Closing Bell - Closing Bell: Stocks Slump, Massive Chip Investment & Diamond In The Rough 12/6/22

Episode Date: December 6, 2022

Stocks sinking for a second straight day as investors continue to worry about a possible recession. President Biden visiting Taiwan Semiconductor's chip plant in Arizona after the company announced it is increasing its investment in the state's chip industry to $40B. Apple CEO Tim Cook announcing that his company will use chips made at that factory. Council of Economic Advisers Member Jared Bernstein discusses how many jobs this investment will create and how long it will take to help ease semiconductor supply chain issues. Goldman Sach's Luke Barrs reveals the two sectors he sees long-term buying opportunities in right now. Bank of America's Jill Carey Hall on why she is still so bullish on small cap stocks despite their continued underperformance versus the broader market. And Signet CEO Gina Drosos discusses the jewelry retailer's strong earnings and guidance and whether she sees any signs that consumer spending is slowing amid recession fears.

Stocks are just about near the lows of the session. More pressure adding to Monday's losses. NASDAQ getting hit the hardest, down 2.25% as we head into the close. This is the make or break hour for your money. Welcome everyone to Closing Bell. I'm Sarah Eisen. Take a look at where we stand overall. Dow's down about 474 points. Just the lows were down 528 just a few moments ago. The S&P 500 down 1.75 quarters percent. You've got every sector lower right now. It is being led lower by tech, information technology, communication services and materials, the bottom three performing sectors. Take a look at the biggest decliners right now in the Nasdaq 100. That's where the pain is being felt right now. Lucid is on there.

Atlassian, meta platforms, which we'll talk about around some EU regulations getting hammered down 6.5%. You're still seeing weakness, though, in Apple, NVIDIA, Alphabet, some of the biggest players all taking some pain today. Coming up on the show, we'll talk to the CEO of one of the day's biggest winners, Signet Jewelers, which is surging today on the back of strong earnings and guidance. That is not the CEO of Signet Jewelers. That is Jared Bernstein. Plus, President Biden scheduled to tour a Taiwan semiconductor plant this hour in Arizona. And Jared Bernstein from the White House will talk to us about the American-made chips bet from this administration. Let's get straight to the market downturn. Mike Santoli

tracking all the action for us. Mike, what are you watching? Second straight near 2% drop in the S&P 500, Sarah. Really kind of just this relentless drip lower. But we did hit the lows of the day. It may be what ends up being a relatively significant effort to make a bit of a stand. Now, first of all, you know, I'm tired of drawing this same old trend line. It's been happening for months, but the market keeps obeying it. Everyone's watching it.

That's exactly where this particular rally halted for the moment. That's where we pull back from as of Friday's close. Now, that's the downtrend line from January 3rd. What's interesting here, to some degree, is around 3,900, just above there, it's like the late October highs. It's the mid-November lows. So in order to kind of keep the look of a market in some kind of recovery mode, maybe sitting above that is significant.

Now, what I think is going on here, Sarah, is, you know, Goldilocks, right? Neither too hot nor too cold. What we have here is anti-Goldilocks because you have parts of the economy that are too hot and parts of the environment that are too cold. Take a look at the two-year versus 10-year Treasury yield curve, and it really does encapsulate this fear. Too hot, services, labor, inflation readings. That means the Fed's got to do a lot more in the next several months. At least that's the market's estimation that the keep rate's somewhat higher. But they believe, the market believes, that it's

going to work and inflation is going to come down. But it may come down the hard way, which is a recession. And that's what we don't really love to see. But that's what usually has ensued on a, you know, up to two years after this curve goes below zero. Also, Sarah, the three month versus 10 year is the one that people say, oh, that's the real predictive one. Doesn't matter. The three month and the two year at the same level just about right now. So the same shape right here. I do think it's a relevant debate as to whether this is really saying, you know, recession in the next few months or it's a relevant debate as to whether this is really saying, you know, recession in the next few months, or it's just kind of saying we're going to get to lower inflation. Nominal growth has got to come down and we'll see if it requires that retrenchment

in growth. A lot of CEOs out there at conferences talking about preparing for potential recession. Layoffs, belt tightening, huge theme. Oil prices lowest level since January, reflecting the recession concerns, though this idea of anti-Goldilocks. Yeah. We haven't talked about it in a long time because we haven't been in a spot where it's been very too hot, where the Fed has to. I mean, it's it's a it's a predicament about what to buy in the market. It's probably it's probably the 80s. But also this was the case in that whole 94 soft landing scenario where the Fed was really concerned about inflation was going to be running too hot and the labor market was going to get too strong. Meanwhile, everybody was saying, look, the economy hasn't

