4,600 in the S&P would be the line between routine and something more. All right, well, we're two days in the trading of 2024, and we're two days in the red, and that's how we're going to end today.