Closing Bell - Closing Bell: Target tumbles, Bull case for bonds, Chips chopped 11/16/22

Episode Date: November 16, 2022

Stocks closed mostly lower on Wall Street after a poor earnings performance from Target dinged investor sentiment. Former Walmart US CEO Bill Simon and JP Morgan analyst Chris Horvers discuss those results, and the read-through for other big box stores. Erin Browne from PIMCO makes the bull case for bonds, amid more color from Fed officials on the rate hike path. Chips were a weak spot in the session following a warning from Micron. Needham’s Rajvindra Gill breaks down that news, and his outlook for Nvidia and Taiwan Semiconductor. Plus the latest on FTX, a big drop for one auto parts retailer, and why Zoom took a leg lower.

Stocks mostly lower here on Wall Street as investors weigh disappointing results from Target against some upbeat economic data. 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 right now in the market overall. The Dow is hanging on to a gain, just a little one. The S&P 500 down a little more than half a percent. Three pockets of strength in the market today. Utilities, consumer staples and health care. the defensive areas where you go out to hide. We're also seeing a bid for treasuries today. Similar theme with lower treasury yields and a weaker dollar. The Nasdaq's under pressure. It's down about 1.3%. Small caps hurting even more, down 1.7%. Check out our chart of the day. Target getting slammed

on a big earnings miss and a holiday sales warning down 12.5%. We're going to talk much more about Target in just a moment when we speak with retail expert, former Walmart U.S. CEO Bill Simon. Plus, we'll break down the latest signals from the Fed and look for opportunities in the bond market when we are joined by Aaron Brown from PIMCO with a brand new call on bonds today. But first, let's head over to the market dashboard with Senior Markets Commentator Mike Santoli. Mike, what are you focused on today? Kind of a multi-day pause in the markets there, holding on to pretty much all of that rally we got off of the mid-October lows, also that burst higher last week. And take a look at the S&P 500.

It's kind of been hesitating here on that 4,000 level. Now, is it stalling out, losing energy? Is it have to pull back? Is it really just essentially digesting those gains? That's what we don't necessarily know. It would look very similar no matter which of those it was. I would say pull back to the like 3850ish area would be absolutely routine and very contained and no big deal. So we're still well above that level. A lot of divergence within the market is also keeping the indexes relatively calm. Take a look at this sort of map of where this October

rally has taken us into this morning relative to the average of other years when there was a bear market low in the month of October. So there have been more bear market lows in October than any other month. And so this is from Macro Risk Advisors. It shows you that there has typically been this run higher, let's say 12% into a little bit of a plateau, and then a rest, pullback, and then maybe a stronger finish to the end of the year. This obviously is just a very rough template. It's a selected group of years.

Only in retrospect do you know if the October low was the ultimate low, but it would be nothing unusual if this was exactly the cadence that we're following right now, Sarah. Today's trade has a recession vibe to it. If you look at what's working, the defensive pockets, if you look at what's not working, the worst performance right now is energy stocks, consumer discretionary and technology, which is a lot of the semiconductors, got that warning from Target, got that warning from Micron. Yeah.

The idea that we're really starting to weaken may be setting in. I would say that it's also just kind of the stuff that's been working well is pulling back. Right. So semis got way overbought in this last little short term. You definitely did see a run higher. By the way, Target has pulled back to levels last seen, you know, a month ago. So it's a terrible day. But you have to take it in some kind of a context with where we came from. I would say, sure, we have this deeply inverted yield curve, which maybe says we're bracing for some weakness in the economy. But the overall retail sales were so strong that the estimates for fourth quarter GDP are going up, not down.

Well, a lot of that was inflation. But it's spending. They're spending, but most of it was higher question. But it's spending. They're spending, but most of it was higher prices. Most, but not all. So therefore, some real growth. Yeah. Mike, thank you. Mike Santoli of Seeing the Market Zone. Let's dive into the stock story of the day. That is Target, which is plummeting because investors are concerned about that sharp decline that the company is seeing this quarter and next in consumer spending. Third quarter earnings per share of $1.54 came in well below what Wall Street was expecting, $2.16. The miss primarily on lower gross margins

of 24.7% versus the street's 26.2% because sales were overall fine, but Target had to be more promotional, which cuts into profitability. And then the holiday quarter sales guidance and margin guidance were both lowered, margins lowered by half. So what is happening here? Well, I spoke with Target CFO Michael Fidelke. He said comp sales took a sharp turn lower after peaking up 4 percent in September. But then by October, they were less than 1 percent or right around there and continue to weaken into early November. He blames the economy for what he called a slowdown in discretionary spending. Fidelke says the weakness is showing up in apparel.

