Closing Bell - Closing Bell: Seasonality Reality 9/22/23

Episode Date: September 22, 2023

Are stocks close to completing a standard seasonal pullback or is there more payback to come as higher rates test the economy’s resilience? Greg Branch from Veritas Financial, Hightower’s Stephanie Link and Invesco’s Brian Levitt debate their forecasts. Plus, BMO’s Simeon Siegel breaks down retail’s rough week. And, Ed Clissold of Ned Davis Research is flagging some technical turbulence. He explains how he’s navigating the uncertainty. 

Welcome to Closing Bell. I'm Mike Santoli in for Scott Wapner here at Post 9 at the New York Stock Exchange. This make or break hour begins with stocks tentatively seeking firmer footing after a jarring week. The major index is struggling to stay in the green most of the day as the breakout in bond yields this week stokes economic concerns. Treasury yields are calmer though on the day and oil prices are quiet. Coming up, Citi out with a new bullish call on Meta. We'll talk to the analyst about why he's optimistic about that name. This brings us to our talk of the tape. Are stocks close to completing a standard seasonal pullback or is there more payback to come as higher rates test the economy's resilience? Here to discuss all that is Greg Branch, Veritas Financial Group Managing Partner. Greg, it's great to have you here. Good to be here, Mike. You know, you have

been in the hire for longer on rates camp for a while, also feeling like the stock market wouldn't necessarily be able to handle it all that easily. What has this week told you about the resilience of the market in the face of higher rates, where rates are going and what it all means? Right. So one of the issues I've had this year with the bearish posture, Mike, and I didn't maintain that because I'm obstinate. I probably am. But the reason that I've maintained it is that I've been higher than the higher and longer than the longer. And so the market is just starting to catch up with my high, right? A year ago, when I declared my terminal rate at 6%, to put it diplomatically, that was highly scrutinized. Sure. But here we are.

We're around 50 bips away from that with the Fed poised to raise more. I know some of us are interpreting that as just one more, but I think that there are several more. So I'm still higher than the high. And in terms of the longer, recall that Fed Funds Futures projected interest rate cuts in the back of this year. In fact, I think when we look at that 8% growth number for the fourth quarter, that's a remnant of interest rate cuts this year. I don't see how there's any other possible path we could get to an 8% earnings growth in the back quarter of this year without rate cuts. So I don't know if the market's gotten to my longer yet i don't think there'll be any rate cuts in 2024 even though the fed just

went well the dot plot suggested only two as opposed to the four right futures are discounting um i don't know if the longer is long enough so what does that mean that meant that my estimates were much lower than consensus estimates both for this year as well as for next. And when you put even a conservative multiple or a fair multiple on my 225 for next year, that puts me at 3800. And so while on the high side the market's catching up, on the longer and on the estimate side that has yet to happen. And that's why I think I remember- Well, this year's number is around 225 or 221 by the consensus, right, for this year.

Most of the year is done. Right. The consensus for next year is like in the 24, right, for this year. Most of the year is done. Right. The consensus for next year is like in the 247 range or something like that. So I obviously I know you're saying that you think that's way too high. I can't get there. But here's the thing. It's not it's it's it's essentially not it's like 10 or 12 percent higher than we had in 2022. Right. The economy nominally is a whole lot bigger. Right. The big growth stocks are leading the growth, the earnings growth path. So I'm just curious as to why it's such a crazy number next year without great cuts. So and to be fair, just because I believe the indices are 15 to 20 percent

too high. Yeah, there will be winners. There will be protected when you talk about big tech, when you talk about things that are not as exposed to the consumer. The reason it's too high is that if I'm 20 percent below that, you know, if I'm 5 percent below that, that's not a shock to the market. But if we have to see earnings revisions, downward revisions in the magnitude of 2015, maybe 25 percent, that typically has posed a very strong headwind to equities. Well, but that also would suggest that you're pretty much in or at risk of a recession. And how does the Fed stay higher for longer in that context? Because, you know, they can say what they want right now when unemployment starts going up or they see these disinflationary forces in corporate earnings and the economy, they're not going to hang here at five and a half percent.

I think the Fed is braced for that, Mike. I don't think the rest of us are, but I think that the Fed is braced for that, and I think they've told us that. When they tell us that they need unemployment of 4.4% to get to their target rate, that means that there needs to be 2 million jobs lost. So I think the Fed has tried to prepare us for that. We're not prepared for that, but they are. Well, their new projection for next year is 4.1% unemployment, and they don't pencil in getting to their inflation target until two plus years from now. Right. In other words, they feel like they can be patient. And I'm not sure that they I'm not sure that that's posture as opposed to reality, because

at the same time, you don't have to put us on warning that there might be another cut this year. Right. Based on what the numbers are. Another hype this year. Yeah. Sorry. Exactly.