even come back yet from the prior recession. So, yes, I agree. We have not been here in a very long time. We don't know how it plays out. Let's start. Thank you, Mike. We'll see you in the market zone. Let's turn now to the chips and news that Taiwan Semiconductor now plans to invest $40 billion into Arizona's chip industry, up from $12 billion previously. President Biden slated to tour the company's Arizona plant this hour, along with Tim Cook, CEO of Apple and other executives. Let's bring in Christina Partsenevelos, who's there with the latest. Christina. Well, the latest is NVIDIA CEO and Apple CEO Tim Cook have just finished speaking at Taiwan Semiconductor's new manufacturing hub in Phoenix, Arizona. Both of those CEOs are supporting TSMC's new $40 billion investment, including two fabs, and these are manufacturing hubs, another way to say it, that will produce advanced nodes used in high performance computing. You just had Tim Cook moments ago calling it a, quote, incredibly significant moment, a chance to usher in a new era. And then I've just

received Jensen. He would be Jensen Wang, the CEO of NVIDIA, saying that it's a marvel of engineering and manufacturing what they're doing. So it's pretty much considered like made in America with a little help from Taiwan. President Biden is going to be speaking very soon as well. But Taiwan Semiconductors new manufacturing hubs in Arizona is not only a representation of a triple investment, but it's two fabs, two fabs that are going to be producing four nanometers as well as three nanometer nodes. These are advanced nodes used in high performance computing. And that means potentially 10,000 tech jobs and 10,000 construction jobs just over the next four years or so. This, if all goes as planned. The two fabs are expected to

produce roughly 50,000 wafers per month. Sounds like a lot, but it's only a fraction of what's being produced in Taiwan. The U.S., though, is determined to diversify away its production from Asia and create more advanced chips on American soil. It's going to take some time, though. This is not going to happen overnight.

No, and that's the thing. Christina, thank you very much. Christina Partsenevelis. For more on Taiwan Semi, the state of the chip industry in the United States, let's bring in Jared Bernstein, Council of Economic Advisors member from the White House this afternoon. Jared, it's good to see you. How long is it going to take before the U.S. can really be a self-sufficient chip manufacturer? Well, we used to produce 30 percent of the global chip supply. Now we're down to 10 percent. So nobody's talking about getting to 100 percent. What we are talking about is taking extremely seriously the lessons we learned about the non-resiliency of the chip supply chain. It's essential importance to both our economy and even our national security.

So when we see the largest investment, the largest foreign investment in history, $40 billion by TSMC, 10,000 construction jobs, 10,000 high-tech, high-quality production jobs. It's a very good day for America production. So, no, but the question was how long will that take? Is it 10 years? How long will specifically what take? Until we can get those jobs, those manufacturing jobs in this country. Okay, so the construction jobs have actually already started in other fabs. Remember, this is the second Arizona plant, but there's also plants that have broken ground in New York State, in Poughkeepsie, in Ohio, in Syracuse, in North Carolina. So construction jobs are already underway. Some of these fabrication plans hope to be producing sometime probably

towards the end of next year. Got it. So it's important, obviously, for our national security. And there's so many there's awareness now of that and obviously for our economy, too. But Jared, it's coming at a time where there are more worries about the cyclical nature of semiconductors and what's happening with our economy in the near term. Recession worries. We're hearing it from a number of CEOs lately. The semiconductor stocks themselves have been hit really hard because it's a cyclical industry, as you know. So concerns about whether this can all be done at the same time with that focus on the long term. Yeah, well, I think the word that you chose to use there is actually very important. Cyclical versus structural.

When I talk about the deterioration in the domestic semiconductor industry in this country and President Biden's absolute commitment to rebuild that capacity, that is a structural, not a cyclical idea. And if you talk to Tim Cook, you listen to some of the statements that were just made, or the CEO of Micron, or any of the other guests who are there today, they will tell you, from the industry, they will tell you that this is a long-term play. And that's precisely where we need to be in this space. If we're going to stand up a domestic semiconductor industry, we've got to think structural, not just cyclical.

LISA DESJARDINS Do we have the jobs? Do we have the engineers, the expertise that we need? Do we have the labor economics that we need to stand up this industry? JOHN YANG Another really important question. I mean, one of the things that you see, I think this is an underreported phenomenon, is there's actually a lot more onshoring going on than than these announcements today. I mean, they're obviously critical. We're featuring them today. The president's out there but you see this happening in many

other industries. Why is that? One is to deal with this problem of supply chain disruptions that we all felt so acutely during the pandemic and the other is because America just has a highly educated and highly reliable workforce. Now, yes, we need to build our labor supply. And if you dig into under the hood of some of the plans that we've passed here, it's not just helped to support the building of these fab plants. It's also helped to train the workers. That's very much part of the bipartisan infrastructure law and the Inflation Reduction Act.

