Closing Bell - Closing Bell: Scary Message from the Bond Market? 3/24/23

Episode Date: March 24, 2023

Should the stock market be more worried about the message coming from bonds following the Fed’s latest rate hike or are things less dire than the plunge in treasury yields suggest? Professor Jeremy Siegel of the Wharton School gives his expert take. Plus, Ed Clissold of Ned Davis Research is gaming out a potential rally. And, Gunjan Banerji of the Wall Street Journal breaks down the crucial final moments of the trading day – and what she’s watching in the tech space. 

Welcome to Closing Bell. I'm Mike Santoli in for Scott Wapner. We're live from Post 9 at the New York Stock Exchange. Stocks finding their footing despite more tremors coming from the European banking sector with the S&P 500 up on the day. Also heading for a positive week. The market firming up after the European market did close, which leads us to our talk of the tape. Should the stock market be more worried about the message coming from bonds following the Fed's latest rate hike this week? Or are things less dire than the plunge in Treasury yields now suggest? Here to help us answer that question is Wharton School professor of finance, Jeremy Siegel. Professor Siegel, look, I mean, the Fed went through with the quarter point hike. A lot of criticism in the bond market had a pretty profound reaction to it, given that it came at this time in financial instability. Jay Powell and other officials making the case we can fight inflation with higher rates with one hand and with the other.

We can take measures to try to ensure banking stability. Do you agree that's possible? No, I don't. And let me tell you, Michael, how absurd the Fed's conference and projections are. They lowered their GDP projection for this year to 0.4 percent. Now, we already know that the first quarter is over 2%. In fact, the Atlanta Fed GDP now is at 3.2%. So this means that the Fed is projecting negative GDP growth over the remaining three quarters of this year. Negative GDP growth over the remaining three quarters of this year. Negative GDP growth over the remaining three quarters.

If that's not a recession, I don't know what is. And by the way, that also implies negative payroll growth over the next nine months. Now, think about that. I mean, we've averaged 300,000 plus payroll growth over the last six. And he now says we're going to have negative payroll growth over the next nine months. That's what the Fed's predictions are. Oh, actually, he doesn't use the words prediction. That's what the Fed says should happen under appropriate monetary policy. How can the Fed project a recession, a loss of millions of jobs, negative payroll as appropriate monetary policy?

Well, you know, even in December, the Fed was projecting an unemployment rate getting up to, what, 4.5, 4.6 percent. This is just really a slight modification of what they thought in December. The difference seems to have been the strength of the economy so far, by all accounts, in the first quarter, and then some stickiness in inflation, right? So I guess, look, they've been telling us for over a year that they're only going to change policy in a dramatic way

if they see inflation coming down in the here and now. Do you think that that type of stance has essentially gotten stale? I mean, look, the banking system is showing some level of distress. And the bond market, as I was saying, is set up in such a way that it's kind of calling out for the Fed to get easier. Well, but you said it yourself. The first quarter turned out much stronger than they expected. And now they're lowering the whole year projection of GDP, which really says they're going to make the last three quarters much worse than they thought last December. This might want one thing that really stuck out to me, they I mean, Powell virtually admitted that if it weren't for SVB in the banking crisis, that he was prepared to go up 50 basis points.

So now he's convinced 25 saying that basically the bank, the banking crisis is worth only one quarter of one percent in the Fed funds rate. Now, I don't know whether you, anyone else on this show, has ever talked to any bankers or any economists. Nobody says that's worth only one. It's worth two or three. Some economists have even said eight. So by raising it one quarter, and if you take a true increase in the tightening of credit that the banking crisis has engendered, it's like raising it one and saying, yeah, we're going to cause a

recession and that's fine. Yeah. I mean, I don't see it. I don't see this. I don't see it at all. I don't know whether the Fed understands the implication of its own numbers. Well, Powell did concede that, of course, there's a wide range of estimates. You can't know in the moment exactly what the effect of that credit contraction might be on the economy. But it's almost as if the markets I mean, look, the Fed is never going to say we're now done. Right. In so many words, the market has taken it to mean the Fed is likely done unless things somehow look a lot better in six weeks when they meet again. What are the investment implications, do you think?