All right. Let's broaden the conversation. We'll bring in Stephanie Link of Hightower and Brian Leavitt of Invesco. Stephanie, of course, ACNBC contributor. Welcome to you both. Brian, I'm curious about your thoughts right here, because it seems like the rally in stocks, at least the big cap stocks this year, has been premised on the Fed is done or almost done. The economy has been relatively resilient to this point. Inflation is coming down more than the economy's weakened. Is there an issue you would have with that with that set up and or with Greg's point of view? I don't have an issue with that set up. It's an environment where,

you know, this is a market that's been enthused about peak rates, peak oil, peak inflation. And so what we've been dealing with a bit here in August and September, which historically are not great months for markets, has been concerned. Are we at peak rates and are we at peak oil? I think what investors need to recognize and why I disagree with Greg is that policy takes 12 to 18 months to work its way through the economy. Many Americans have fixed rate mortgages, businesses locked in low rates. So we haven't seen the lagged effects of all this. 18 months ago, the Fed funds rate was 0.0 percent. So this is an economy that will start to slow in 2024, which means the Fed is close to being done. Historically, if you invest when the Fed is done, you're very happy over the next one, two, and three years.

Yeah, I don't know. I mean, the Fed done is one thing. The Fed being forced to cut isn't historically, Brian, not the greatest thing for stocks? Well, by the time the Fed is cutting, I mean, you're starting to look ahead to a to a new business cycle. And so, you know, this market that was down 25 percent last year, that was forecasting a weak economic environment that still hasn't happened yet, but is likely still to come. Now, people will say, well, stock markets bottom in recession, but inflation usually peaks in inflation in a recession. So this is weird timing. Inflation has already peaked. We're closer to peak rates. To me, that sets the stage for the next cycle and a good backdrop for risk assets over the subsequent years. I just want to clarify, because Brian and I are not actually

disagreeing at all. I'm not saying it's the incremental 100 basis points that's going to do the heavy lifting. I agree with him. It's the 525 prior. But what that means is that this is not an environment where we can expect earnings growth when the cost of capital is higher, when we have yet to see all the effects filter through the system, and when consensus is way off to the other end. And so we're not disagreeing at all. Yeah, no, I do see the connection there between those views. Now, Steph, obviously, all of the worry that we've been dealing with, whether the economy can handle rates here, what the Fed has planned for us is being combined with some of the immediate headwinds that all of a sudden have piled up. Right. We have the we know about the strikes. We know about a potential government shutdown, student loan restart. And we've swung over the course of this year from we're going to overheat in the economy to we have a recession or a credit crunch, one or the other. And through it all, it's been kind of slow and steady. So how do you see things playing out?

And as we mentioned, earnings growth, by consensus at least, is starting to pick up. I don't think that people are giving enough credit to the economy and the economic growth and the momentum that we're seeing in the economy. Mike, at the beginning of the year, the first quarter GDP was supposed to be the peak. That was consensus. And then from there, we were going to roll over and roll over hard and we would be in a recession by now. Actually, the opposite has happened. We had two percent growth in the first quarter, two point one in the second. And we're Atlanta. Atlanta Fed tracker is at four happened. We had 2 percent growth in the first quarter, 2.1 in the second. And Atlanta Fed tracker is at 4.9.

We're not going to do 4.9. We're probably like 3, 3.5, 4. We get GDP, by the way, next week, so it will be interesting. But we're above trend, and that is the point. And that's because the economy has been fueled by the consumer. I mean, every week we are surprised on initial claims. They keep coming in lower and lower and lower. And they're nowhere near recessionary levels at this point. The four-week moving average is 217,000.

Recession is about 350 to 375. The $2 trillion in manufacturing and infrastructure stimulus is helping that industry as well. It's pockets, though, right? It's onshoring. It's aviation. It's AI data centers and that sort of thing. But that being said, it is what it is. It's pockets, though, right? It's on-shoring, it's aviation, it's AI data centers and that sort of thing. But that being said, it is what it is. It's helping, it's working, and not all that money has been filtered into the system to begin with. So that's going to be

a nice offset to higher rates. I'm not saying we're not going to slow. We are going to slow. But there's a lot of momentum here. And that is the reason why the Fed is staying higher for longer, because the economy is driving a little bit more inflation and that's a little bit more persistent. Right. And Brian, honestly, we can talk about what the market is doing. We all know it's been very uneven in certain parts of the market, like small caps have broken down to a degree. And so maybe we can explain some of this disagreement with the divergences there. But to me, it all does really come down to the path of inflation, because that's going to decide if the Fed can comfortably pause, if it can maybe cut down the