Jared, it's another ugly day here in the market, down about 450 or so on the Dow. Technology is getting hit hard, getting a lot of commentaries from CEOs on CNBC, at the various conferences that are going on about this belt tightening, about impending layoffs, about preparing for a recession, even if it is a soft landing. How are you interpreting the data, which, as Mike Santoli just noted, some of the parts of the economy are too hot and the Fed is still going, and some are getting too cold and they're worried about recession? I think if you average a lot of that out, what you see is at least a path, and we see a pretty visible path, to a pace of growth that's more steady, more stable, but yes, in fact, slower, probably closer to trend than we enjoyed in 2021.

We had a breakneck pace of GDP growth close to 6%. No one considers that sustainable. If you look at the underlying trend growth rate of real GDP right now, it's pretty close to around 1.7, 1.8 percent. That's about trend. As we slow down to trend, the mechanics or the hydraulics of the economy mean that that will lead to slower job growth and certainly a cutback in some vacancies. Now, a year ago in November, we added over 600,000 jobs. Again, a great number for November 21, but unsustainable over the long term. This November, 260,000 jobs added. So keep the labor market strong, maintain the gains that we've made while pushing back on inflationary pressures. And the cooling I just described is

essential if we're going to get inflation back down. Yeah, well, if they can get a soft landing, that would be good. But the yield curve keeps getting more inverted by the day. Jared, thank you. Jared Bernstein from the administration. Talk about a diamond in the rough. Look at shares of Cignet Jewelers. They're surging today, even in a down tape on the back of strong earnings that more than doubled Wall Street estimates. Up next, CEO Jenna Drossos on what drove the beat and her outlook for holiday spending. You're watching Closing Bell on CNBC. Look at shares of Cignet Jewelers surging today

up nearly 20 percent at the moment on the back of Q3 results that beat on the top and bottom lines, especially the bottom line. The jewelry retailer also updating its full year revenue guidance. Joining me here exclusively at Post 9 is Cignet CEO Jenna Drossos. It's good to see you. Great to see you, Sarah. I know, in person. Where did the big surprise here come from? You know, I think consumers were stronger than we really expected in the quarter. It was a broad base beat. We beat on the core business on the top line. We beat on our peer plays, including Blue Nile on the top line. And actually, the bottom line, as you mentioned, was strong enough to offset the losses on Blue Nile.

Yeah. So it's very strong. Three times what some of the analysts there were expecting. We're expecting. There was also the strength, the consumer strength came from the higher income level. Exactly. So have you pivoted? Or are people trading down? What's happening there? You know, we have 11 banners in our portfolio now. We've worked very hard to widen our playing field.

So we used to have all the banners on top of each other. If Kate ran a promotion, Zales declined. Now we've teased those apart. We're targeting different consumer journeys, different attitudes, and different price points. And our inventory is very healthy. It's the healthiest it's been in recent history. And so we've been able to pivot our assortment very quickly, use our data to target higher income customers. And as we anticipated that lower income customers would be more challenged, we pivoted our assortment and our marketing into the higher end. So is there any indication that the higher end is slowing down? What are you seeing for holiday?

We've seen a strong consumer so far. You know, I hear the same news as you about potential recession. But at this point, you know, I think let's let the economists determine that. We're prepared for a strong holiday season. Do you think there's a shift in attitude around buying jewelry post-pandemic? There has definitely been actually a very endearing shift. People are giving fewer gifts, but at higher price points because they're giving to people that they care more about. So gifts of love more so.

And that's been very good for the jewelry business. There's also been a wedding boom. Is that still happening or is that tailed off a bit? You know, it's been an interesting cycle. If you look at, you know, over the last 40 years, engagements and weddings are very steady, both up about 2% every year. But COVID caused a bit of a short-term blip. So we didn't see weddings. Then all of a sudden we saw record weddings this year. We saw engagements slow down a little bit, then spike up. We've seen them slow down actually a little bit this year. But I think, you know, two years from now, it's completely back to normalized levels. So 2023, fewer weddings than 2022.

Yeah, but still high and engagements a little bit lower. So you mentioned the inventories that are low. That also separates you from the rest of retailers. Is it just because you didn't have the supply chain issues? No, no. We've been very diligent in bringing down our inventories. That's been great for us. We've invested $900 million in acquisitions, $700 million in digital data and store refresh, and given back $1.3 billion to shareholders over the last number of years. So our cash position has been a big advantage, partially driven by healthy inventory. Our inventory was down 2% in the quarter. We have flexible fulfillment across our fleet, so our jewelry consultants and customers

can access jewelry from anywhere in the country, any one of our banners. Are there any problems with supply in the industry? We haven't. A little bit on packaging, but nothing in terms of delivering jewelry. We have 30% newness and our stores are well stocked. What about the pricing environment? We keep hearing retail is more promotional and what drove Black Friday and Cyber Monday were promotions. Are you seeing that?