It's showing up in home goods, hard line, which can be appliances or tools and toys. Both food and beverage and beauty, he says, stayed consistently strong, updatable digits. As a result, Fidelki expects the holiday season to be more promotional to help offset what they're expecting, a traffic deceleration. The company now did also announce a $2 billion to $3 billion cost-cutting initiative. And the CFO told me it's not expected to include layoffs. They are continuing to hire. The focus on that is bringing out cost efficiencies in places like delivery and e-commerce. And he's expecting that there's a big opportunity there to boost productivity and help profitability. Overall, though, Target doesn't necessarily paint a great picture of how the consumer is holding up.

Despite, as Mike mentioned, the retail sales number we got this morning showing 1.3 percent jump in October. That was the best we've seen in months compared with the prior month. But a lot of that, as I mentioned, does reflect the higher prices we're paying for everything. Most, but not all, is inflation. So what does all this mean for the economy and the consumer? Let's bring in the former CEO of Walmart U.S., Bill Simon. Bill, thank you. Do you take Target as a bellwether for consumer spending on discretionary items here? Well, welcome to the wacky world of retail where somebody does good and somebody does bad and the rest of us guess what happened. You know, Target really it's really interesting story to see Target and Walmart released so close together with such what at least on the surface looks like different results. But when you peel it back, it was actually quite similar. Walmart's growth, as everybody knows, came from their food business

and Target talked about struggles in their general merchandise, hard-lined apparel areas, as you just told everybody. If you peel it back and look at Walmart, that was negative in their release too, those categories. And so, you know, this is the time when the Walmart folks are real glad to be selling a lot of food. And all that food growth is inflation. And so by and large, what we're seeing is promotional activity from the consumer. That's driven in part by the consumer in their in their interest in being wary with their spending, but in large part being driven by these just absurd inventory growth that both Walmart and Target and other retailers had that they're having to liquidate. And you can see that in

their gross margins. So how do you square this with a better retail sales number we got for October and not as bad numbers, say, for Lowe's, Home Depot yesterday. These weren't disasters on consumer spending. No, I think you're going to see retailers and categories specifically that are going to do quite well and continue to do quite well. I think home improvement with all the home equity values that have been built up is a really good place if you're going to be betting on retail food, particularly when food inflation is double digit, is going to continue to drive traffic and volume all across the board for food retailers. And that's why Walmart's doing so well. Everything else is going to be purely promotional because

the consumer is going to be a little leery. And there's just a lot of inventory in those categories. So if inflation is really starting to hit the consumer hard, which is basically what Target told us that happened sort of from September to October, you know, we talked to Brian Nickel, the CEO of Chipotle, yesterday on this show. Bill, listen to what he said about where inflation is headed. We anticipate probably roughly still 10 percent inflation in the fourth quarter. And, you know, we continue to see elevated pricing as it relates to, you know, beef, dairy, tortillas, oil. So the good news is it's plateaued, but it's still at a fairly elevated level. And, you know, that's going to continue to put pressure

throughout our supply chain. For all those people excited about the fact that inflation rates are starting to come down, not so much in food. If you listen to that, still stubbornly high. What's that going to mean for consumer spending? Well, I think you're right. And I agree with him. You can see it in Walmart's release, too. You know, their food business was up, but their gross margin was down. So they haven't even priced in all of their cost increases yet. And I think that eventually those things will have to work their way through the system at retail and restaurants. And so I expect to see things continue at a high level in the fourth quarter and probably start to turn down into the first and second quarter next year.

So given the warnings we got from Target Target and we're starting to get from some others, and you can see some of that in the retail sales report, department stores were flat, apparel, these are not hot areas of spending right now. Who else is at risk for the fourth quarter? Oh gosh, you know, if you're a, if you're a broad lines retailer like Kohl's, Penny's, department store, those guys are going to have really tough because discretionary sales are challenged. Supply chains left us after having, you know, empty supply chains. They've now left us with a glut in some of those categories. And you don't have food to drive your business.