I mean, do you think it's you suggesting it's a it's a massive mistake and the economy is kind of on a one way trip lower? And is that, in fact, what the market's going to have to deal with? Well, I think really, if they go through anything that they're saying, the probability of a recession is definitely much higher and I think unnecessary. I mean, I think a lot of progress, as I've mentioned, has been made on inflation. I mean, next Tuesday, we're going to get another housing report. It's going to be the seventh consecutive decline in the KSHO or housing index. The Zillow and apartment list rental indexes are all down. That's the biggest segment of the consumer price index.

As I've mentioned before, if you actually factor in real housing prices into the CPI, the CPI core has actually been negative over the last five months. So, I mean, this constant emphasis on, oh, we still have to squeeze out this wage inflation when Chairman Powell himself in the November meeting admitted it's a structural shift. The Fed should not be responsible for a supply side shift, snuffing out wage increases when wages have lagged inflation over the last three years. I think it's just a wrong-headed policy. I think it's a, you know, let's, I think the mistake of not testing banks for an interest rate, from what I hear, they didn't stress test the banks for an interest rate over 2% while he was planning for the last year to raise it two to three times that much is a failure as big as their failure for not

raising interest rates in 2020, 2021 to prevent the inflation. Right. I mean, I am just astounded. And by the way, let me also mention something else. Remember one of his statements. We're not thinking, despite projecting negative GDP growth over the next three quarters, negative payroll growth, we're not thinking about lowering rates. Did he not say that explicitly? Sure. Michael, that sounded like a mirror image of that famous or or should I say infamous statement that he made in 2021 when inflation was raging, speculation was raging. And he said, we're not even thinking about thinking about raising rates. How far behind is the Fed? Yeah, I was a little in advance of that. But yeah, I got you. Let's bring in Stephanie Link, Hightower Advisors, chief investment strategist and a CNBC contributor, along with our very own senior economics reporter, Steve Leisman.

And Steve, if I could just ask you to jump in and maybe frame it with some context here in terms of the Fed's communication challenge. Look, we were just at a 5 percent two year note yield a few weeks ago. People thought that inflation was going to force them to go to 6%. So maybe conceding in the press conference that they considered pausing and not explicitly saying, yeah, we're planning on cutting is not necessarily, you know, that tone deaf a message. Yeah, let me first weigh in and say I don't necessarily share the professor's certainty about a negative outcome, but I do share his concern. I'm not sure that the move on Wednesday was the right move, and I think it's a bit of a cop-out to say time will tell if this was one of those classic monetary policy blunders. The Fed's run an experiment here,

and I think Professor Siegel just grabbed what's left of his hair and pulled it out, but they run an experiment here, and the experiment here is, and I can say that, right? I'm allowed to say that. Stephanie can't say that,

but I can say that, which is that what they're trying to do is they're trying to figure out, can they run monetary policy to attack inflation with one set of tools and then run the financial stability issue with another set of tools? They feel like they've geared up for this moment for a lot of years, and they feel like they have a series of, they have an ability to do things on the financial stability side

that they didn't have before. Sometimes it means dusting off an old program. Sometimes it means creating new ones like this bank term funding program. And they're going to see if they can do that because they still see and think they have an inflation problem. And that inflation problem, Mike, as you said, comes from the fact that growth has been stronger than they expected, and the payrolls just don't seem willing to give it up now the way they like it to. They may be forced, and I asked Jim Bullard that question today, as to when do monetary policy and financial stability meet,

and it comes through the growth in the inflation channel. If inflation should begin to decline, decline precipitously, they will reverse course on policy. Right now, though, Mike, I want to show you our famous Fed market gap graphic that we have up here. And it shows that the Fed is 120 basis points more hawkish than the market is right now. This is to say the Fed has that five and an eighth or five point one three percent rate projection for the end of the year. And the market's down near 380 or so. Yeah. Well, we all know markets move a lot faster than committees and tend to overshoot in the short term. So I guess some gap might be expected. Steph, with all of this and with just exactly how contorted the Treasury yield curve is, I mean, the stock market's better than

flat for the week. It's not too far from where it was before the Fed actually did what it did. What's your read on that? I mean, what is the is the equity market sort of feeding off of or maybe what is it ignoring? Well, first, I think it's feeding off of technology and comm services, which is 35 percent of the weighting in the S&P 500, those two sectors have done remarkably well year to date, both up double digits, far superior than any other sector year to date. So I think a lot of it is that because there's a big chunk that has done really, really well. The other part of it is I think we're kind of looking through the banking issues. I am on record, and I'll say it again, I think

the three failures were three of very problematic banks to begin with. And I think the market is seeing that, right? I think the market knows that CS was in a world of hurt, unprofitable, and had very little capital because the capital requirements were so much less over the last 15 years in Europe versus the U.S. banks. We know that Silicon Valley Bank had the mix issue with VCs. We know Signature Bank had the mix issues with crypto. And so those are kind of one-offs. Are we going to see more, Mike?