No. Our margins were actually very strong over Black Friday weekend. It was a more promotional time, but we've been able to value engineer products in a way that give great value to customers at all price points. We're highly vertically integrated, so we have an ability to really flex in times like this to make sure that customers are getting great value. So we haven't seen that kind of pressure. But you have increased prices in the inflationary period, right?

We have increased prices somewhat. We've mostly tiered up our inventory, though, to higher price point product, which is offering a great value to customers. And finally, a question I know investors are paying attention to and have watched since the acquisition of Blue Nile. What are you telling them about profitability in Blue Nile, how dilutive it's going to be for how long? So Blue Nile was not profitable in the third quarter. We anticipated that and more than offset it with our core banners. It won't be profitable again in the fourth quarter. That presents an opportunity obviously over time, but it is the strongest brand name in online bridal retail. We think there's a lot we

can do with it and so so far, we're very pleased with the talent in the organization and with the synergies that we're seeing. A lot of opportunity in the back office. Jenna, thank you so much. Thank you, Sarah. Good to see you. Jenna Drossos is the CEO of Cignet with shares on a roll today. Check out the overall market, though. We are low or down 480 or so on the Dow. S&P 500 down almost 2%. The only sector that has just popped into positive territory is utilities. Everybody else is down on the day and down significantly, down 3%, for instance, for energy shares, down for technology 2.7% as well. That's why the Nasdaq's getting hit the hardest. It's down 2.4%. Still ahead, Barry Sternlicht on the record today,

weighing in on those recent concerns about the REIT market. We'll tell you what he said when Closing Bell comes right back. Let's hit Pepsi. Shares under a little pressure today. A lot of discussion about the layoffs after The Wall Street Journal first reported that it is eliminating hundreds of corporate jobs in North America. Is it a sign of coming recession, belt tightening, pain? What I can tell you after doing some reporting here is that this isn't material or financial for PepsiCo. I'm told the business is doing quite well. It's not a reflection of what Pepsi is seeing with the consumer or the

broader economy. A person familiar with the strategy tells me it's more of a move toward efficiency, simplification, challenging the team to eliminate duplication. Pepsi is not cutting the front line just at headquarters. And this is a company that's still investing. It's not cutting costs. For instance, the new Tesla trucks are an example of that investment. PepsiCo overall has 300,000 global employees, 100,000 people in the U.S. We're talking about a few hundred layoffs. And while it is a sign that companies are looking

to preserve growth and also margin expansion by cutting out inefficiencies, it isn't necessarily a bearish statement about the health of the consumer or corporate America. When we come back, the tech sector getting slammed again today and tumbling more than 20% this year. But our next guest is starting to see

interesting entry points in technology. His top picks when Closing Bell returns. Welcome back to Closing Bell. Stocks pulling back again today as recession fears bubble up on Wall Street. And we've heard a slew of recession talk from top CEOs on CNBC today. Listen. Rates are now, you know, 4 percent on their way to 5. Inflation is eroding everything I just said. And that trillion and a half dollars will run out

sometime midyear next year. And so when you're looking out forward, those things may very well derail the economy and cause this mild or hard recession that people are worried about. If I didn't watch CNBC in the morning, which I do, the word recession wouldn't be in my vocabulary. Just looking at our data, you just can't see it in our data. A lot is going to depend on what happens to the economy. I'm not going to call a recession. That's for economists to do. But right now we're still seeing a pretty strong consumer. Cignet CEO Jenna Dross has just told us consumers have been stronger than she expected

as well. And our next guest says the chances of a soft landing are on the rise. Luke Barrs is the global head of fundamental equity client portfolio management at Goldman Sachs Asset Management. He joins us now. So how do you interpret what you are hearing for corporate America when you need to give advice to clients? Look, Sarah, it's a great question. And so we're looking out over multiple years as equity

investors, but absolutely next year still is critical. And what we've seen at the moment is just some tempering of that inflationary picture, which gives people some confidence that on the inflation print, on the terminal rates for fixed income markets, you can start to find some level that you can price equity markets. Now, I would say, evidently, the rally we've seen in the last few weeks does bed in a lot of positive optimism. And so we're seeing a little bit of a rollover of that as people start to get a little bit more concerned about the probability of soft landing. Maybe it's not 50-50. Maybe it's a little bit weaker than that. But when we're looking at opportunities across the equity landscape, we still think that's more likely than not likely.

