Power Lunch - A sell-off on Wall Street 8/26/22

Episode Date: August 26, 2022

The sell-off intensifies this afternoon after Fed Chair Powell said the economy would likely endure some pain in its fight against inflation. Our market pros tell you what’s next for the Fed, how to protect your investments and which high dividend payers are worth owning. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

A sell-off on Wall Street, a big hour of power lunch ahead. Stock's getting hit hard after the Fed Chair, warning of higher rates for longer. In this hour, market pros weighing in on the Fed's next move, how to protect your investments and whether dividend payers are the best place to hide. But first, we get to Tyler with a check on the market. Ty? All right, welcome, Seema. Welcome, everyone.

Those hawkish comments from Fed Chair Powell, sending all 11 sectors of the S&P 500 lower. Let's take a look at the Dow, the S&P, and NASDAQ. on PACE TOOP for their biggest one-day drop since late June. There you'll see those numbers. If I can see them, we'll bring them to you. 695 points. They were down about 700 on the Dow. S&P 500 off 2.5% NASDAQ and even 3% decline. Tech is getting hit the hardest as these interests, the forecast for interest rates goes higher. Alphabet down more than 4%. Meta, Microsoft, Apple, off about 3%. And the yield on the two-year note, which is most driven by Fed policy. That one popped after Jerome Powell's remarks earlier this morning out in

Jackson Hole. Could this signal that a recession is looming? As Jerome Powell said earlier today, they will do the Fed that is, whatever it takes to get inflation down. Our next guest is looking to tech and defense for safety. Jason Ware is a partner in CIO of Albion Financial. Jason, You say the worst is behind us on inflation, but there looms another risk. It is a big one. It is called recession. When, how pronounced and deep, and what will the effect be on stocks? Yeah, good afternoon, Tyler.

Good to be here. So, yeah, we believe that the worst of inflation is, in fact, behind us. But as far as the recession or the looming recession to come, you know, as we look across the broad preponderance of economic data to us, it seems like recession is a high, probability sometime likely in 2023 at this point. And, you know, the reality is that this is likely to be a Fed-induced recession, meaning that it's probably going to be more garden variety business cycle type of recession as opposed to something that is, you know, put forth by a crisis that oftentimes makes those recessions more difficult and deeper to endure. So we would anticipate that it should be fairly mild, fairly typical, but nevertheless, stocks have not priced that in and will likely be

pricing that in in the coming weeks and months. And we're starting to hear some warnings. We're starting to hear about companies planning to slacken their hiring pace and so forth. What stocks will be the ones that will be most vulnerable if we move toward a recession and the stock market starts really to discount one? Right. Great question. So I think, you know, first of all, you've got to avoid the cyclical areas of the market, those that are most sensitive to the business cycle. You know, if we are to see a macro economic recession, those types of, you know, sectors and industries are going to have the most revisions to their profits downward. So I think those stocks are probably going to be most impacted. But there are areas that you can, I think,

build a portfolio around even with the recession call. It's not about going all in or all out or going to cash or making these wholesale moves. Rather, it's about tilting the portfolio to be defensive while retaining that long-term and long-term fully invested tilt. So we like large-cap tech still. We think that's likely to perform. on a relative basis through recession better than some cyclical areas of the market. Stay away from high valuation, no profit tech, which has been killed this year, but should continue to do poorly during recession. But also add to that some low volatility as a factor. You know, having LVHD is our preferred ETF in low volatility right now, kind of given the

intersection of that factor, i.e. low volatility with high dividends. We think given the macro, a recession coming, but still elevated inflation and a Fed, as we see, saw at Jackson Hole today that's still pressing on the accelerator, having dividends. What kind of stocks are in LVHD, the ETF you just mentioned? What kinds? Great question. Great question. So the sector waiting is utilities, it's consumer staples, and it's real estate. It's heavy those three sectors. And you're going to see things like Johnson & Johnson, Pepsi, Dominion Energy, etc., etc. Gotcha. What are your thoughts on commodity-focused stocks and ETFs? Certainly energy, the best

performing sector so far this year, Jason. But now we're seeing oil trade lower on these growth concerns gold on track for its worst week in a number of months? Yeah, so I mean, commodities are very sensitive to the economic cycle, as you noted. I mean, we are seeing, I think, to some degree, some softness on the demand side as a result of the slowing macro. The Fed is making that situation worse by continuing to press the accelerator on monetary policy raising rates. So I think those are going to be sectors that are going to be very difficult to own, whether