road without an economic downturn. What are you looking at to indicate whether, in fact, inflation has downside momentum well look inflation has come down from nine percent to as low as three and back up to three seven on oil but if you look across money supply growth which is negative on a year-over-year basis if you look in the good side businesses have rebuilt inventory there's been a lot of talk about you know why is the cpi the consumer price index saying so elevated a lot of that has, you know, why is the CPI, the Consumer Price Index, saying so elevated? A lot of that has to do with the way the U.S. Bureau of Labor Statistics is looking at shelter. I mean, we've already seen the S&P K. Schiller National Home Price Index go

to flat or slightly negative on a year-over-year basis. If you look at rents, rents are now down significantly, down to about 3.8 percent on a year-over-year basis. You talk to landlords, they say this is about as soft as a rental market as we've seen in some time beyond COVID. And so I'm trying to figure out what's going to drive inflation here. I think that people talking about too strong growth and elevated inflation, to me, that was a 2022 story. This is now a story of moderating growth, inflation that's going to moderate, and a Fed that's ultimately going to back off their tightening stance if they haven't already done so. Greg, I know you think that there's going to be

more stickiness in inflation. What among those things, you know, that Brian was detailing that are in the pipeline do you not think are going to come through? Yeah, I think Brian Cherry picked it a little bit. When you look at the last two reports and you go underneath, let's forget about the headline number, because, yeah, it includes energy, but it also includes base effect. Well, the base effect is going to be less favorable as we move forward. Energy will certainly be less favorable as we move forward. And when you look at the individual 24, 25 components, in the last two months, the only three, only three have actually contracted more than 70 bps.

And that's used autos. And we have reason to believe that that's going to reverse going forward. That's electricity. Obviously, we have reason to believe that's going to reverse going forward. And airlines. Airlines did the heavy lifting at 8% in the last two months. And we have reason to believe that that's going to reverse going forward. So I have no problem seeing where we are seeing the resistance to disinflation. I hear this at every inflection point. I hear this before every recession. We heard it in 2008 as well. We heard it prior to 2000. The oil prices go up, and that's going to drive headline inflation higher. I mean, oil prices moving higher at this point is a tax on the consumer.

We talked about it in the prior program on CNBC, the debt that the consumer has taken on. You hear about now what we're paying at the pump. This is all going to slow down consumer spending after what had been a pretty torrid pace. Steph, just did want to get to you in terms of within the market. One of the things that's gone on the last couple of weeks is some weakening of the cyclical leadership within the S&P 500 and the broader indexes. It's not been given up, but it's one of those things where it seems like we're questioning all of those those uptrends that we took a lot of comfort in, like the cyclical leadership. Where does that leave you in terms of picking your spots for where you might want to buy some things? Yeah, I mean, I think that with the market down 6% from its highs, there's a lot of

ideas out there that I've actually been picking away at. You know, I have had an overweight on the cyclicals in energy and industrials. I kind of fine-t at. You know I have had an overweight on the cyclicals in energy and industrials. I kind of fine-tuned financials. I'm now about market weight. I just think that the struggles for net interest margins are gonna continue for some time. But I still think you're gonna see better demand

and the top line numbers in energy, especially where oil is relative to last year. And I also think on the industrial side too, especially anything, again, tied to onshoring, things are just on fire. I do like a couple of ideas, though. GE Healthcare, that stock is down 25 percent from its highs. This is a GE spin, right? And hospital spend is going to be one and a half percent growth next year. Well, GE Healthcare, they have a 35 percent market share in imaging and a 40% market share in ultrasound. And if you believe these Alzheimer's drugs are really going to take off, which I do, which a lot of people do,

you need four MRIs while you're taking that treatment. So I think that there is a lot of momentum. And we all know that spins work because they've been ignored when they were part of a conglomerate. I also like the Cisco Splunk deal a lot. I mean, you're going to see software now be 50 percent of their total revenues. And this deal is going to be gross margin and cash flow accretive in the first year. So I bought that recently, too. All right. Yeah. A couple of specific strategic situations there. Steph, thanks very much. Greg, Brian, appreciate the conversation. Thanks a lot. Thank you.

All right, let's get to our question of the day. We want to know, is the recent pullback a buying opportunity? Head to at CNBC closing bell on X to vote. We will share the results later in the hour. Meantime, we're following the latest developments out of the United Auto Workers strike, now expanding against GM and Stellantis in a major way. Phil LeBeau here with an update. Phil. Mike, we are outside a Mopar parts distribution center here in Romulus, Michigan, just a little

bit west of Detroit. I want to give you some sense of just how widespread the new strikes are that were announced today by the UAW. Take a look at this map. There are 38 GM and Stellantis parts distribution centers where UAW members are now on strike. Now, these centers are not huge employers. Often they have maybe 100, 150 employees in them, but altogether another 5,600 UAW members are on the picket line. And earlier today when we talked with the president of the UAW outside a different parts distribution center. He said these centers are critical to what they want to send a message to the automakers about. GM and Stellantis are both in the same place, in my opinion. We've not made progress there, and it's unfortunate.