Yes, we are, likely. But we're not going to see it at the big guys. And I think today specifically Deutsche Bank is not CS. And I think that's what the market is looking through. It reorganized in 2019. It's been profitable. The solvency and liquidity ratios are fine, better than fine. In fact, by the way, profitability, 10 last quarters of profitability.

So this is a different story. And I think that Unicredit backing their AT bonds, AT1 bonds this morning, I think was also a sign that this is that the Credit Suisse issues were really more specific. We'll see, Mike. But I just think that the market is looking at these two things and that's why it's hanging in there. And so as you look at the the movement within the market staff in terms of, look, we had a great run for industrials and some consumer stuff at the start of this year. A lot of that's fallen back to a degree. Has it surfaced any particular types of opportunities or would you still, I don't know, go with what's working in the moment here, which is kind of mega cap defensive stuff? I think you want to have a balance. Last year, I was definitely leaning a little more value and more cyclical. I still want to have some of that because I think some of the cyclical sectors are actually

doing OK. And it's very stock specific, of course. But I think some of the banks down here, as I just mentioned, I think you have a lot of these one-offs here. I think Bank of America is very interesting. I picked up Schwab for the first time in a couple of years given its 30 percent decline but at the same time i'm trying to pick up a couple of other names maybe a little more defensive in in a tjx um and in and in a occurring dr pepper uh or in a ge healthcare which by the way has been a really great stock but i

think it has a lot of long um tailwind ahead of. So I think you can kind of have almost back to the barbell that I had two years ago. I kind of want to see that. But today was all safety sectors for sure. Staples, health care, utilities. I get it. I understand it. But I'm not sure I want to go that defensive at this point in time. Professor Siegel, for as alarmed as you were with what the Fed did and what it continues to say, is there not a scenario where the inflation numbers start to really become a help to the Fed? Maybe starting next week, we know that the credit issues are going to be net disinflationary to the point where they might be able to, I don't know, land this thing and make both sides, the kind of the would-be hawks, the would-be doves somewhat satisfied in the short term? Well, I would hope so. But first, I do want to maybe correct Steve. This is not my projection for that negative GDP growth over the next three quarters. This is the Fed's projection

under appropriate monetary policy. Fair enough. I'm sorry if i'm mistaken than that okay so i want i want to make i i want to make that clear yeah i mean certainly we'd love them to be able to thread the needle and as i say if they they finally recognize the housing data so he's taken that out that's not really going to start to help us on the official data till the end of the year. But look, the Fed is supposed to be a forward-looking institution on what they see is happening to inflation. And I know there's got to be a little bit more wage increases, but crushing wages at this point in this delicate time for the economy, I just think is absolutely the wrong thing to do.

Hey, Mike, can I make just one more point? Just very quickly, I've been reporting on this bank failure and these bank failures, and I've been refreshing my knowledge of how the Fed operates and the FDIC operates. And it dawned on me, Mike, that I don't know about you, because you're a dogged reporter out there. It's been a very long time since I've reported on a bank failure to the point that I kind of had forgotten some of the phrases and some of the processes. And it was a reminder to myself that, hey, you know what? Banks fail.

Not everybody, not every bank has the perfect business plan. Sometimes they screw up. And not every time is it a systemic problem. I know we have issues and I know it's not limited to just one bank. There may be more banks, but it is more normal for banks to fail than for banks not to fail. And so I just think there is a possibility, Mike, it could turn out not to be the end of the world, is my point. Yeah, they've seen this before. That's granted. And by the way, on that general issue, Steve, we're not done with potential news on this front for the week.