it's energy, whether it's materials, whether it's commodities producers. they're going to see very large revisions to their profitability in the coming quarters. And I think the stock market is going to reflect that in the share prices, unfortunately, very painfully for those who are in those sectors. Did we mention that among the defensive names you like are defense stocks? Right. Yeah, Lockheed Martin is our favorite pick there. And, you know, not only do we like the business on rising global defense budgets going up in response to the brutal war in Ukraine, but the reality is that it also not only does it have

a defense business, but it's a defensive stock in that its beta is quite low. And again, that's the goal here in tilting the portfolio is to take beta out to smooth the ride, but staying fully invested. Lockheed Martin has a beta of about 0.25 if you look at it on a three and five year basis. You can see today that it's performing on a much more, you know, better on a relative basis versus the S&P and of course tech. Simply put for people who might be newcomers are not familiar, a beta of 0.25 means that that stock will move. Relative volatility. relative to the market at one quarter of the pace, 25% of market volatility. Got that right?

Yeah, that's correct. I got it right on the SAT. That's great. All right, thanks, Jason. You did. Yeah, have a great weekend, ma'am. Bye. Appreciate it, guys.

One stock in focus is Apple. Shares taking a leg lower this afternoon on a political report that the Department of Justice is in the early stages of drafting a possible antitrust complaint against the company. Now, this would not be the first time Apple and the government have come to with us to discuss. CNBC Tech correspondent, Steve Kovac, and Oppenheimer's senior analyst who covers tech, Martin Yang, and Steve, let's start with you.

What is the company saying? Are they about to enter another lawsuit? Expect another lawsuit from the DOJ? No comment from Apple, Seema, but I can walk you through what we do know. So there have been reports about the DOJ's investigation into antitrust activities by Apple for about two years now, and it largely focuses on the App Store and Apple's market power there, particularly the fees that Apple takes from other developers, including some competitors and other services like music, for example. So we've heard companies like Spotify and the dating company match complain about

these fees saying it's unfair, especially when Apple competes with them in certain areas. Apple, for its part, has been trying to lower the fees a little bit on some of these developers. Some people think in response to all the scrutiny they'd be getting from antitrust, But by and large, it's the larger app companies that are really complaining about this and standard benefit. And by the way, Seema, over in Europe, they're actually ahead of the United States in looking into these issues. Just earlier this spring, they passed what's called the Digital Markets Act, which would heavily regulate app stores, including Apple's App Store, and potentially require Apple to allow other app stores on the platform. So these are all similar issues that we've heard the DOJ has been looking into in relation to Apple. And remember, this isn't the only big tech company under scrutiny from the U.S. government.

META has already been sued, and so is Alphabet. And Martin, it does follow a similar report from the information a couple months ago that said Apple is very likely to face an official antitrust lawsuit from the DOJ. Should investors start to price in the regulatory risk care when facing Apple? Shares are down about 3% today. Yeah, I don't think the fear is material or the concerns on DOJ lawsuit is material to Apple's over. overall performance. When you measure the total app store revenues is likely in the low single digit to miss single digit to Apple's total revenues. And if you, let's say, you cut the 30% app store fee to 15%. And, you know, Apple doesn't really lose half of the app store fees. Those lost fees or

lower fees will flow back into the IRS ecosystem in other ways. For example, Apple is building a more robust advertising business. And some of that saved fees for app developers is going to flow back to Apple in some of the other ways in the same form of high margin service revenues. Is it, just as a matter of opinion from you, Martin, as I understand it, Apple collects a fee from app developers when a person downloads their app. But one of the things Apple does, if I'm understanding correctly, is that if there are in-app additional purchases. For example, if you want to get special powers for your game or whatever,

Apple also takes a fee from that. Is that cricket? Is that fair? Well, the rationale is it's going through in-app purchase through Apple's own payment system. Yes. So Apple, you could argue that Apple should open up the payment system to third parties so that others can charge lower fees for in-up purchases. But the reality is, you know, consumers are lazy. They opt for the most convenient way for them to pay in order to get those virtual items. So Apple, by default, will be the most convenient solution even after it opens up the payment options for other third parties. Yeah, I'm one of those lazy consumers. If I sign up once, I want to sign up once and then just have it all go to the same payment source or system that I use.