They chose, and I want to make this clear, they chose for us to be out here right now. This wasn't a decision we made. This was a company's decision. Both GM and Stellantis say they are negotiating in good faith. Stellantis went a bit further in its statement following the announcement of these strikes, saying about the UAW, they seem more concerned about pursuing their own political agendas than negotiating in the best interest of our employees and the sustainability of our U.S. operations given the market's fierce competition. Not a whole lot of reaction from investors today for GM and Stellantis, but there was some reaction

for shares of Ford moving a little bit higher after the UAW said that it is seeing some progress when it comes to negotiations with Ford. Back live here in Romulus, we will see more strikes at some point, according to Sean Fain, if there's not progress down the road. When that might be, whether it's next week or a week after that, he said that all depends on the progress or lack of progress when it comes to the negotiations. Mike, back to you. Phil, how is the UAW's strategy here of these kind of targeted strikes trying to keep the manufacturers off balance? How is that playing into the sort of willingness to negotiate in a serious way? And do you feel as if they're just going to kind of keep with this drumbeat indefinitely here? They will keep with this

strategy. They believe this strategy is working, and they believe it's working from this perspective. In their opinion, this is a case where the automakers don't know where the next strike may be. It may be a large final assembly plant, or it could be a small distribution center. The point being, they want to show the automakers that they will continue calling these strikes, and it keeps it in the public's eye, Mike. And that's a big part of what the UAW is trying to do. Absolutely. Phil, appreciate it.

We'll certainly be back to you as it develops. We are just getting started here. Up next, a rough week for retail. The XRT ETF falling nearly 4% since Monday. We'll hear from a top analyst, Simeon Siegel, with how he's navigating the downturn and the key names he's betting on right now. We're live from the New York Stock Exchange. Indexes have firmed up a little bit. The Dow up 46.

The S&P up about a quarter of a percent. You're watching Closing Bell on CNBC. Let's get a check on some top stocks to watch as we head into the close. Christina Partsinevel is here with that. Hi, Christina. Hi, Mike. Well, let's start with Chinese tech. It's higher today as China reportedly plans to ease restrictions on foreign investment in Chinese publicly traded companies. So China currently limits total foreign ownership to about 30 percent and a single foreign shareholder to about 10 percent. So Bloomberg now is reporting that the country could ease those caps in an effort to open up the market and boost trading.

And that could benefit names like JD.com, Alibaba, PDD Holdings. All of those names you can see on your screen are higher today. JD or Alibaba, for example, up 5 percent, although all of those names still tracking for monthly declines. And investors are hitting the brakes on Hertz as Oppenheimer cuts its price target on the car rental company to $21 a share for $25. Analysts are expecting lower revenue in the current quarter, but they maintain their buy rating as demand and utilization remains strong. Shares down, wow, almost 10%.

All right, Christina, thank you. It's been a rough week for retail stocks, with the group now on track for its worst month since May. And with more concerns around the health of the consumer, is there more pain ahead for this space? Let's ask Simeon Siegel, senior analyst at BMO Capital Markets. Simeon, great to talk to you. You know, just if all you had was was the stock charts in this group, you'd think things were pretty lousy on the consumer front. Then you look at things like the, you know, the bank credit card tracking data, spending volumes, wage growth. It seems like it's not that bad. Where do you come down in terms of just the general state of play in terms of consumer spending?

Am I good to see you? Yes. You asked the question, is it all going to be bad? I sure hope not. So listen, I think that the answer is, and it's funny because when you look at the conversations versus the numbers, companies are still growing revenues and they're still growing gross margin. You wouldn't know that by all the headlines. And so we're in this limbo period right now. We're not, we're passed back to school. We're not yet at holiday. We're deep into 23. We're too far from 24. So investors can't put on next year ideas yet. And then you brought this credit card data up. It just has people chasing their tail, trying to figure out what revenues are doing today.