Those would be the ones I'd be worried about. Yeah, Kohl's reports on Thursday. Bill Simon. Bill, thank you very much. Thanks, Sarah. Appreciate your perspective. Former head of Walmart U.S. San Francisco Fed President Mary Daly pouring cold water on any hopes of a pause in interest rate increases earlier today on CNBC. Listen. Pausing is off the table right now. It's not even part of the discussion. I'd say right now the discussion is rightly in slowing the pace. After the break, we'll ask PIMCO's Erin Brown for her take on the Fed's path forward and how that is informing her investment decisions, making some changes lately at PIMCO. Dow has gone negative. We're down 39 points now. You're watching Closing Bell on CNBC. Stocks are mostly in the red here as we head toward the close, with the Nasdaq seeing

the sharpest pullback of the big three, down 1.6 percent. Small caps are down 2 percent. Today, we got some new color on Fed policy every day. We've got a raft of Fed speakers. Here's San Francisco Fed President Mary Daly earlier on Squawk on the Street, dashing any hopes for a rate hike pause. Pausing is off the table right now. It's not even part of the discussion. I'd say right now the discussion is rightly in slowing the pace and putting the pace discussion in the background, focusing our attention really on what is the level of interest rates that will end up being sufficiently restrictive. Meantime, Fed Governor Chris Waller saying in remarks just moments ago that signs of deceleration and inflation and looser hiring conditions would make him more comfortable downshifting to a 50 basis point hike at the December meeting. Joining us now is Erin Brown of PIMCO, who published her asset allocation outlook today, Erin, and likes bonds.

Is this a big shift for you guys at PIMCO now embracing bonds after they've had a terrible year? Yeah, it has been. I mean, throughout most of this year, we have been underweight bonds and we are now starting to shift to see value within certain segments of the fixed income market, you know, particularly those that are higher quality that offer good return with very low default risk probability. And we think that those bonds will start to outperform in the year ahead, particularly given the starting levels for fixed income yields, which for a cash rate is about 4 percent. And you take a little bit more risk for high quality corporate and it's about five and a half to six percent. That's a really good return relative to

what you can expect to earn across riskier asset classes next year. Is that a recession call? It is a recession call. We do think recession is more likely than not into 2023, likely hitting early 2023. And we see that as pretty high probability in the US and very high probability across Europe and the UK. And we think as a result of that, you're going to have duration start to perform better as you move deeper into a recession. And that certainly is underpinning a lot of our call for next year. So what does it mean for stocks? Because we stocks sort of have a they've been actually doing better when you see bonds catch a bid lately. It's really been the opposite for

most of the year where stocks and bonds sell off together. So ultimately, is this constructive for stocks as well? So in late cycle environments, it's typically an environment where bonds do poorly and where equities do OK on a relative basis. As you start to move into a recessionary environment, that's where the scales really tip in favor of fixed income and owning fixed income in portfolios relative to equities. And we think we're at that tipping point right now as we turn the page into early next year. We think that equities are going to continue to remain weak, but bonds should start to deliver positive returns as we move deeper and deeper into recession. And that negative stock bond correlation will reassert itself in 2023. That certainly is

one of the things that's underpinning our view. For equities specifically, it's very hard to invest in equities if you have bond volatility as volatile as it is today. So we need to see the core, the fixed income asset core stabilized before you can start even thinking about investing in equities. Beyond that, you also need to see earnings be more reflective of a recession. And right now, forward earnings for the S&P 500 are still up 6 percent versus historical recessions where earnings fall 15 percent during a recession. Are you getting anything from any of these Fed comments that move the needle one way or the other? I mean, clearly they're not all exactly, I think, on the same page in terms of how much they want to hike rates and how strongly and how quickly. But overall, it feels like nobody wants a pause yet. They still feel like they have work to do, but they are paying attention to some of these better inflation readings and worse readings on the economy. Well, so first, keep in mind that we over the past year, we've had two sort of fits and starts of inflation, thinking that we've all thought that inflation sort of

peaked. And yet we saw inflation accelerate to the upside thereafter. So I think we're still very tentative and in early days of making any, you know, big call with respect to inflation. You know, and I think the Fed is probably in a similar camp. Second, you know, inflation, even when it does peak, is not expected to come down, you know, rapidly, and certainly not expected to be not expected to be falling back down to within their central bank sort of target for 2% inflation, plus or minus. So even after we see inflation peak, we expect that it's going to remain persistent. We expect that it's going to remain sticky and elevated.

And so that's going to also create a challenge for the Fed to navigate around this environment. The third thing is we've had a significant re-rating in both stocks and bonds since the CPI print. And I think the Fed is also cognizant of that. They don't want financial conditions to ease. They want them to remain tight. And so they do have this challenge that the more financial condition easing we see, the higher they're going to have to hike rates. And I think that they're trying to keep that framework in mind as they sort of, you know, don't let the market get too excited in the last few weeks.