Steve, I wanted to ask you whether the DOJ decides to proceed. Doesn't it really really? depend on the outcome of Apple versus Epic Games, which I believe that hearing is coming up this fall. Yeah, that's actually a separate case, but it is related to all these issues. And look, Apple largely won most of the counts in that case and Epic, but they are going against the one count that they lost. And so those issues are going to be playing out in that separate case. And again, this is on the DOJ level. And I do just want to talk about it's what Martin was talking about here. It's that in that payment system, that's another angle to it, because If you're on the, if you're making a case against Apple, an antitrust case against Apple,

you're going to say by Apple taking those fees from potential competitors, it can kind of stifle innovation and make it harder for a new company to kind of spring up and compete with Apple or another tech giant. That's the argument that side is making. The side that Apple is making is saying, look, we created the app store, we created this platform. These companies wouldn't even exist. All this money wouldn't even be made at all if we didn't have the app store and support it the way

we do by taking those fees. So Apple is going to make that argument throughout this process, throughout that epic games process, and throughout the EU thing bursting with the digital market saxima. Yeah, good to understand, some good color as we try to understand what the DOJ does next. Steve Kovac and Martin Yang on the Apple News. Thank you for joining us today. All righty. Our coverage of the market sell-off continues with the Dow down now 735 points. Coming up, global dividends hit a record in the second quarter. AT&T, Simon Property, Pioneer Natural natural. They're some of the biggest payers in the S&P 500, but not all our buys right now. We'll tell you which ones are. And no gluts, no glory. A long-time market watcher is looking

to housing, apparel, and the chip sector to see if the feds fight against inflation is working. He may object to my describing him as a long-time market watcher. Before the break, CF Industries and Mosaic trading higher in today's down markets. Both fertilizer stocks are up about 15% this week. Give us some fertilizer for the market. Power lunch will be right back. Well, as the market sells off the Dow down more than 700 points, NASDAQ off more than 3%. 3.1% right now. Some investors are looking to dividend payers for safety. With global dividends at a record, we are trading some of the highest payers in the S&P 500. AT&T, Simon Property Group, both have 6% dividend yields. Pioneer Natural Resources has a 9% yield. That is the second highest in the index. Let's bring in Jeff Kilberg,

sanctuary wealth, CIO, and a CNBC contributor to trade the dividends. Let's start with AT&T, a beleaguered stock. Sometimes dividends can be a sucker's game, right, Jeff? I think we're I think we're not hearing, Jeff, but I can hear him say, yes, Tyler. You're exactly right. That was a brilliant point you just made. There he is. Now we got him back. So, Jeff, the question is, okay, you got a 6% dividend on AT&T. It's easy to get suckered by a juicy yield. But maybe AT&T is a buy. Well, if you look over the last three years, Tyler, it is not a buy. It's been down over 30% on those three years. But I want to be a buyer here. But to your point, you have to understand where this fits in the portfolio.

When I talk to all the sanctuary buys, we have to understand this is part of a diversified approach inside of volatility. But if you look at AT&T, it's dip back below. It's June lows. It had a recent scare that they weren't going to be able to collect some of their bills. If you think of Caddyshack, when Rodney Danielfield was going to send Moose and Rocco out to collect from Judge Smells. Similar situation here. But the CEO, John Stanky, is reassuring that there's going to be $20 billion of free cash flow to support that dividend in 2023. So I think it makes sense to be a buyer here.

You just have to understand that they still are going to pay out 40% of their cash flow. But this has been a tough stock. What are your thoughts, Jeff, on Simon Property Group, which also has a 6% dividend yield? Well, Seema, think about a reet in itself. This is the second largest reet in the United States. So 6% yield is attractive. But if you look again over the last year, this really had a haircut, had a great. year in 2021 and now it's had a significant pullback. When you see last year is up over 95

percent, I think you have to consider where does this fit in your portfolio? But the one thing that's positive, and maybe I'm a little bit early here, because I do want to be a buyer of Simon's group as well. Where I'm a little bit early is that we're just seeing about a 200 base point uptick. What does that mean? Well, last year, their capacity of their rental rates was about 91.9%. You're seeing it near 94%. So I think it's turning around. We're seeing people return to work, but this is one of the biggest players globally. They have new projects coming in line over in Paris and Tokyo. So maybe we see a little bit of China open up, help this stocker and attract some assets. But remember, this is a reed that makes a ton of sense as one piece of

the puzzle and it's on a deep discount. Boy, you got 94% remember two years ago, same of people, we're talking about the death of real estate, the death of stores and so forth. Here's one's 94% occupied globally. I think the next stock we want to look at is, is a pioneer. Pioneer Natural. Pioneer Natural. So you're going to ask me, Tyler, you know, did I not wear my helmet the last year of my football career? But nonetheless, I did.