The end of the day, I think for those that can take a step back, I think there's some interesting opportunities. But I think until that happens, in the absence of micro news, the macro dominates. And right now the macro is scary. Yeah, there's no doubt that there's been a, you know, a flight to relative safety, perceived safety and some of the more defensive type names, whether it's, you know, a Costco or something like that. But in your universe, is it just, you know, about going to the sort of proven market share winners or are there other, you know, just super cheap situations that are worth playing? I think for better or worse, you have a single digit PE in my world. So there's the Costco you referenced. There's the TJX. So the off pricer,

this company is a go to destination for all the largest brands. TJX will continue compounding. It's not cheap, but it's not cheap for a reason. And that's great. And that's one side of the portfolio. But then on the other side of the portfolio, to your point, all this wreckage creates opportunity. And some of those businesses are going to be trading. You're going to have to figure out where do you want to play in the mall if you want to throw a dart. But some of the businesses actually are pretty good businesses that have been thrown out. I think you and I have historically, we've talked in the past about a company, Bath & Body Works. This is a business that sells soap and candles. It's a fairly replenishment business

It's not subject to the winds of fashion, but it trades as if it is and so here's a business with a new management team They're affecting change. They're turning on loyalty, but To everyone it's just a mall based retailer. That's a really compelling opportunity So we're looking there at Bath and Body Works for a little bit more of the risk reward play. So you have the TJX, which will be your compounder. You have the BBW, which will be a little bit more alpha if you're willing to stomach this limbo in between periods. You mentioned that, you know, we still have some time until we're in the core of holiday season, but that seems to be where some of the focus is. Even some survey based work suggesting that, you know, consumers may spend less.

Is there any way to handicap how it's going to look? Isn't the beauty of these holiday reports, they're always up 3% or 4%. And if it's low 3%, it's a huge problem. If it's 4%, they're still showing they're growing. It's this fascinating thing when you look at some of these surveys. I prefer to look at the revenues because at the end of the day, if you ask me my intent to purchase, it's never going to be as powerful as my actual receipt of what I did purchase. And so my gut, people are going to spend on holiday.

And I think good for you and I, bad for investors, I guess. There are probably going to be discounts there, but they're not going to be everywhere. And I think that's where we're finally past this all rising tides is good or bad of COVID. Because remember, at the beginning of COVID, there was simply no product, which means there were no discounts. Last year, there was too much product, which means there was a plethora of discounts. Right now, good brands are going to be able to hold their own. Tougher brands are going to chase. And so you and I are going to find deals, both from an investment perspective, but more importantly, from a sweater perspective, there's going to be promotions, but not for everyone. And so that's why when I look at holiday, listen, the amount of times we talk with both investors and corporate about shrink

and about student loan and all these other macro, I mean, right before I heard you talking about the recession, they have to acknowledge it and they're scared of it. But at the end of the day, they're also pointing to their P&Ls, which are showing that when they give customers product, those customers are buying it. Rightly or wrongly, the U.S. consumer is incredibly resilient. Yeah. And I guess this is obviously going to vary by name, but in terms of their pricing, their ability to preserve margins, has that changed much over the last, let's say, six months? So I think you said it. It will vary by name. I think we are seeing certain companies that are chasing because they feel the need to drive revenues and they're realizing that the brand equity that they thought they got was simply the fact that their neighbor didn't have any promotions on.

But then there's other companies. You look at the handbag companies and they're telling us they're raising price. And so I think it will be very case specific. But I think you're right. And that's why I alluded to the fact that not only were revenues up, but the majority of my companies saw gross margins up. And so those are going to be the dichotomy. I think we're going to see plenty of brands, unfortunately, fall back to what we saw since 2008, what triggered the whole death of retail, everything is bad scenario. That was promotions. But there's also some that are looking at this and saying, for the first time in 10 plus years, people paid up for my product. I don't want to be

so quick to give that back. Yeah, no, that absolutely seems like a pretty significant turn. Simeon, great to catch up with you. Thanks so much. Good to see you. Have a good weekend. Up next, technical turbulence. Ned Davis researches Ed Klissel is breaking down how to best trade the uncertainty he is seeing in the charts. He joins me after this break. As CNBC celebrates Hispanic heritage, we are sharing the stories of influential Hispanic business leaders with you.

Here is the Ipsy co-founder and chairman. We've been through a lot in our countries. High inflation, our governments have changed a lot. And many times entrepreneurship is a necessity because we can't get a job in Latin America. And I would say, you know, my advice is just go for it. Just go for it. Just like maybe your parents did and your grandparents did back home. And once you make it, lift somebody else up. Stocks have moved slightly in the green as we near the close for the week, but this week's losses come as investors continue to react to the Federal Reserve's signal

that it intends to keep interest rates higher for longer. Joining me now to discuss how he's managing the current environment is Ed Klissel, Chief U.S. Strategist at Ned Davis Research. Ed, always good to talk to you. I wonder your assessment, as we've seen this little bit of damage over the last several weeks, have we done significant harm to the longer term trend? How are you thinking about it? At this point, the damage has not been significant enough to say that this is a major peak. Whenever the market pulls back, the short term technicals are going

to look a little bit messy. And that's where we are now. As of yesterday, only 15% of stocks were above their 10-day moving averages. But if you look at percentage of stocks above their 200-day, so that's a little bit longer term, we're down about 45%. Usually, that needs to get into the low 30s before you'd say it's a bigger sign of trouble. So at this point, we'd say it's part of a good, healthy correction after a very strong start to the year. There's room to a seasonally stronger quarter in the fourth quarter look for the market to resume its uptrend. Are we in that mode, which often happens after you get any kind of a pullback where you're wanting to see the numbers get worse before they get better to give you some kind of a signal that it's overdone to the downside?