Your boss, David Solomon, just has 35% chance, he said today, of a soft landing, which doesn't sound like high odds. I have to be very careful how I frame it, but when we're looking at it, we still think that inflation print three weeks ago gives us some degree of optimism that inflation is coming down. It's been very much in the good side of things, supply chains reopening, seeing some normalization of those one-time issues around, say, secondhand auto sales. We still see tightness in the labor market for sure. And to the point that was made earlier, we haven't seen that attrition in the consumer. That is where the risk is. If you see that delayed mechanism of monetary policy starting

to hit household budgets, that could have an impact on retail sentiment, on consumer. But at this point, we're still optimistic and we see corporate CEO guidance across a variety of other sectors still being quite favorable going into next year. So, decent entry point for stocks, technology even? Cautious just in the short term because we have seen a rally in the last couple of weeks. But actually as a longer term investor, some of the technology space looks very attractively valued to us. Which parts?

Take software as a good case in point. Think of that as a deflationary investment. If you're a large corporate at this point, you're not stepping back from your productivity software investment, whether it's in manufacturing and automation technologies, in white collar industries, where you're thinking about a work from home hybrid model. How do you use productivity technologies to improve the per unit of capital output, per unit of labor output from that investment? And so we're not seeing... Well, it depends how long term you are, because everything you just said may be true, but

it's also a sector that suffers when IT spending budgets get hit during recessions. That's absolutely right. I would say on that front, the two areas that we're not seeing people step back from that software and technology investment is productivity-based software solutions and cybersecurity. And we can understand why. I think it's hard for a corporate CEO at this point in time to say, we're going to roll back our CapEx agenda as it relates to cyber, given the challenges we see globally. And so selectively, and I think the headline here is that yes, equity markets have a little bit of a challenge going into next year off what is a

slightly higher multiple on the last couple of weeks, that rally. But selectively, if we can take a view of where there's opportunity for fundamental strength next year and long-term growth aligned to some of those secular megatrends, that's a really interesting place to be. Software, I think biotech is also on your list. It is. Selectively, again, very thoughtful around what type of biotech exposure you want to take. But we're talking about a complete dislocation in the valuation side of things for some very high quality biotech genomics aligned businesses that are going to find solutions to some critical health issues. And actually at this point are not being reflected in valuation. I'd say as much as

we have an IPO market that's fairly shuttered as it relates to technology, an M&A that's been a little bit more muted, we think going into next year, M&A activity in the biotech space as Big Pharma uses that built up cash on balance sheet to just rebuild their pipeline is a really interesting place to be. Yeah, there were some hopes that biotech M&A was back this year and it's sort of been sidelined. You also have Chinese consumer companies on your list, which isn't that risky to invest in China now, not having any clarity on zero COVID, the regulatory environment, the geopolitical environment? Again, I think we have to be very thoughtful around selectively allocating capital into markets like China, as well as broadly across emerging markets.

Actually, that heterogeneity and the fact that you have greater separation outcome is quite interesting as an active investor. On China specifically, we think the prospects of reopening with a successful, hopefully mRNA vaccine rollout through into the early part of next year, potentially a slight alleviation of that zero COVID policy into the second quarter. You're just betting they're going to use a Western vaccine. I think there's going to be a higher probability of that, or at least what you're seeing coming out of Chinese biotech space is greater efficacy in some of the domestic solutions. And if you can roll back some of the zero COVID policies and actually reopen the domestic economy, not only is that a good demand impulse globally, it's also a good supply impulse in the sense that

you reopen supply chains. So some of those high quality technology and consumer facing companies in China selectively actually look very cheap. Interesting ideas. Thanks for coming out and sharing them with us. Luke Bars from Goldman Sachs Asset Management. Take a look at where we stand. We're hovering down around 450 mark. That's pretty much where we've been for most of the hour. The S&P down one and three quarters percent. We're adding to losses for the week. It's the Nasdaq getting hit the hardest, down 2.3 percent. Apple, Microsoft, Amazon, Meta, NVIDIA, Alphabet all weighing on the tech heavy index. Small caps also down 1.8 percent. Wall Street is buzzing about all the money that is coming out of these