And I am booking profits here. So I know I put a sell on this. But look at this name. This name has had a sensational. Just in the last month, tie, you've seen Pioneer go up 30%. This is kind of like a reap. It nearly pays out 80% of the cash flows. And to your point, you talk about this is like the leading S&P 500 dividend.

So we like energy, but I think at this moment in time, you have to book profits. I think you have to be considered that there's a buyback program here. You know, in Q1, they bought back $250 million. They're committed to $4 billion. But after such a wonderful run, I think you have to sell this. You have to book profits and look for a lower entry. But again, remember where dividends fit into your portfolio. And you can't get lured by a dividend.

Yield, if the stock goes down, if you're getting 12% here and the yield, the stock goes down 30%. Pretty sure that math is still losing, tie. Yeah. So here your call is, if you own it, look for opportunities to book profits. If you don't own it, look for a better price to get in, right? And we've owned Occidental, exactly. We've owned Occidental instead of this, but nonetheless, all the energy, the tactical model that I'm the portfolio manager of, we actually just booked some profits

last week at energy. So we're not walking away from energy. We think demand is still going to be there. I don't see a recession, but nonetheless, pigs get fat, hogs get slar. That's an old term we're using the pits in Chicago. Quick thought on the market that we're seeing today. Our first guest from Albion said he expects a recession in 2023, garden variety, nothing too dramatic, but that it's going to be hard for stocks to make headway against that prospect. What do you say? I disagree, and I go back to where I cut my teeth in this market.

It was a fixed income piece. Look at the U.S. Treasury markets. They're not buying into the hawkishness that the equities are with the selling price you we're seeing. So I think we're halfway through the last meeting and the September meeting for the Fed. So I think we have to take a big, deep breath, and realize that we're going to continue to see volatility. We're going to see back and filling in the SMP 500. But the Fed, I believe they're going to do 50 basis points. I think they were very much like the chicken hawk that Jerome Powell is. He was talking to talk. I don't think they walked the walk. And I don't see

a recession. I see a soft landing tie. Interesting. Jeff Kilberg. Thanks very much. Have a great weekend, sir. Thank you. You too. Stocks getting crushed today as Fed Chair Jerome Powell warns of economic pain as the Fed fights inflation. The Dow is down about 750 points. Nasdaq down 3%. Every in the S&P 500 is lower this week, except energy, a gain of more than 4%. Up next, we'll tell you what's moving and why. Plus, higher interest rates tends to lead to higher mortgage rates. We'll dive into the housing sector and go looking for names that could hold up amid a downturn.

We'll be right back. Welcome back to power launch time for our weekly ETF tracker. This week, we're looking at nuclear energy, including uranium. This group, though small, has brought in $1.7 billion. in net inflows so far this year. This comes as prices of other forms of energy soar, and supply concerns, especially in Europe, have led some countries to take a new look at nuclear energy. Germany, for instance, is considering delaying the planned closure of its three remaining nuclear power plants. And it's been a huge week for uranium funds. The Global X uranium

up 11 percent, even with a drop today. Sprott has two ETFs, physical uranium and uranium miners, both with double-digit gains this week. This data comes from our partners at Track Insight, and for more information, you can find it on the F.T. Wilshire ETF Hub. Let's get now to Bertha Coombs with a CNBC News update. Hi, Bertha. Hi, Seema. The Justice Department releasing a redacted affidavit from the FBI search of Mar-a-Lago earlier this month. Among the reasons listed for the search, concerns from the Justice Department that Trump officials might flee or destroy evidence before the warrant was served. Authorities began distributing iodine tablets to residents near Ukraine's Zaporizia nuclear power plant in case of a radiation leak amid mounting fears that the fighting around the complex could trigger a catastrophe. The move came one day after the plant was temporarily knocked offline because of fire damage to a transmission line.