Or might we not need that? At this point, I wouldn't say it's washout levels. Like you want to see percentage of stocks or other tend to move and averages get below 10 percent. We have a sentiment composite that combines a lot of sentiment indicators like the VIX index, put-call ratios. That's down to a low neutral. We'd love to get that to show a lot of pessimism, a lot more concern in the market. That's the kind of washout levels we'd like to see. So perhaps there's some downside risk over the next few weeks to get a few more people out of the market, shake some of those uncertain bulls out before the market can start that year-end rally.

And how has this move higher in yields and, I guess, increasing expectations of how high the rates might remain into next year, how does that play into equity valuations or the ability of the market to absorb that? It has, even though you say, well, this was a really strong year. The first seven months of the year were the best since 1997 for the S&P 500. But if you start back to the start of the bull market in the fourth quarter, this is actually the third weakest bull market for the first year post-World War II. And I think one of the reasons why is that if you can get 5.5% from cash, why put your money in stocks? The hurdle rate to get into the market is much higher, which is part of the reason why you saw these AI stocks do so well.

I say, OK, I'll put some money in cash and then put the rest in areas I think that can do a lot better than cash. So if a company maybe is improving its earnings growth from, say, 3% to 7%, it may not be worth it in a world of 5% T-bill yields. Yeah, I guess that's true if, in fact, the relative weakness of this bull market since the low last October, if that can mostly be explained by investors preferring to get 5% in cash, that's not such a bad economic message. I just wonder if you also look at things like smaller cap stocks breaking down and just the average stock lagging so far behind the S&P 500, if those things are sending any kind of an economic warning signal on top of it. Well, yeah, there's a couple of things here, Michael. One is that the bear market last year was not associated with a recession.

And so the rebound from the high beta areas like small caps tends to only last about six months. And that's kind of what we got leading into the Silicon Valley crisis in March. But I would say that as the bull market matures, then small caps tend to weaken. And so what we're seeing right now from small caps, for example, is that their interest expense has soared as rates have gone up and they're having to refinance their debts. That's also happened with large caps. But because large caps have more cash on their balance sheet, they're actually playing the yield curve.

Some of them are making more money on their cash, their interest income, is greater than their interest expense. And small caps just don't have that ability for the most part. And so this rising rate environment is playing into the challenge for small caps, which is why we think there's economic risk as we head into next year, as the rates start to take hold. Those long and variable lags that the Fed likes to talk about are still out there for 2024. Yeah, I guess if we dial back, you know, to the beginning of this year, you were able to point to a bunch of things. Yep, you got a pretty good low in October. Inflation was coming down hard. That's usually bullish for stocks.

You had the third presidential year, the presidential cycle, also bullish. Next year would seem like it might be a little bit cloudier. Yeah, cloudy is a good way to put it, Michael. One thing that we were noting earlier this year, there's this accidental fiscal stimulus because of the inflation adjustment for Social Security, which is 20 percent of all federal expenditures was 8.7 percent because that's what inflation was last year. Well, as inflation came down this year, that turned into a real after inflation, massive fiscal stimulus. Well, next year, the inflation adjustment isn't going to be so strong. You throw on tighter

lending standards. You throw on a resumption of student loan payments. And the outlook for the economy next year does get a little bit tougher. The market peaks about six months before the start of a recession. So we would start to see the cracks start to form maybe after a year-end rally, or even as you get into that year-end rally, maybe the breath isn't as good as it was the summer. And that's the initial sign that a market top is forming. All right. Yeah, absolutely. The things to watch as we get toward year-end. Ed, thanks very much. Appreciate it. Thank you. Ed Klissel from Ned Davis. Up next, we're tracking the biggest movers as we head into the close. Christina is back with those. Hey, Christina.

Silicon carbide is a semiconductor material you may be hearing a lot more of. And one U.S. supplier is potentially worth $5 billion. I'll have details of that next. 18 minutes until the closing bell. The index is wavering again. The S&P 500 is just about flat. Let's get back to Christina for a look at the key stocks to watch. What do you have, Christina?