Yeah, exactly. Right. Aaron Brown, thank you very much for joining us on the new strategy from PIMCO. Let's show you where we stand right now in the markets, because the S&P 500 just hit a session low right now. Low of the day on the Dow is down 75. We're down 54 right now. S&P down almost a full percent. And the Nasdaq weakening further down 1.7 percent. Tesla's weighing hard on the Nasdaq. Nvidia, Amazon, Apple, Meta, AMD, all the chips are getting slammed on this new outlook from Micron, which we'll talk about. Also up next, the latest on the FTX saga, including a new push from Congress to find out exactly what happened to the former crypto giant.

As we head to break, check out some of today's top search tickers on CNBC.com. No surprise, Target actually takes the top spot today after getting crushed on earnings and its outlook, followed by the 10-year yield. And there's buying of bonds today. Yields are a little bit lower. Saw a good auction earlier in the session. Tesla, Amazon, and the S&P 500 all weaker at the moment. We'll be right back. Check out today's stealth mover.

It is Zoom video. Investors are not remotely happy about this stock today. Citigroup making a bearish call on the company, cutting its price target to 72 from 76, implying 17 percent downside from Tuesday's close. The analysts there believe Zoom's growth prospects will be hurt by tightening corporate IT budgets and also rising competition. Stock down about 5 percent. There are increasing calls now for regulating the crypto industry. No surprise in Washington in the wake of FTX's collapse. This as another crypto lender, Genesis Global, halts customer withdrawals.

Elon Moy is at the Blockchain Association's Policy Summit in Washington with the details. I'm sure there's a lot of discussion of regulation there, Elon. Yes, Sarah, I've been talking to lawmakers and lobbyists here and everyone is preparing for a new wave of legislation. Here at the conference, Democratic Senator Kristen Gillibrand said that she is working on a new stablecoin bill with Republican Senators Pat Toomey and Cynthia Lummis. She hopes to unveil that bill over the next several weeks and possibly even get a hearing before the end of the year. Now, remember that Gillibrand and Lemus are co-sponsors of an existing bill that would

establish a new framework for digital assets more broadly. Gillibrand said that she wants to update that with more transparency and disclosure requirements and potentially with tougher capital requirements as well, and then reintroduce that in the new Congress. Of course, all of this is coming as crypto's reputation in Washington has taken a hit because of what happened with FTX. Just this afternoon, Treasury Secretary Janet Yellen warned that more effective oversight of the industry might be needed because of what happened with FTX. She called on Congress to fill in the regulatory gaps more quickly, And she said that further interconnections of the traditional financial system and crypto markets could raise broader financial stability concerns. Now, committees in both the House and the Senate are planning hearings to find out what

happened at FTX. Sarah, industry folks here say they want to make sure that any new rules are tailored for different players in this space. Back over to you. Ilan Moy. Ilan, thank you. And we will discuss the outlook for crypto regulation tomorrow when we are joined by House Financial Services Committee Chair Maxine Waters here on this show. Closing bell. When we come back, semiconductor stocks selling off following Micron's warning. It is cutting its memory chip production by 20 percent because of weaker demand. A top analyst joins us to discuss whether it's a buying opportunity for Micron, which is down 7.4% today in the broader semi-index. We'll be right back. Check out shares of Micron that stuck under heavy pressure today after the

company warned it plans to cut production of its memory chips. Micron saying it expects to scale back its two main types of memory chips by about 20 percent as the entire industry deals with softening demand. Joining us now is Needham Global Semiconductor Analyst Raji Gill. Raji, it's good to have you. So is that how we take this as a sign of increasing economic weakness? Yes, the demand has weakened further, you know, even just over the course of three months, worse than what they expected. I think the macro has softened. A lot of their customers are

burning through excess inventory that they built up for the last two years. If you recall, about 50% of Micron's revenue comes from the mobile and PC markets. There was a significant overbuild the last two years because of COVID, because of the supply chain shortages, the weakness in the Chinese economy. That's been happening throughout the year. It does not seem to be approaching a bottom, but that's leading to the wafer cuts. We think the bottom most likely in smartphones is probably going to be more likely in the second quarter of next year versus what we initially thought, which might have been in

the first quarter of 2023. So is the chip shortage over? Is this now where we shift to worrying about demand instead of supply? In some areas, the chip shortage is over for certain components. There's definitely excess inventory of semiconductor components that are going into the smartphone market, the PC market, the graphics card market, more of the consumer-orientated markets that have been affected because of inflation and lower consumer spending. There is starting to be more supply coming online for the automotive and industrial end markets and the data center. Next year's supply picture will be much better in terms of allocation of supply and availability of supply.