So what are we looking for in this Fed report after the close? So that was one of the things I was refreshing myself on is how to read the H-8, which is the statement of banking positions and what we'll get is we'll get the deposit base of the toe all the banks out the small banks and the large banks and by the way just everybody knows it's a week old it's going to predate by a week this h41 we got yesterday but it will tell you in the first several days after the failure of of silicon valley bank and signature did a lot of money move out of the small banks into the large banks. That will be the thing we'll be looking for and be able to report and watch that over time. All right, Steve, we'll get it from you in a little bit. Appreciate that,

Steph. Professor Siegel, thanks so much for the time today. All right, earlier today, Double Line Capital's Jeffrey Gundlach tweeting, U.S. two-year versus 10-year is now inverted 40 basis points, was 107 basis points just a few weeks ago. All U.S. Treasury yields two years and out are well below the Fed funds rate. Red alert, recession signals. Which brings us to our Twitter question of the day. We want to know, do you agree with Gundlach? Are Treasuries signaling a recession?

Red alert. Head to at CNBC Closing Bell on Twitter to vote. We'll share the results later in the hour. And you won't want to miss our interview Monday at 3 p.m. Eastern. We will speak with Jeffrey Gunlock. We're now just getting started coming up, gaming out a rally. Our next guest is highlighting what he sees as the best path to a second quarter bounce. He'll make his case after this quick break. We're live from the New York Stock Exchange. You're watching Closing Bell on CNBC. Welcome back. Less than 40 minutes left in the trading day. Let's get a check on some top stocks to watch as we head into the close.

Seema Modi is here with us. Hey, Seema. Hey, Mike. Shares of General Mills are heading for a weekly gain, while a majority of analysts still have hold ratings on the stock, many raising their price targets overnight. That follows the company's earnings beat and guidance improvement yesterday. We're also seeing some outperformance from Lululemon. Ahead of its earnings report next Tuesday, Citi analysts are opening a positive catalyst watch, while Deutsche Bank analysts say the stock's valuation is attractive,

heading into what they expect will be an earnings beat. Stock up 2.3 percent. Lula also tracking for a weekly gain. Mike? Seema, thanks. Talk to you again in a bit. We are actually at session highs here. The S&P 500 up more than half a percent.

Tech stocks have been outperforming quite a bit this year as investors flock to the sector amid more rate hikes and bank turmoil. Our next guest, though, believes that the beaten down areas of the market performing quite a bit this year as investors flock to the sector amid more rate hikes and bank turmoil. Our next guest, though, believes that the beaten down areas of the market need to catch up for stocks to stage a meaningful second quarter rally. Joining us now is Ed Klissel, chief U.S. strategist with Ned Davis Research. And Ed, it's great to catch up with you. Thanks a lot for coming on. Boy, this split market has been pretty conspicuous. We've been talking about it for a week or two here. How do you think it resolves? I mean, do we take heart in the fact that investors have been rotating toward perceived safety or is a narrow market a dangerous market? Well, I think within equities, a narrow market is a dangerous market because then if those few

companies that have been rallying run into trouble by themselves, and there's nothing left for the market to hang on to. But I do take heart in that investors have not left equities as a whole. They haven't abandoned the stock market. So there's a possibility they could rotate back in. So for example, you don't want to see what we call multiple 10 to 1 down days with all the volume of stocks were down in the day were more than 10 times the stocks that were up on the day. That only happened once a couple of Thursdays ago when the Silicon Valley Bank news first broke. Besides that, it's been more of a rotation. So what we want to see is a rotation back into some

of these areas that have been beaten down. And I know you do a lot of work trying to characterize what sort of market we're in, whether it's bull or bear market, what kind of moment in the cycle we might be at. You know, if you go back 10 months, the S&P 500 has been very, very sideways. It's been hard to really say that it's done much in either direction, although we are up off those October lows. And there was a lot of excitement in January. And you looked at it closely about how broad the rally was. And you had industrials and material stocks and cyclical things leading. And it seemed to prompt a lot of people to say, you know what, October could have been a very important low. We might be in a noble market. Where do we stand on trying to figure that out? Well, we're going through a testing phase. And in fact,

if you were to just say maybe October was the start of a new bull market, this is about the time in the rally you tend to get a gut check. Now, each cycle is a little different. You know, may not be a bank failure, you know, one cycle. But this is where you'd expect it to happen, Michael. And at this point, you haven't seen enough broad technical damage for that to take place. And also, I'd add that a lot of times the first scare really brings out a lot of the people who were nervous. And you've seen that from a lot of sentiment data showing that people have been skeptical. Again, that's a positive sign that the market is working through this information. And of course, the big caveat is you can't have a lot