And it's been one month since a lucky player won $1.3-4 billion in mega-millions jackpot the prize winner still hasn't claimed their fortune. The massive jackpot marked the largest lottery prize ever won in Illinois and the third largest lottery prize ever won in the U.S. The winner has one year from the drawing to claim that money. Hopefully they're talking to financial advisors and getting everything all set, setting up their charitable trust. Maybe that's what they can do.

Maybe that's what they're... Or they're looking through dumpsters to see what they did with that ticket. Oh, my God. That would just be awful. On the very rare occasions, I usually just throw away. Yeah, no, you got to check. I forget. I forget.

All right. But I didn't play this time. Anyhow. We'll see what happens. All right, ahead on Power Launch, much more on the market. As Fed Chair Powell's hawkish comments sends stocks sinking, especially tech stocks. The NASDAQ 100, down 3%. So big names getting hit hard.

Among them, Invidia, Alphabet, Ammo. Amazon. Biggest loser on the index, however, is not a tech stock. It's a biotech. Cgen down 7%. Reports its talks with Merck have hit a snag overpric. The deal had been rumored at about $200 a share. Seagen shares down now about 150. Power lunch will be right back. About 90 minutes left in the trading day. Let's get you caught up on stocks, bonds, and commodities and we will begin with Bob Bassani at post nine when you look at stocks Bob right now on track for their worst day in two months yeah really since the june 16th low we are essentially at the lows for the day and whenever you get these comments from powell where you have growth

concerns or you get interest rate scares it's always tech that gets hurt the most and it's always speculative tech that moves down the most so you have big moves down here in the unity block teled This is all Kathy Woodh Holding, Roku, Zoom video. Broader tech, more profitable tech, big tech, down 2%, 3%, 4%. Interestingly, Apple and Microsoft usually hold up better. They often perform in line with the market on down days, and that is happening today. You see Nvidia down pretty big, obviously earlier, lower guidance earlier in the week still weighing on them. Beating inflation, Mr. Powell said, involves some pain to the consumer, and home builders are definitely.

definitely getting hit today. So we saw Lenar, Pulte, D.R. Horton, all move rather aggressively. But remember, we saw big moves in some of these names like Lenar was 64 a few weeks ago, went to 88. It's now come down a little bit. But these stocks have outperformed the overall market. Curiously, gold stocks are getting hit. Now, you might think, gee, gold's a hedge against inflation. Now, that's not what's happening here. What's happening here is they're anticipating slower global demand overall, slower consumer. that means less demand for gold. Remember, big sales in India, big sales in China around gold. So it's lower, concerns about lower demand here. Finally, a bad day for everyone. Just want to remind everyone for the quarter, the market is still up nicely. The S&P 500 is up 11%. But even the

Russell 2000, the transports, and the technology-ridden NASDAQ 100 is doing well. Just a little reminder there, guys, that even though it's a tough down day overall, we're up for the quarter. Back to you. Good point. Bob, thank you. Now to the bond market, which is reacting to Powell's speech and a key inflation index that did show pricing pressures are easing in July. Rick Centellie, tracking all the action. Rick. Yes, it has been a wild day, not only for equities, but for treasuries and global sovereigns in general. If we look at Fed Fund futures for January of next year and keep it simple, what we see now is that a price of 96, 34 and a half, it's basically getting very close to its June

14th, low contract close at 9631. We're only three and a half ticks away. Remember, the lower we go in Fed Fund futures, the more tightening it's building in. So some of the goodwill seems to be dissipating, although it's mostly in shorter maturities. Look at an intro of two-year note yields and realize that at 239, it's up two on the day, up 16 basis points on the week, very much in tune with the hawkishness of our Fed chairman. However, as you go to the longer maturities, a bit of a different story, paying much more attention to the equity markets and the generalized notion of possibly slowing. We see at 303 at 10 is unchanged on the day, only up a half dozen basis points on the week.

And finally, when we think about the dollar's strength, we should really think about the euro weakness driving it. Monday was the first closed below parity since 2002, 20 years. There's a one week of euro. And since that happened on Monday, every single day is closed below parity. Seema, back to you. The dollar surge in the month of August should not be overlooked. Rick, thank you. Oil is slightly lower on the day, but much of the focus is on the energy crisis in Europe.