But the problem, the challenge is that this is going to be coming right at the point when demand is starting to really taper off and decline in other end markets. A lot of that's been priced in into the stocks for most of this year, anticipating that inventory correction. But given the kind of the massive rebound in semis for the last month or so, we've seen a pretty big snapback. You know, we're more inclined to be kind of selling it to some of the strength and look for, you know, other more attractive entry points. Does that include NVIDIA, which reports after the bell? Yeah, I mean, I think NVIDIA is up 45 percent off the bottom the last four weeks. So significant outperformance versus the Sox. We expect kind of a mixed quarter with Nvidia. We continue to see weakness in the gaming market, which is about 45 to 50 percent of the revenue. Two thirds of their gaming revenue is tied to the Chinese economy and the European

economy. That's two thirds. Both those economies are weak we still see X's inventory that still exists in the channel there and needs to be cleared out they've been doing a good job under shipping that that market to try to clear it out but we think it's got another quarter or so to go on the data center side we're expecting to hear kind of mixed mixed data points on the positive side there's still spending spending from the hyperscalers on artificial intelligence and machine learning, recommendation engines, natural language processing engines. That's all in NVIDIA's wheelhouse. We don't see that slowing down. But where we do see a slowdown within data centers, really on the small and medium-sized businesses, spending less

on cloud, the cloud spending, and some weakness in the enterprise. So we expect it to be kind of a mixed bag. But NVIDIA's print is going to be very important because it's basically the last semiconductor company, and the earnings cycle is a good indication of overall data center demand, which has really been the bright spot for semis of last several years. You know, it hasn't been great news for the semis lately, although TSMC, I feel like we need to talk about that because it got a double shot of good news with the report from Bloomberg that Apple CEO Tim Cook is telling engineers and employees that they're going to move, start sourcing some of its silicon processors from an upcoming plant that they're building

in Arizona. And at the same time, Berkshire Hathaway taking a big stake. So are they better positioned than others? I mean, TSMC is clearly the leading foundry for sub-3 nanometer leading process node technology. They kind of raised their outlook for calendar 23. They have a tremendous history in producing leading-edge technology.

What I think was a little bit puzzling for me is that given kind of the increasing tensions between China and the U.S. and Taiwan being kind of right in the middle of those tensions, that there could be a retaliation from China. And that puts TSMC kind of right in the middle of that potential retaliation, given all the U.S. export controls that the U.S. has pushed on to China. And so to me it's a little puzzling that they would make that massive investment in the middle of those tensions, which are, in my mind, are going to just accelerate over the next kind of three to five years. But TSMC, no doubt, has the best leading edge technology in the world,

and there might not be much of an alternative for other fabulous semiconductor companies as well as customers as well. Yeah, I mean, the stock went up in Asia overnight. The ADR that trades here in the U.S. for Taiwan Semi is lower today with the semis. Raji, thank you for joining us. A lot of semiconductor news today. We appreciate you being here. Take a look at where we stand in the markets, down 37 points or so on the Dow. It's really about the S&P and the Nasdaq today.

The S&P down almost a full percent. The Nasdaq, in part because of NVIDIA, which we just mentioned, reports after the bell. Tesla, Amazon, Apple, Meta, it's down 1. full percent. The Nasdaq, in part because of NVIDIA, which we just mentioned, reports after the bell. Tesla, Amazon, Apple, Meta. It's down 1.7 percent. The strength today actually is in Microsoft, which is an outlier. And then some of the staples like PepsiCo, Amgen. Alphabet is higher as well. A new round of viral infections forcing a record number of Americans to miss work.

And Wall Street is buzzing about the impact on the economy. We'll share the details straight ahead. 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? Sick days. A record number of parents are missing work right now. That's according to data from the Bureau of Labor Statistics. One hundred000 Americans missed work last month because of child care problems. That's worse than at the height of COVID. It's clearly a drag on productivity and could also exacerbate worker shortages in a very tight labor market. Why is this happening? Well, if you've got kids, you know there is this quadruple threat of viral infections surging right now. Flu, COVID, the cold and RSV.