of bank failures. This is ring fenced within the bank so far, then that would be a positive element. Yeah, there's no doubt folks are afraid and maybe pointing to things like the way the yield curve looks in treasuries and the fact that they'll tell you that if the Fed's about to pause or about to cut, that's not always the best time to get very excited about stocks. Yeah, if you go back to, say, World War II, after the last hike, six months later, the market's actually down. The S&P 500, to be specific, is down about 5.5%. So not a great time to be in the market. Although I would say since 1989, kind of the modern Fed since Greenspan, four to five times the market's been up double digits six months later. Now, what happens sometimes, like in 1989, 2006, the Fed did break something. It just took more than a year for the stock market to roll over.

So generally something does happen. But the more recent history is probably a little more positive over the short term, the next few months, for a Fed to be done with hiking rates. Yeah, it gets tricky figuring out the leads and lags when it comes to all this stuff. Ed, great to see you. Thanks for coming on. Thanks for having me. All right.

Up next, finding overseas opportunities where one portfolio manager is putting her money to work abroad and how you can best position yourself for a potential recession. That is after the break. Closing bell. I'll be right back. Apple's Tim Cook is in Beijing today. He is there to attend China's Development Forum. Steve Kovach is here with more on that trip.

Hey, Steve. Yeah, Mike. And also taking a stop by a Beijing Apple store there today. We saw him post a picture of that on the Chinese social network Weibo. Now, this is his first known visit since the pandemic hit. And he's also expected to attend the China Business Development Forum this weekend, along with some other U.S. execs like Pfizer CEO Albert Bourla. And this forum is really seen as a kind of coming out party for China after it decided to reopen everything a couple of months ago. And by the way, coming amidst rising tensions between the U.S. and China, just recently, TikTok CEO yesterday faced that grilling as lawmakers consider a ban of that app and highlights the conundrum many of these companies are in. They rely on huge sales in China. For Apple's example, $24 billion in sales in China in just the December quarter. That was about 20 percent of all sales in that holiday quarter.

And not to mention all the manufacturing for Apple is still largely based in China that we've seen many times that they're trying to diversify that manufacturing after the issues we saw with the covid lockdowns last year there. And by the way, China needs Apple. It provides tens of thousands of jobs through those manufacturing facilities, primarily through Foxconn. So it's kind of a double-edged sword here, Mike. Absolutely. Steve, thanks so much. You got it. Well, Deutsche Bank, off the lows, the global risk-off wave sparked by concerns over Europe's banking system, spilling over to emerging markets. Our next guest is invested abroad, running a number of internationally-focused funds.

Sarah Ketterer is the CEO of Causeway Capital Management and she joins us now. And Sarah, I mean, characterize your level of concern about Deutsche Bank, about the European banking complex in general, and maybe how it fits into any view you might have on whether we're bracing for a recession. Mike, I'm going to quote our portfolio manager, finance and banking for us, Conor Muldoon, who says, Europe has just borrowed less. And this sort of encapsulates what we think about European banks. In general, they're in better shape, better capital shape than their U.S. peers.

They also, and this includes Deutsche Bank, have a deposit base that should protect them more than, say, the U.S. regionals. And yet you look at the share prices of so many of these big now we're not talking small but the big European banks and they have plummeted. There are nowhere near where they were in twenty twenty. But the fact is

you can really get some banking bargains or more marking down some of the. The rap marking up cost of risk and marking down some share price targets. But that's if this continues, these are really quality institutions. So the contagion effect from the U.S. has hit Europe and we think somewhat unjustifiably. Interesting. So so you've kind of adjusted your assumptions based on some of what's going on.

And even with that, you find some of the big European banks to have value. Yes, they do. Now, Deutsche is an interesting situation. It's not one we have in our fund, but we do think the market has gotten a little carried away with itself. I guess we would agree with the German chancellor on that. This is a bank that has become profitable across all four areas, business lines that they have, including private wealth and corporate lending. They have a loan-to-deposit ratio, and this is where we get worried about commercial real estate on bank loan books.

But in their case, in non-recourse loans in real estate, in commercial real estate, about 7% of gross loans. And that's manageable. So again, markets gotten a little nervous after Credit Suisse looks like Deutsche Bank would be next in line. We think it's very unlikely they will see, and they'll neither see a run nor have to be rescued.