Coherent. That was the name I was talking about. It's higher after Reuters reported that the company has attracted interest from four Japanese companies for an investment in its silicon carbide business, which could be worth more than $5 billion. The U.S. company supplies materials used to make chips, and silicon carbide is especially important for applications like inverters, as well as electric vehicle batteries. Other companies, it's very similar in the space, are on Semi and Wolfspeed.

Investors, though, are clearly happy about this potential deal, and that's why shares are up about 8% right now. Biotech giant Segen is higher today after announcing positive trial results for a drug aimed at treating bladder cancer. Today's boost adds to an already strong year for Segen is higher today after announcing positive trial results for a drug aimed at treating bladder cancer. Today's boost adds to an already strong year for Segen, which has been fueled in part by Pfizer's plan to acquire the company. The stock is up about 65% year to date. Compare that to biotech ETFs like XBI as well as IBB, both which are in the red year to date.

So definitely a discrepancy between both. Yep, big outperformance, Christina. Thank you. Last chance now to weigh in on our question of the day. We asked, is the recent pullback a buying opportunity? About a 6% pullback in the S&P so far. Head to at CNBC closing bell on X. We'll bring you the results after this break. Let's get the results of our question of the day. We asked, is the recent pullback

a buying opportunity? The majority of you, almost 60 percent, saying yes. Up next, making the case for Meta, Citi out with a positive call on the social media giant. We'll hear from the analyst behind that note and hear just why he's so bullish on that name after this break. That and much more when we take you inside the Market Zone. We are now in the closing bell. Market Zone index is pretty much at session lows. A little bit of a failed rally attempt in the closing bell market zone. Index is pretty much at session lows. A little bit of a failed rally attempt in the last hour.

Seema Modi is with us to break down Deere's latest weakness. And Christina Partsenevel is on the sell-off in chip stocks this week. Plus, Citi's Ron Josie on his positive catalyst watch on Meta. Seema, let's start with you. Tough week for Deere. What is the street saying here about this one? Well, we have a downgrade, Mike, from Canaccord Genuity and a price cut to $400 from $530. And the analysts there are basically focusing on some new industry data that does show a

slight drop in agriculture equipment sales, inventory levels, building, which analysts translate to farmers pulling back as crop prices weaken. Mike, if you take a step back, though, what differentiates John Deere from its direct competitors like Agco and C&H Industrial is its robust tech pipeline that includes drones and artificial intelligence that's embedded in equipment that they say will make farmers more efficient and use less fertilizer.

It's why Cathie Wood has the stock in her ARK Innovation ETF. I spoke to Deere's CTO, Jamie Hinman, a couple of months ago, and he has said at that time that recession or not, Deere will continue to spend on research and development. Their total budget, roughly $2 billion this year. It's up from last year. But pressure now growing on getting that equipment to the field, especially given what we're seeing in the stock. Yeah, and Seema, I guess it's always a tough call when you see a stock like Deere. It's obviously cyclical on some level, and you maybe have to wait through a downturn,

but it looks also kind of cheap. I mean, I was just looking at the valuation. It's at the lower end of its 10-year range, whether it's price earnings multiples. Obviously, the earnings estimates can come down in the future. But it seems as if there's not a lot of confidence that they're going to have steady growth in the next few years priced into the stock. And there's also seasonality factors that kick in. The first quarter and the fourth quarter tend to be seasonally weak in terms of revenue.

So we'll see how that plays into the overall story. But you're right. We've seen the stock fall by around 7 to 8 percent just this week, the worst week since August. And for the first time, we're also seeing a trade at a slightly cheaper valuation than some of its direct competitors in the agriculture equipment space. Seema, thank you. As the market does deepen its losses to session lows, Dow down about 116, one third of one percent. The S&P down a similar percentage. Christina, semis have not been able to escape the weakness

this week. Yeah, well, let's say today. Let's be a little positive. Most of them are higher today. But like you mentioned, almost every single chip name on the Nasdaq 100 is in the red for this week, with the exception. Remember, we were just talking about silicon carbide? Well, silicon carbide producer OnSemi. Even those shares, though, they're not even 1% higher at the moment. Intel, though, I got to focus on Intel. It's one of the worst performers on the VanEck Semi ETF, the SMH, heading for its worst week since June. It's down roughly almost 10% at this rate a week to date. Today, we did learn that the EU antitrust regulator is re-imposing a $400 million fine related to allegations back in 2009 that Intel was using illegal sales tactics to push out competitor AMD. I reached out to Intel. They told me they're not happy with the fine.