We talked to a doctor about it, Dr. Vin Gupta, a public health physician and NBC News medical contributor. He says kids are at risk, especially because two years of masking has weakened natural immunity. Not only that, but hospitals are struggling because many beds meant for children have been converted to adult beds during the pandemic. That means there's no slack in the system right now when we need it more than ever, according to Dr. Gupta. He also points out that many of the pediatric hospitals have closed in the last two and a half years because the economics are worse for pediatric care because they just do fewer procedures. Clearly, the pandemic aftershocks are still very much with us. When we come back, Canaccord's Tony Dwyer explains why he thinks risk assets are in a temporary sweet spot right now. That story, plus Target tanking and an auto parts retail wreck, 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, J.P. Morgan's Chris Horvath is here on Target and Walmart. And Canaccord's Tony Dwyer on the overall market strategy. We'll kick it off broadly here, Mike, because we are selling off today again into the close, down 1.7% on the Nasdaq. Most of the S&P 500 is red. Utilities now the only sector hanging on to a gain. We're down three quarters of one percent. OK, retail sales comes in better than expected. Some hawkish Fed speak from New York Fed President John Williams and also Goldman

Sachs took up its terminal rate forecast to over five percent, I think five and a quarter, which was an upgrade from where they were expecting the Fed to land. Perhaps that's weighing on sentiment. Well, yes, and then Fed Governor Waller as well, essentially reiterating the message of two weeks ago from Chair Jay Powell that essentially whatever the pace at which they go from here, even if it's half a percent in December and thereafter, there's still more to be done to get to where they believe rates have to go.

Also, while we're talking about how the strong job market effectively gives the Fed ammunition to continue to tighten, they don't feel as if there's this direct tradeoff just yet. And so things have to slow down more. So clearly that's probably on investors' minds, even though it's not really fresh news. It's, I mean, maybe contributing to the aggressive buying at the longer end of the Treasury curve right now, because real sharp decline in longer-term Treasury yields. And, you know, maybe something somewhat technical, but definitely is a key feature of this pullback in equities today as well. Also, so is the retail news. Target, we've got to talk about that, which is slumping pretty hard right now.

After reporting a profit decline this morning, 50% profit decline, the earnings coming a day after Walmart beat earnings and raised its full-year outlook. Joining us now is Chris Horvath from J.P. Morgan. So now it's interesting, Chris, because you've got the stocks in different directions because of their differing outlooks. And I'm wondering which is a bigger opportunity because now Target is much cheaper than Walmart, I guess, because of all that discretionary exposure. So which one do you buy? We're definitely buyers at Target. At the end of the day, the consumer is weakening. Discretionary purchases are softening. Your

anniversary and earlier holiday last year. So that exaggerating the weakness but it's still you still need more promotions for the consumer to buy all these covid winning categories like apparent electronics that's a much bigger portion of target's mix and they're deflationary because all the promotions all of target all of walmart's comps is food and it's all driven by inflation food inflation up mid-teens. Their food business, 60% of the mix up mid-teens. As you look out a year, the way we think about it, one, you want to get ahead of the earnings revision curve. Target's numbers have come way down on all these markdown and supply chain issues. We get those back next year, and you can be more optimistic

the further you look out on the consumer. On the Walmart, you know, in a hard landing scenario, you look out in the consumer. On the Walmart, you know, in a hard landing scenario, what typically happens is the consumer gets worse and then all these safe stocks and safe categories start underperforming and food inflation is peaking. And then so lastly, if you end up in a scenario where the Fed starts lowering or stops raising, you wanna own discretionary names. So we really wanna be long in buying Target. The stock's holding above its June lows,

so we'd be active buyers here. 13 times, Walmart's trading at 20 times price earnings, so there's a valuation gap as well. Chris, what about what they mentioned on shrinkage? What is the problem here? They mentioned organized crime and how they're having to invest more to work with law enforcement. Other retailers are experiencing this as well. I just wanted to bring it up because I thought it was notable. It was mentioned twice on the earnings call. Yeah. I mean, so if you go back a couple of years, Home Depot started talking about that. And in fact,

CNBC did a whole piece on this, how you have organized crime. And they were going in and stealing basically battery-powered hand tools and going out. E-commerce has enabled this to be sold online. So they were discovering warehouses full of Home Depot and other companies' products. This has now moved forward into the electronics category and now you're starting to see it hit more of the targets in the Walmart's of the world. So it's bigger ticket kind of durable products could be small kitchen appliances, electronics and it's ending up at a warehouse and then being resold online. All these retailers

are really trying to do different things. Home Depot is testing locking things up. Home Depot is testing with the manufacturers, basically giving a key to turn the product on when you actually pass it through the register. All those efforts are pretty early on. And what we really need is more of a legislative and more of an aggressive industry solution coming down from state, local and the federal government. So my final question, since you like Target so much, is are you satisfied with the measures they've taken to bring inventories down? Because that was the big risk around the stock and Walmarts earlier this year, that they just had way too much inventory