The other interesting European banks, top of our list would be Barclays, for example, in the UK. Well-managed and delivering profitability like just about all the European banks. And Q1 should be very profitable for the bulk of them. Yeah, maybe the reporting season will come as a bit of a relief there. More broadly, Sarah, are you kind of recession-proofing your portfolios? What are you actually doing most here in terms of, you know, leaning toward or against certain parts of the market at this point? Well, we just put on our website a piece called the end of easy money, and that's no surprise to

anyone. But what it does mean is that with banks being cautious in particularly in the developed world and reining in loans, there'll be less liquidity. And less liquidity just means less money to put to work in assets. So the pressure on asset prices might be severe as we head into some type of slowing, likely recession, maybe in the next six months. It's hard to say. Depends how aggressive central banks continue to be. But in the meantime, we want to see companies that are engaged in operational restructuring, where they're actively cutting costs, improving the business. And it just happens there are quite a few of those outside the U.S. Companies like Danone in the food business, they've got both nutritional food, dairy and waters, well-managed

new management team, the dividends increasing, really attractive. We want to see more capital returned to shareholders because now cash is worth something. So we'll take it. Thank you very much. And amongst that, there are many in technology like SAP in Germany. So there's a long list. It's this, the other side of this sort of meltdown is an opportunity. Sarah, it's great to catch up with you. Thanks so much for your thoughts today. Thank you. Thanks so much for your thoughts today. Thank you. All right, up next, we're tracking the biggest movers as we head into the close.

Seema Modi standing by with that. Hey, Seema. As the major averages head for weekly gains, we're tracking some of the biggest gainers for the week. Stay with us. Closing in on 20 minutes till the closing bell. The S&P 500 up half a percent. Let's get back to Seema Modi for a look at the key stocks to watch. Well, Mike, we're watching two big weekly outperformers, starting with GameStop, which is on pace for its best week since May

after posting its first quarterly profit in two years. It's also the stock's first weekly gain in five, as it remains more than 50% off its recent high, still up in today's trade. Another big gainer is On Holding, which is headed for its best week since going public in 2021. This is the Swiss running shoe company that's become very popular. Saw a flurry of positive analyst notes this week after its quarterly results on Tuesday, including a street-high price target of $39 a share at UBS, currently trading at $31 and change. Mike? Seema, thank you. It is the last chance to weigh in on

our Twitter question. Ahead of our big interview on Monday at 3 p.m. Eastern time, we want to know, do you agree with DoubleLine's Jeffrey Gundlach? Are Treasuries signaling a recession red alert? Head to at CNBC Closing Bell on Twitter. We'll bring you the results after this break. Let's get the results of our Twitter question. We asked, do you agree with Jeffrey Gundlach that Treasuries are signaling a recession red alert? Well, there you go. 75% said yes, they are. Don't miss our interview with Gunlock right here on Closing Bell. That's Monday at 3

p.m. Eastern time. Up next, one market strategist is raising the red flag on a key part of the market that he says the Fed needs to be paying more attention to. That and much more when we take you inside the market zone. We are now in the closing bell market zone. Warren Pies of 314 Research and the Wall Street Journal's Gunjan Banerjee here to break down the crucial moments of the trading

day. Plus, Stephen Bigger Of Argus research on this turnaround. In the banking stocks that we are seeing. Welcome to you all- Gunjan- we've had a Fed rate hike we've had really almost record volatility in the bond market-

and yet the stock market has been relatively on solid footing we're up for the year still up for the week. If nothing else I guess you could say this is not a twenty twenty two. Type of of stock has been relatively on solid footing. We're up for the year still, up for the week. If nothing else, I guess you could say this is not a 2022 type of stock market reaction. Absolutely not. It's pretty wild to see that we just saw the first week of inflows into domestic funds for the year, the biggest weekly inflows since November 2022. And that just tells you that a lot of people are

shrugging off some of these banking fears. And I think a lot of that goes back to the fact that tech seems to be the crisis trade. The Nasdaq is up more than double digits this year. So people are piling back into the stock market. But I really do think that's masking a lot of uncertainty under their surface. And we are seeing pockets of anxiety, whether it's in the options market, the bond market, the gold market. For sure. Yeah. And in fact, those inflows, I think, were very much skewed toward growth funds. So chasing that that Nasdaq type move. Warren, I know you're not necessarily particularly encouraged by the by the way the stock market's acting,

given what's happening in the bond market, in the way that whole yield structure has really gotten to some dramatic extremes. Talk about that a bit. Yeah, thanks for having me. What we've really been paying a lot of attention to since last year is this relationship between the Fed funds rate and the two-year yield. And so this is a great proxy for forward Fed policy and during crisis periods of financial stress. And so most recently recently we've seen that spread drop below 100 basis points. And this is absolutely rare. You only see this right before crisis events. So we went back and said, when does this spread blow out to 75 basis points or more?