REITs in recent days. We're talking about real estate investment trusts. Up next, Starwood Capital CEO Barry Sternlich weighs in on the impact that could have on the entire real estate market. And a reminder, you can listen to Closing Bell on the go by following the Closing Bell podcast on your favorite podcast app. We'll be right back. What is Wall Street buzzing about today? REITs. Investors yanking money out of real estate funds. Two non-traded REITs in particular from Blackstone and Starwood Capital. Both have in recent days had to halt withdrawals. It's creating quite a stir as investors wonder whether there will be a spillover effect on the real estate market

because these funds are owners in multifamily apartment buildings, for instance. I spoke today with Barry Sternlich, who runs one of them, SREIT, got his take on the withdrawals for the first time in our financial advisor summit earlier. Listen to what he said on that. We can't produce our dividends, which are around four and a half percent, and they're almost completely tax sheltered versus buying a treasury. We can't produce that without putting the money in property. So we held about 90 percent in assets and 10 percent in liquid securities to handle redemptions. There are caps, which the SEC is enforcing on how much

investors can take out. It's 2% a month and 5% a quarter. And that's because we can't just sell assets willy-nilly to meet redemptions. We want to protect all the investors. These vehicles are solid. There's no issues with their dividends. I'll speak to SREIT. I don't know that much about BREIT. But they're paying their dividends. They're secure. I mentioned the caps in place give us confidence we can pay these dividends for

the foreseeable future. And this is in the best interest of shareholders, of all our shareholders, which are smaller investors, to manage liquidity for them. And I think there's a lot of noise, a lot of press, and people think this is a run on the bank. This isn't a run on the bank. I mean, we have real property producing real assets. This isn't FTX or anything. Isn't FTX or anything. His main message overall, beyond the rates, is that the Fed is destroying the economy, struggling like doubling down on criticizing the aggressive rate hikes,

which he thinks are backward looking and calls the Fed broken. Even said that rent prices have rolled over and are starting to go down. I asked what his highest conviction bet is for 2023. And he actually said Japan, both real estate and hotels. Mike Santoli joins me on this REIT problem because as he explained it, it's really largely structural, but it has shined a light into these non-tradable real estate funds, which I guess are popular among wealthy investors, which are both up, both the Blackstone and the Starwood ones, double digits this year, even though we've seen the REIT index in the public market down 27%. How does this work?

Well, as with private equity, they just sort of mark their assets as they see fit periodically. It's not a daily mark to market based on how market prices are acting. And look, his point is we own a portfolio of illiquid assets, buildings, right? So you can't give daily liquidity to something where you have underlying illiquidity. And that's why you have the regulation of how much you can redeem. Now, that doesn't really get to the question of whether the stuff is worth what they say it is. The rents are what the rents are. And the dividend yields are real. They're coming out of producing property. So I don't think it's that much of a mismatch, except if people are just saying, look, this

asset class in general is going to have trouble. You're going to see weakness in commercial real estate. Rents are rolling over, as he says. We want our money back. And that could force you to sell the assets. It could force you to actually have realized lower values on them. So I don't see it as a systemic issue, but it does show you that there are pockets of this market that have not yet felt the pain. The publicly traded REITs, they're down a lot because people can basically just pull their money out. And they've already kind of recognized what's gone on or what's expected to go on due to higher rates in the economy. It certainly weighed on Blackstone stock this week. That's right, because those funds produce very big fees for the managers. And so that's the other problem. Mike, thank you. Up next,

Bank of America's Jill Carey Hall and whether small caps will be able to bounce back after underperforming the broader market pretty much all year. That story, plus a mess for Meta and a preview of Toll Brothers earnings when we take you inside the Market Zone. We are now in the closing bell Market Zone. CNBC Senior Markets commentator Mike Santoli here to break down these crucial moments of the trading day. Plus, Wedbush's Matt Bryson on Taiwan Semi and Bank of America's Jill Carey-Hall on the small caps. We'll kick it off broad, though, Mike, because the Dow's down a little bit less than it was just, I don't know, a few minutes ago. Down 370 or so. The S&P 500 still pretty sharp pullback, down a little more than 1.5% for the week. That means we're down 3.3% or so.

Just wanted to zero in on the financials for a second because they're down a percent. Some names like Bank of America down 4% or so. There was a Goldman Sachs financials conference. Is it, what did we hear? What is that group telling you? Well, Brian Moynihan, Bank of America CEO, did have some comments about trimming some headcount

and expecting things to weaken through next year. I don't think it was particularly surprising as a general outlook for how the economy might do. They did point out consumers still have a cushion, but that's not going to last forever. And it's just investors are very skittish about this group right now. Earlier in the week and last week, you heard from some regional banks like Comerica talking about deposit losses and having to pay up for deposits to replace them. So just a sense out there that the banks are vulnerable if, in fact, we do have a weakening economy. But broadly speaking, investors don't know specifically what to be afraid of, whether it is an economy that continues to overheat to force the Fed to do more or an economy that's weakening fast.