and they had to unload it at very promotional prices. We thought this kind of stuff would be over. Now there's concerns about demand. So are they, first of all, are they dealing with the inventories in the right way? And second, are they in the right product categories? Can you really chalk this up all to consumer discretionary spending weakness from the macro environment? You know, if you disaggregate Walmart versus Target, Target Walmart is basically 70% grocery plus prescription and healthcare. You know, it's a lot different for Target. Target's basically 55% general merchandise, home decor, appliances, small kitchen appliances, electronics. So they have a much longer lead time. And those categories are the ones that are that

are a big COVID winners that are now hyper promotional in order to drive sales. And it's also up and mixed in the fourth quarter. So they're still a little heavy as trends in general merchandise slowed through Halloween, through the election and the first part of this year. They're still a little heavy, but we have a very high degree of confidence that they will be clean. They are in a much better spot than they were one and two quarters ago. I think you enter into 23 clean, and then that's what drives the visible margin recapture in 23 and why we think ultimately you'll start to see this upward revision cycle for Target inverting what just happened over the past year. Chris Horvath, thank you. Making the drum on

Target there. Consumer discretionary versus consumer staple Walmart. By the way, big gap in those stocks overall. Consumer staples are higher today. Discretionary is at the bottom of the market. One of those names, advanced autos, is plummeting today, hitting its lowest level since February 2021. The retailer missing Wall Street's earnings estimates, customers opting for cheaper products over the more expensive brands, and a stronger dollar and inventory spending is weighing on its forecast. Here's the CEO talking about the quarter and the outlook earlier on Power Lunch. We're going to finish the year with expanded margins. We'll be one of very few retailers to accomplish that this year. We're going to return close to $900 million

back to our shareholders. But we're very disappointed in our relative top-line performance, as you indicated. And that's what we're taking action on right now to address as we head into 2023. Mike, I know you've been looking at this group. And interestingly, O'Reilly Automotive is up again today. This is a stock that's up 18.5%. So where's the distinction here? What does this tell you? Yeah, I mean, advance has been the laggard for quite some time relative not just to O'Reilly, but you look at AutoZone, look at Genuine Parts. Those all have moved very much in tandem and to a very similar degree over the last year. And advance has had these issues trying to convert customers more to their private label.

It's had a margin, you know, hit on that level. But the result is that there's also a massive valuation gap. So advance auto parts now trades at like 10, 11 times forward earnings. Those other ones where there is a little more predictability, where investors are much more comfortable with the outlook, is, you know, 20-ish times earnings for the other three. So it shows you the market has kind of gotten here to a fair degree already. It also says don't necessarily pull too many, you know, macro inferences out of what Advance reported today, simply because it's been mostly about execution relative competitive position. Good point. Thank you, Mike. Mike Santoli, just a few minutes to go here before the session. We had New York Fed President John Williams commenting today that monetary policy is not the best tool for financial stability, saying policy shouldn't try to be a,

quote, jack of all trades and a master of none. A lot of people took that as a very hawkish statement. Tony Dwyer joins us, chief market strategist at Canaccord Genuity. And Tony, hearing that from the New York Fed president, does pour a little cold water on the idea that if we weaken really substantially here in the market, see a huge sell-off, that the Fed will swoop in and just fight it with cuts or easing? It's really hard to do that when you have such a high level of inflation. And really, that's what got us going back to the beginning of the year. What got us cautious is the inflation was higher than expected. And that means that the Fed is going to have a hard time really cutting rates to come in and rescue anything. At this point, the market's

kind of in this temporary sweet spot, as you did on the lead-in. But again, it would be historically unique for the yield curves to invert the way they are, the U.S. Treasury yield curves, and not go into a recession. So I believe very clearly history shows we're going to go into a recession. And the S&P has never made, quote-unquote, the bottom prior to a recession. So it's one of those, since it's been a 500 stock index. So, Sarah, it's one of those times where it's a really kind of a dicey environment. So you say temporary sweet spot. We're up still for the month of November, 2.3 percent. You see this run going into year end?