Really it's a handful of cases. The SNL crisis, the 1990 recession, long-term capital management management in 1998 2001 recession we saw two of these in the great financial crisis one in 07 one in 08 we saw in the 2000 repo crisis late 2019 and again right before covet so they happen right before crisis periods this blowout between the fed funds right in the two year. And always, in every case, the market is saved by the Fed. The Fed cuts rates within weeks or at least at the most a month following this huge inversion. And what we saw is the Fed hiking rates just this week. And so this is odd. We're off the map. We've never seen this kind of behavior from a Fed when we have this kind of a signal from the bond market. And I would say it's pretty ominous for equity investors. It's fascinating. I would look at that list of prior instances and maybe push back and say, obviously, they were dramatic in the moment. They were scary. There certainly was more risk they came along with. But S&L crisis, what, 1986, right? The economy seemed to weather it okay. 1990, shallow recession, 20% S&P drawdown.

Even 1998, some people say the Fed got too easy too quickly given how strong the U.S. economy was. So I wonder if you can say that you don't necessarily have to have the Fed immediately go into panic mode in order to avert a bigger disaster? Yeah, well, it's hard to always argue the counterfactual and know how history would have turned out if the Fed didn't cut rates. But in fact, every single one of those cases, the Fed absolutely responded to this inversion. And so let's think about 1998 and the LTCM for a moment and think about how much different the backdrop is, because I see bulls making the case that, hey, the Fed could come in, cut rates right now, and this could reinflate the bubble. Kind of similar.

We were up 30% off the inversion for 1998. And so is that possible? Well, think about back then, CPI was sub 2%. Oil prices were at like $15 a barrel. And then two months after that crisis, when the Fed cut rates by about 75 basis points following LTCM, oil prices dropped below $10 a barrel on Brent to make a generational low. So there were a lot of tailwinds within the inflation picture that are not present right now to give the Fed leeway to cut back then. Right. All right. So I guess the net effect is you feel

like the Fed is squeezed into a position of remaining too tight for too long. Right. In a word. Yeah, absolutely. And I think when you spin it forward for equity investors, the average max drawdown in each one of these cases is like 25 percent. So your downside volatility is extreme. If you think about the history of the stock market over any given 12 month period, you should expect an average drawdown of like 11% or 12%. So it's more than double following these massive inversions. And so we don't have the Fed responding. I think you're going to need the market to throw a fit in order to get them to respond. So expect downside volatility. All right. Warning acknowledged. Warren, thanks so much. Appreciate it. Thank you. Let's talk to Stephen Bigger of Argus Research. And Stephen, maybe a surprise. We have regional and larger banks more or less flattish for the week right now. Does that tell you that, you know, some of the storm has potentially passed for at least the U.S. banks?

Yeah. Hi, Mike. You know, I think so. I mean, you know, certainly the value situations have been, you know, cut pretty substantially. The KRE down about 30 percent here. So I think, you know, investors are finding some value. They're finding value in, you know, much higher dividends, 5 percent, 6 percent yields at this point. Looking at the, you know, price to book type ratios, PEs, and there's a lot of value to be found when the market gets shattered like that in a 30% drawdown. So I think we've gotten some healthy news out of the Fed more recently. The primary credit, the Fed discount window, fell actually from $153 to $110 million in the past week. The bank-turned-lending program, this is their new program that allows banks to pledge underwater assets at par. Rose to 54 billion in the past week from 12 billion. So, you know, that doesn't sound like a crisis era. So I think some of this

is cooler heads are prevailing. So even if it's not that kind of acute crisis in the moment, you know, the rejoinder to that, which is, well, what about commercial real estate? What about the fact that they're going to be pulling back on, you know, lending appetites? What about net interest margins? What about the higher funding costs? I mean, is all of that already priced in? Well, a 30 percent haircut for the regionals, at least, and a little, you know, of course, less so for the global banks that will you know most likely be beneficiaries of this deposit surge. But I think that's the you know that the narrative that has been developing is that yeah the Fed has gone too far.