Speaking of AMD, it's about, look at that, 5%, almost 5.5% lower on the week, along with NVIDIA. These lofty valuations you just spoke about, driven in part by the AI boom this year, has really some investors right now scrutinizing the fundamentals of these particular names. Cathie Wood, for example, the CEO of ARK Invest, she told CNBC this week there's been too much emphasis on AI. NVIDIA is heading for its third straight week of declines, also why she sold about $7 million worth of stock in NVIDIA. And speaking of AI, ARM was the latest chip designer to go public last week, but shares are currently falling close to its IPO price, which was $51.

Now you can see it's at $51.22, down again, down 8% this week. Susquehanna, the latest analyst, suggests the stock seems fully valued, while others, there's been so many notes just in the past week or so, pointing out it is a chip name, but it's not necessarily an AI play, given its exposure to the mobile smartphones market. Absolutely, where it does dominate in some areas, but that is the crucial question, I guess, AI or not AI. Christina, where it does dominate in some areas, but that is the crucial question, I guess, AI or not AI. Christina, thanks very much. Ron, Josie, on Meta, you do have this idea for a catalyst call. You see some reason coming up why this stock could, I guess,

get recharged even after a strong run. Why is that? Hey, Mike. Yeah, thanks for having me. I mean, there's a few things going on at Meta. We do a lot of proprietary work and just looking at what we think is the engine for engagement, which is reels. And we're just seeing a greater ad load. And that makes us more confident on just the monetization side. But the Catalyst Watch is really based on a few things. One, not only greater monetization given greater engagement, but next week there's an event called Meta Connect, which we expect to hear a lot more about Meta's overall strategy with Gen AI. I don't think we're anywhere near the beginning phases of what it could be for Meta. And we look to hear more details there.

And on top of that, for McAllister, watch his better overall results going forward, especially as we go into the holiday season. And our view that online advertising is just in a better spot overall than many other sectors. Am I looking at this right in terms of your earnings forecast for Meta for this year and next year being that radically higher than consensus? I mean, three bucks this year, almost four next year. Well, we're at closer to $17.60. I think consensus and just on a gap EPS basis. And there's a lot of different numbers. But I think consensus is closer to 16-ish or so. So we're a little bit higher, but we actually think there's, if that top line really does re-accelerate or continue to accelerate, I think there's a lot of earnings power that can result from that. Obviously, the stock has had this great rebound from those lows as they started to focus on margins,

a lot less spend. You're focused, I guess, more on the revenue side and earnings leverage within the advertising opportunity for reels. What is the overall advertising setup right now? Is it just about meta gaining share or is there a broader comeback in digital? That is the question that we get almost every single day. And our view here is that the broader online advertising environment is improving, but it's not a rising tide. And really, it's those platforms that have been investing in ads innovation that we think are gaining greater share. Meta is sort of the poster child for that. From our perspective, you can point to so many different new ad products that are coming out that are attracting more advertiser dollars and driving better targeting. But just this week, we actually got back from Pinterest Analyst Day. We upgraded the stock.

We think they're in a better spot here as well. And of course, we'd be remiss not to talk about Amazon and Google here. But yeah, we think online advertising is a better spot than perhaps what many people think. Yeah, with Amazon, of course, that story today coming out, perhaps they want to increase advertising through Prime Video. It strikes me that we always think about it as, oh, the consumer is going to have to watch ads and pay up. It seems like there's a struggle among advertisers to find more ad inventory as television declines and other areas are harder to access. I think that's nail on head. I mean, an hour's long of content online, you only have maybe four ad breaks in a minute

or two, you know the business better than I do. When you go online, that's where Reels is so powerful, where there's sort of a never-ending amount of potential monetization as long as that engagement still grows. And anyway, the point being on Amazon, back to Prime Video, we actually think it's a really interesting play. You might see ads here more and more. And we think that could actually help to subsidize their content players. More content rights are up for bidding in the next couple of years. But you're right. Everyone's looking for greater CTV, as we call it, connected TV inventory overall. It's not easy out there. Yeah. And I'm sure the industry will do its best to deliver it. As you mentioned, Reels does not have a fixed ad hole.

Ron, great to talk to you. Thank you very much, Ron Josie at Citi. As we head into the close, just about a minute to go. You see the Dow is down about 96 points. S&P off by about almost a quarter of a percent. There have been some half-hearted rallies throughout the day, although volatility has drained down a little bit. Looking for the week, the S&P 500 is on the verge of about

a 3% pullback overall since its late July peak. The S&P is off some 6%. So a proper pullback, not necessarily a deep correction just yet. The 10-year Treasury yield at 443 has backed off, I mean, has calmed down a fair bit from the big lies that investors were afraid of, although on the week, only up from 433. So not a huge move, even as the Fed had tried to convey. It's going to keep interest rates higher for longer than anticipated before. As we head out to S&P, right at the 43.20 mark, that is just about the August low as well. That's going to do it for Closing Bell. We'll send it into overtime with Morgan and John.