Well, coming into the fourth quarter, Sarah, anytime that you've had a 20 percent or greater drop through the first three quarters of a calendar year, other than the great financial crisis, which credit's not telling us we're in, outside of that, you've had a range of outcomes by year end of that fourth quarter of 8 to 12 percent. So our call, sincerely, it's our call, is that the S&P will be up somewhere between 8% to 12% this quarter. So our tactical plan in the sweet spot, and the sweet spot simply means that the interest rate hikes that have taken place are slowing down economic activity, and inflation's coming off a little bit of expectations as a result. But you still have positive growth. So that's the sweet spot. A little bit lesser inflation, but still positive growth. That, again, I think next year is going

to transition into a recession. But if the market goes up 15 percent, if the range of outcome is 8 to 12, that means we would get more defensive. If the market dropped this week to up 3 percent, same range of outcomes, then we would be adding a little bit. So ultimately, on December 31st, history is very clear and it shows that we're going to be somewhere in there. And Tony, just right, you said so the market never bottoms. What did you say before the recession? Before the recession. Correct. It's confusing. I want to bring Mike Santoli into this because there are all these adages like that in historical patterns.

And some would say that the market, you know, the market bottom comes when inflation has peaked because we've seen evidence of that in history, too, which would suggest that we have seen the bottom. So, yeah, there's a lot of historical references, but also mixed signals on what to do with stocks. Well, there are a lot of overlapping scenarios that they can't all necessarily line up correctly. So one thing I've been saying is if the market ultimate peak was January 3rd and we don't get a recession until the early part of next year, that would seem by historical reference too early for the stock market to peak. Now, if we also hit the bottom on October of this year before recessions start, that also would be almost unprecedented. So I think you have to sort of be aware of all these dynamics and how they, you know, what they suggest about the probabilities. But you can't get wedded to any one template that says this is how it must be. You know, also, when it comes to the yield curve,

it's sort of saying and basically all these different yield curves that we have across the maturities, so many of them are inverted that it says, OK, recession coming, but within two years. So who knows what markets can do between between now and then? The yield curve is flattening today. Tony, I'll just let you respond. No, that's a great I mean, it's a great great point. It takes time and that's the sweet spot, right? The yield curve's inverted because the Fed, the growth is good enough that the Fed is still tightening. So short rates are higher than long rates. Long rates are dropping on the outlook for economic softness. So it's happening the way it always happens. We try to make it different every

cycle and it's not different. The yield curve inverts, it affects credit, it begins to slow down, and eventually it rolls over into slowing economic activity becoming negative economic activity. And Sarah, as you know, I've talked about Powell had better be careful of channeling his inner Volcker, which he did. And the reason for that is they're raising rates in a historic way into a generationally levered system with spiking inventories and slowing demand. So nobody cares about that right now because it was so oversold and we're in that temporary sweet spot. So, again, I just, you know, I want to be crystal clear. By the end of this year, the fourth quarter should be positive. Right. But ultimately, you got to if you do

have a recession, the market should go back to lows. Right. The focus shifts to growth and not inflation. Tony, appreciate it. Tony Dwyer, good to have you on your latest call. Canaccord Genuity. There's the two minute mark in the trading day. Mike, what do you see in the market internals with the S&P down almost another percent here? Yeah, it's pretty skewed to the downside across the board, Sarah. You see the small caps are underperforming pretty severely. That usually means breadth is negative. So talk about 5 to 6 to 1 declining to advancing volume, giving back yesterday's strong number.

We'll say overall volumes kind of mediocre, just as they were on one of the rally days last week. Take a look at Goldman Sachs taking a pause today, but has been on a very aggressive run. A lot of financials, a lot of capital markets, stocks and a lot of value stocks. Goldman fits into all those categories. And it actually ran up to be break even for the year. December 31st, it was 382 and change. Here we are just about there once again. The volatility index hasn't been doing much. It's been able to stay subdued as we do have a very contained pullback in the S&P 500 so far. 24. It's obviously getting sticky around these levels. But keep in mind, we're going to segue into a holiday week coming up, and that often will sap volatility, Sarah. Mike, thank you. As we head into the close, the Dow's holding up better than some of the others.

It's only down 15. That's because it's got a lot of safety stocks in it, which is what's working today. UNH, UnitedHealthcare, McDonald's, Home Depot, and Amgen are all adding to the Dow, along with some others like IBM, Microsoft, and Walmart. But Salesforce, Chevron, and Boeing are the biggest drags. S&P 500 looks like it's going to close down about eight-tenths of 1%. Utilities and staples, the only sectors to close green. The biggest losers today, energy, consumer discretionary, technology. Obviously, Target down double digits.

But TJ Maxx is going to close at a record high price today after raising its sales guidance for the year. The Nasdaq hit the hardest, down more than 1.5%. That's it for me on closing balance.