Pippa Stevens at the CBC Commoddy desk with that angle. Pippa. That's right, Sema. European natural gas has been on the move all week, hitting a series of new closing highs. And then today, it surged to a record of 343 euros per month. megawatt hour. And it's important to put that number in context. It's equivalent to $100 per MMBTU. Remember here in the U.S. we're paying about 932. So in Europe, prices are more than 10 times as high. And putting that price in terms of oil, it's about $580 per barrel,

according to the Institute for Energy Economics and Financial Analysis. European Natural Gas is now 566% more than a year ago, which is driving up power prices across Europe. Italy, France, Germany, parts of the Nordics and the UK, all grappling with what's shaping up to be a record month for electricity. Just today, the UK regulator raised the price cap by 80% starting in October, meaning consumers' bills are going way up. Ofgam said the new prime minister will need to take urgent action

with a response that will, quote, match the scale of the crisis. Seema? Oh, certainly a developing story. Pippa, thank you. Fed Chair Jerome Powell, warning today that the fight against inflation will cause some economic pain. But our next guest says there's evidence that the central bank strategy is already working. Let's bring in Ron Insana. He is CNBC senior analyst and commentator, also a senior advisor at Schroeder's North America.

Ron, always great to see you. Why do you think the Fed's work is mostly done? Well, we're starting to see the inventory build of all different kinds of goods, consumer goods in particular, whether it's retail clothing, whether it's automobiles, to a certain extent we're seeing industrial production of motor vehicles rise sharply. And then if you look around and take a look at semiconductors, chips, those are being moved up in terms of the available supply as demand slows. And then housing. New homes.

Whoops. It looks like we have had a little bit of a satellite issue there with Ron and Son. If we get him back, we'll let him finish his thought there, the main thought. We may be seeing some inventory build up in lots of areas where there had been shortages before. Norstrom, they've been all talking about that. We're going to take a quick break coming up. We're going to go back out to Jackson Hole for more reaction to Fed Chair, Jay Powell's hawkish comments that are sending stocks lower.

We're going to hear from Gita Going Path of the IMF. As we head to break, remember you can now listen to Power Lunch on the go. Look for us on your favorite podcast app. Follow us and listen today. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Don't know how much of that you heard. I didn't hear much but the last part. But anyhow, that was Jay Powell speaking this morning at the Fed Summit in January. Jackson Hole, making it very, very clear that tackling inflation is priority number one, even if, even if it dings the economy along the way. And that's why stocks are selling off right now. The Dow near its session lows, if not at them, down 750 points or 2.1⁄4%. Steve Leesman is in Jackson Hole for more on the Fed Chair's stance today. Steve.

Tyler, thanks very much. And I'm joined by a special guest, Gita Gopening, the first deputy managing. director of the International Monetary Fund, who you may know or we have known over the time as the chief economist for the IMF. And I don't know if that's a move up or a move sideways. Either way, you were in the room today when Chair Powell was speaking. Did you hear such a hawkish tone from him? I think Chair Powell appropriately came across as being firm and resolute about bringing inflation down and making sure that inflation expectations don't the anchor. And I think that's absolutely critical at this current point. And he also said that it would take time and that he sees, you know,

the rates staying at close to 4% for most of 2023. So I don't think people should jump the gun about, you know, rate cuts and so on at this point. So, Gini, you've been in the room quite a bit. I have two. I don't remember a Fed chair or even a central banker so much talking about pain on the way. What did that it signal to you? I think what it signaled was recognizing that there are tradeoffs in doing this and bringing inflation down. But he didn't make the point that, yes, there will be short-term pain. But if you don't bring inflation down durability, then there's going to be much more longer-term pain, and that's what you want to avoid.

Right. So the signal that I heard, and I'm sort of attuned to this a bit because I asked him at the last press conference, how does a possibility of a recession change or not change your outlook for policy? When he says look out for pain, I sort of hear him saying, you can tell me if I'm wrong about this. If there is a recession, we may have to keep going because we have to. to bring inflation down as the primary objective. I mean, the extent of the slowdown that this will require and to bring inflation down is still unclear.

But I do think what he said today was that, you know, we have to keep our eyes squarely on bringing inflation down, and that may come at the cost of a slowing economy. Sort of become a single mandate central bank for a time while you try to get both of your targets. That is the priority right now. So recently the IMF brought down, I guess, global growth, as well as U.S. growth.