It's you know the credit reduction from the banks themselves on the supply side is also going to be hampered by reduced loan demand, you know, with the prime rate now at 8%. So capital projects are going to start getting shelved and just less demand for lending. Deposit costs are moving up. That's going to hurt NIMS a little bit. You know, and we still have this banking confidence issue,

and the Fed's narrative is still for, you know, another quarter point rise. So, yeah, there are some issues on the horizon, credit costs I could add as well. But, you know, I think by and large a lot of this is factored in. All right. We'll see if, in fact, it is. Stephen, thanks very much for joining us. Appreciate that. Gurjan, I wanted to get back on this idea of investors taking shelter from the banking issues in growth and tech. I mean, you had Netflix up about 8% this week. It's up another couple percent today.

And people buying it will tell you it's for Netflix reasons, right? There's some reports about, you know, some pricing benefits and things like that. NVIDIA, people buying that aren't thinking they're buying safety. They think they're buying a new story. But when it comes to Microsoft and Apple, it feels as if they're just the staples of today in a sense. They absolutely are. And I think forget Fang right now. People are really focused on those two stocks, Microsoft and Apple.

And we're seeing the concentration of those two stocks hit the highest level since the 1970s when AT&T and IBM were looming large over the market. So it's fascinating to see how that trade has evolved lately. It is fascinating. I know you did write that up this week. So I'm trying to think back to say, in 1978, were people alarmed that AT&T and IBM, was it, were the two biggest? Or, in fact, was that okay because these were solid companies and predictable companies? I think that it's hard to avoid the idea, though, that those large companies today are a good deal more expensive. They have higher valuations.

So once again, we went through this two-year process of tech having a real gut check, and yet people say we're still going to pay a premium for them. That's right. And what's crazy is that last year we saw tremendous outflows from technology. I think people realized the risks of being concentrated in a handful of names. Yet here we are again. And I think it highlights how wrong-footed

people were really caught this year. You know, they were positioned for higher yields, for value, for cyclicals to rally. And that just hasn't been what's happened. Instead, we've seen people turn to the 2020, 2021 favorites. And, you know, that's become the crisis tree. Yeah. And certainly people seem to own more cash. There's no doubt about that. So that's sort of sitting over to the side. Money market funds have had huge inflows as well, as I'm sure you know. I know you keep an eye on

the options market. And to what degree does that type of frenzied activity that's in the day to day reflect the same kind of appetite for big tech or is it hedging, is it all sorts of other stuff? You know, what I think we have seen during this banking turmoil is a rush for protection in the options market, which is nothing like what we saw last year, where even though we had this steady grind lower, people weren't turning to put options. People weren't turning to stock market insurance. And they have this year. So I think it goes back to how the muted moves in the stock market have masked a lot of anxiety underneath,

because we have seen that hedging demand pick up in the options market. You know, just yesterday, we saw put options activity tied to Deutsche Bank hit a record. So that tells you there are people positioning for this banking crisis to keep playing out, to potentially worsen. I think we're all wondering, are we going to spend the weekend doom scrolling on Twitter? Are we going to spend it watching another bank go down? Well, I have flashbacks to not just the CDS charts that we've been running all day and seeing how people are buying credit protection, but also I remember the leveraged inverse ETFs for the banking stocks were blamed for creating some of the sort of preconditions for the financial crisis. Totally. I mean, I think that just speaks to this market moment that we're in, where this does seem to this is going to take up our entire weekends, spill over into next week. Next week, we have an inflation print, which ups the ante for

what we're seeing in the market right now, where people are saying, we don't think the Fed is going to keep raising interest rates. You have Powell saying, cutting rates is not my base case. So it's going to be an interesting stretch for sure. It's a good reminder that the CPI numbers have been the most important in recent months. We'll see if that does continue. Bridget, great to have you. Thanks so much. Appreciate it. As we do go into the close, S&P 500 on track to be up half a percent today, reversing earlier losses once the European markets close.

We also are going to be up for the week on the S&P 500 by about 1.3%. And on a year-to-date basis, it might be a surprise S&P up 3.4%, at least so far, thanks to all those big tech stocks. That does it for Closing Bell. Let's send it into overtime with Morgan Brennan and John Ford.