So they're deciding on a given day to be afraid of both. And so I do think that explains some of the action or at least the lack of buying interest on this pullback so far in the last two days. It's the whole anti-gold. What did you call it? Anti-goldilocks? Anti-goldilocks, contra-goldilocks, whatever you want to call it. All right. Let's hit Taiwan, Sami, because President Biden is touring its factory in Arizona this afternoon after the company said it would increase its investment in the state to $40 billion. And then just moments ago, Apple CEO Tim Cook, who is also there with the president, said Apple will use the chips built at that factory. Joining us now is Matt Bryson from Wedbush Securities. How much of a game changer is this, Matt?

I think it's a game changer for the American semiconductor industry in that semiconductors have been moving away from U.S. shores for some time. Now you have TSM and a number of other leading vendors bringing their fabs back to the U.S. What I tried to ask Jared Bernstein earlier from the White House, though, is how investors should think about this. Obviously, there's long-term great opportunity, but in the White House, though, is how investors should think about this. Obviously, there's long-term great opportunity, but in the near term, we're worried about the economy, and it's a very cyclical industry. Yeah, no, that's true. I think that because of increased geopolitical risk and because of the fact that so much of our semiconductor base is in Asia,

there was an unseen risk to a number of industries should tensions between China and the West continue to lift. And so when you think about TSM, they are integral to almost any product you can think of that uses electronics. So without them, there's no more iPhones. There's no more – you're going to have a hard time producing an automobile. Certainly, their production has ramifications for military applications. And so I think that not so much from a TSM perspective, but there was a lot of non-understood risk for a bunch of other industries. Should we not have semiconductor production in the U.S.?

By TSM diversifying, that certainly does a lot to remove that risk that I think investors weren't necessarily thinking about. We're looking at a live shot right now of Phoenix, Arizona, where President Biden is touring the facility there that is being built. Talking to some of the construction workers who are working on that. Again, they're with Taiwan Semiconductor. They are with the CEO of Apple there with a number of other CEOs. And Matt, what I think is such an interesting geopolitical story as well. I know you're a semiconductor analyst, but there's a message here for China. Yeah, I mean, there certainly is. It's that we are willing to do our best in our industry. We are willing to diversify away from Asia.

And not necessarily with what's happening with TSM, but certainly given the trade restrictions, we have this advantage, and we're willing to use it in order to create economic advantage for the U.S. Is it a risk to the U.S. semiconductors, though, what the U.S. is doing with the China export controls? We haven't really seen much of a retaliation or response from China, but as I understand it, if these are implemented well,

it would really crush what China's trying to do. Yeah, certainly, when you think about U.S. companies that export lots of product to China, there is a risk that at some point China retaliates in the sense that you haven't seen them ban U.S. products. The retaliation has been relatively minimal, I guess. So to some extent, if I think about popular U.S. exports, there's certainly risk that China acts against that.

Of course, the fear is that China at some point tries to take over Taiwan. And I view this action as essentially trying to insulate the U.S. against that risk, whether it's TSM investing in Arizona, Intel building out Ohio, Micron putting money in New York, Samsung building out Austin, Texas. Matt Bryson, thank you very much for being here to talk through some of these live pictures we're getting right now from Arizona. We've got to hit meta because it is one of the biggest decliners in the S&P 500 right now. Following a report that the EU's privacy watchdog is ruling the social media company cannot run ads based on the personal data of users. Meta also threatening to remove news from

its platform if Congress passes a new bill, making it easier for the media industry to negotiate with tech companies that distribute their content. Steve Kovach joins us. The EU ruling feels like it is somewhat existential for Facebook, for Meta, isn't it? Yeah, that's right. So, Sarah, you might remember last year when Apple put forward those iOS privacy safeguards that you get those annoying pop-ups every time you open an app asking if you want to be tracked. Well, that's for tracking what Facebook does, tracking your data in between apps from third parties and websites. This would be internally within Facebook's own apps, within Facebook, within Instagram, within WhatsApp. They would have to ask your permission first before they're allowed to

use that data to target ads. So this would be worse than what Apple is already doing. And we already know that helped or led to a decimation in sales growth for Meta's ad business. So this could be bad. But there's a lot of ways to go if this actually does happen. So according to The Wall Street Journal, this was recommended by the EU to the Irish regulator that's in charge of enforcing these rules. And we're waiting until next month when the Irish regulator decides whether or not they want to adopt that recommendation. And even then, even if those

Irish regulators say, yes, we want Facebook to ask permission first, Facebook can appeal. And even then, Meta had put out a statement to us saying, we're pretty confident we can find a legal way around it anyway. So if this does happen, it's going to be months and months and months out. And even then, Meta can find a way around it, Sarah. Well, certainly a legal fight is to come. Definitely. Thank you very much, Steve Kovach. Check out the small caps.