How bad do you think it will become globally? Because, again, the United States is not the only central bank raising rates at this point and potentially raising them fast. Well, yes, we recently downgraded global growth, and our concern is that, or at least what we're seeing, is that the three major economies, the U.S., euro area, China, are all stalling to different degrees. And the data that we're seeing in the high-frequency data

for the third quarter also shows growth momentum slowing. Now, gas prices have gone up a whole lot more in recently for Europe. Fed tightening is certainly being strongly signaled, but interest rates are going up. I think there's about 85 central banks that have raised interest rates over the last year and continue to do so. And in China, you know, in addition to COVID and the shutdowns, we also have the real estate sector, which is in crisis. And the slowing momentum is also coming from there. I didn't mean to go down this road. But I keep getting asked the question.

How is it that China is undergoing a completely separate different set of policies and outcomes when it comes to lower inflation? And they're stimulating the economy than the rest of the world. So a few things are different. So firstly, in China, the amount of demand stimulus was smaller than what we saw in other parts of the world. Their consumption basket has more rice in it than wheat. And rice prices haven't gone up as much. So that's also one of the reasons why inflation has been lower. Right. Very quickly, and I want to get SEMA in here with a question. You just talked about inflation in the conference there.

And it was very interesting. You say, we don't really know where it's come from. I think what we know right now is there are multiple factors that play the road. The difficult thing in these last two years has been to try and figure out how much imbalance there is between demand and supply. In a world where you have recovery that's strong, you have supply chain breakdowns, you have labor supply that's still not coming back up. And then, of course, you had Russia's invasion of Ukraine. I think we're still in that spot. We're trying to figure out how much slack there is, or how tight it is, is a major challenge. Seema, go ahead. Thank you, Steve. Gita, I was wondering, I know that IMF has historically played a role

in bailing out distressed nations. Now that we know interest rates are perhaps rising faster than expected, as Powell perhaps alluded to earlier this morning, curious, which nations do you think are most at risk right now? Well, we've been saying this, which is that we have about 60% of low-income countries that are assessed to be either already in debt distress or in high risk of debt distress. We have about now 20 emerging markets whose debt is trading at distress levels. Now, just to be clear, these are not systemically major emerging markets, but we have many countries coming in there, including Sri Lanka and the others. So this is a major concern. And at the same time, with global demand slowing, that also is having a negative effect on

these economies in terms of how much they can gain from their exports. Seema brilliantly took me exactly where I wanted to go, Gita, which was this issue of but I'm going to ask the question a little less diplomatically. Are you worried about an emerging debt crisis, considering not only the inflation issue, but what's happening with the currency issues? You're right. We are at a point in time where we have global growth slowing. We have a dollar that's strengthening, which obviously has implications for countries that borrow in dollar terms.

We have commodity prices that are high that are a major concern. So I do think that we will see more countries that need help in terms of debt relief and debt resolution. But as of now, we don't have any kind of a systemic emerging market debt. crisis. I think the situation is not there yet. It's bespoke by country. One more question, Gita, I have to ask you. Can you talk briefly, I'm sorry, about the extent to which the IMF is ready to step in and help in the rebuilding of Ukraine when it becomes appropriate? I think there are many steps that we are very engaged with the Ukrainian authorities. We have multiple options on the table in terms of how we can help the country. There is, of course, a more immediate need, which is in terms of how to

make sure that they're able to meet their macro, kind of stabilize their macro economy without going into hyperinflation. So those are some of the big risks in the near term. But then, of course, later on, there will be the question of rebuilding and restructuring, and we will continue to be engaged with them. So the important takeout from this interview is you need to come visit with us like once a month, not once a, twice a year like you do. We need to have Gidon more often. Seema, to go around the world and understand all of the complicated things that are happening abroad, but also kicking back and affecting us here in the United States. I'm in favor of that. Steve, thank you for bringing us this interview, and thanks to

Gita Gopinath of the IMF as well. We are looking at stocks at the lows of the day. The Dow is currently down 786 points. The yield on the tenure note right around 3%, actually lower than yesterday despite the Fed Chair's hawkish comments on inflation. Homebuilders getting no relief. Big losses across the board for D.R. Horton, KB. Home and Pulte. Up next, we'll get an analyst take on what's ahead for the once-hot housing sector. And take a look at shares of electronic arts. The stock is among the few names in the green today. Report out this morning that Amazon may be looking to buy the gaming company electronic arts.