They're bearing the brunt of the sell-off over the past few days. The Russell 2000 down more than 4% in December so far, as rising inflation and recession fears weigh on the group. But our next guest is betting on a comeback. Let's bring in Jill Carey-Hall. She's the head of U.S. small and mid-cap strategy at Bank of America Securities. Jill, you've been expecting it for a while now. Why should it be different now with these recession fears really bubbling up? Thanks for having me. And look, we've been neutral on equities over the next year when we launched our 2023 outlook. We're expecting the S&P 500 large cap index to end the year at 4000. And

really what we're looking for is that we could see downside risk to equities near term. Our economists are expecting a mild recession next year. So we don't think the market has bottomed yet. But our belief is that, you know, near term, you could see more downside risk to large caps than to small caps. Once the market bottoms sometime next year, that then tends to be one of the best times to overweight small caps. But even in the meantime, we do think small caps could hold up better. We think they're, you know, more adequately pricing in a recession. And a recession. And we think if you look back at what happened in the 1970s, the 1980s, typically you don't want to own small caps going into a

downturn. But they actually outperformed during the downturns during that period, which is a similar backdrop when the Fed was trying to tamp down high inflation. Is that because they get hit harder on the way in which is what what we're seeing now that in other words their valuations reflect the recession earlier than the broader market. Well I think right now valuations definitely

are reflecting the recession earlier we've we've seen small caps trading at these deep recessionary multiples. You know when you look at the the I. S. M. manufacturing indicator that's one of the most correlated indicators with

with small caps performance and valuations. But, you know, right now, small caps are pricing at about 30 on the ISM, which is pretty much the lowest it's ever gotten in a recession. So valuations are already reflecting it. But we also think small caps are positioned to hold up better. And in a backdrop like we're seeing today, they've historically held up well during high inflation periods. And when you look at periods like we're expecting, so below trend economic growth and still high but slowing inflation, small caps have actually been the best performing asset class during those backdrops. They've actually had decent pricing power. They have more exposure to some of the commodity-oriented areas. We are expecting a higher for longer oil price backdrop

and less exposure to some of the consumption-exposed areas that are hit by higher commodity prices. Jill Carey-Hall, thank you very much for the context and for weighing in here from Bank of America to buy small caps. Look at Toll Brothers, the big name on the earnings calendar after the bell. Diana Olick here with a closer look at what number we should watch for here. Diana. Well, Sarah, to be honest, I'm less concerned with the numbers and more with the color on

buyer demand given the recent big swings we've seen in mortgage rates. In August, Toll CEO Doug Yearley said that demand had dropped sharply early in Q3 as rates really spiked in June. But after that, rates pulled back in August. So he added that average weekly deposits in the first three weeks of August were up 25 percent compared to July. Well, fast forward a month and rates shot back over 7 percent again in October, then came sharply down recently, well over a full percentage point to the mid-sixes. So how is that going to change the guidance? That's what we're looking for, Sarah.

All about the color lately. Thank you, Diana Olek. We've got just about two minutes to go in the trading day, Mike, and it really does feel like that is what is weighing on stocks. Goldman CEO saying only 35 percent odds of a soft landing. The yield curve inverts further every single day. And we hear worries about recession, even if we're not necessarily seeing it yet. What do you see in the interim? Yeah, and almost every firm really saying first half of next year looks like it's going to be weak. There's going to be this big value to cross. So I think the good part about that is expectations have been beaten down pretty low at this point. Internals not as bad as you might think, given the fact that market was for sale all day. Obviously negative, but more like 70 percent downside volume, not 90 as it was

yesterday. So that's one slight advantage there. Take a look at the banks over the last few months relative to the S&P. They were tracking pretty well, and then they've just kind of fallen apart right there. So that's the current target of people's recession fears is some of the big banks and the regionals. Volatility index really not up that much, above 22. Not getting too excited. The downside today did not really get out of hand. The S&P traded back down to essentially where the Powell pop rally of last Wednesday began. So, so far, somewhat contained, even if we're off the lows with the VIX,

which was under 20 going into the weekend, Sarah. So we're down about 4% now for the week on the Nasdaq, only Tuesday here. That makes the Nasdaq about 31% or so off the highs. Take a look at where we stand as we head into the close. We're off the lows of the day. We're down 355 or so. There's the Nasdaq. It's down 2 percent. The S&P 500 is down about one and a half percent. There's one group that is going to close positive today, and that's the utilities. Everybody else is lower on the session. Energy getting hit the hardest today. Oil prices closing at the lowest levels since back in

January on fears of an economic slowdown. But right down there, communication services. I talked about that meta big slide, that swing on that group. Technology also hit hard. Consumer discretionary, industrials, materials, and real estate all going to end the day lower. That's it for me. I'm closing now. See you tomorrow, everyone.