However, sources have told CBC's David Faber that no such deal is in the works. More on that. Welcome back to Power Lunch, everybody. Home builders getting caught up in the sell-off as a rise in short-term rates pressures that sector. Lanar down about 5% Pulte, Toll, KB, Home, down about 4%. Extending their year-long slump, their forward PEs are already low in the single digits. For more on the damage in the sector, let's welcome Ken Leon of CFRA. Ken, welcome, good to have you with us.

As you look at the home builders, you've got either a hold or a cell on the lot of them, and that is after they have taken it really on the chin. why do they seem so more abundant and not worth investigating to you? Great to be here. And our conviction really is because we look at the overall housing markets, 22% of the U.S. economy. And we take a discipline approach of macro top down and bottom up. And we were seeing lots of red signals back in May.

And really scratching our heads just two weeks ago when we saw a mortgage rate's below 5%, and yet the economic data continues to be negative. Six percent mortgage rates is what the industry, the National Association of Realtors, look for the end of this year. And Toll Brothers reported this week, and it was the last segment to capitulate, which is above $750,000 for a home,

with 44% decline year over year on net order value. So unfortunately, for the group, Home builders will not be the place to be. They are typically early cyclical groups in the stock market. So watch them at a later time when we get some clearer indication maybe that the economy or how the housing economy, I should say, is turning in a different direction. You've got a sell and a strong sell on rocket companies, mortgage company, and Zillow. And Zillow. Again, part of that housing ecosystem, mortgage refinancing is down 65% year over a year.

The forecast from the Mortgage Bankers Association is very bearish looking into next year. And you need volume, really, to drive those businesses. And Zillow is looking really for a core business exiting the buy-buying, sell and buy-and-sell homes. So I think it's a failed company. The bright note, really, or the fork in the road is home improvement. 98% of U.S. households don't move. And the wealth effect would higher prices means that they're not going to move to another home, but they're probably going to improve theirs.

So we're positive on Home Depot with a buy. And again, everyone's focus on the Fed and inflation with the CPI, 42% of the CPI is housing and its rents is a big part. So we do like residential reeds such as Kandem Property Trust, equity residential. Those are buys. We have a strong buy in mid-America apartments, which is the Sun Belt Market. So there's ways to play the housing market, but our research team at CFRA is disciplined, particularly watching the macroeconomic.

And I think J-PAL set the news. note of where we're going over the next 12 months for housing. Although, Ken, Powell didn't really detail what exactly we should expect in the September meeting. Bostick said he's leaning towards 50 basis points, but without that level of clarity, I'm curious where you see home prices going from here. Many more economists are now expecting a bigger drop in prices as the affordability issue just becomes pretty tough with mortgage rates back up to 6%.

Yeah, I love the question in two parts. First on rates, we looked at rate rise regime since 1990. You know, it's kind of like Apollo 13 back in 92 and 93 to get a soft landing. So rates are going up, but it's also quantitative tightening, not easy. And we're going to see 95 billion of takedown of the balance sheet every month. 35 billion of that is mortgage-backed securities. So maybe 6% might be the base or we can go higher on mortgage rates next. year. That's going to create some demand destruction.

All right. We're going to leave it there. Ken Ken Leon of CFRA, thank you very much. And it's good to point out that the housing market is not just the builders. It's the REITs. It's the home repair, home repair and improvement. It's the mortgage companies. Always good to remember that. We are down 800 points on the Dow better than 2.4%. Big sell off on Wall Street. The Dow selloff as Pallet was just saying was just saying is intensifying. We are off 800 points. nowhere to hide with all 11 sectors trading lower. Only a handful of stocks in the S&P 500 are higher. Even the normally safe consumer staples are lower.

Still, stocks like Pershey, General Mills, Campbell's Soup are sitting near 50, two-week highs. We've got much more on today's market action coming up. Draw your attention to the Dow. It is now down 830 points. The broader consumer discretionary sector among the key lagerds. Travel names, Airbnb, Marriott, Winner. resorts down about 2 to 3% on the day. Airlines, Delta, United, down a similar amount at a time when Hopper is showing prices this fall are coming down. And a new survey from TripAdvisor

also finding that inflation is cutting into travel budgets, Americans prioritizing nearby destinations. And take a look at the cruise lines. On the week, they are higher, but trading down today, these stocks tend to be sensitive to higher rates given the debt they are sitting on and the need to refinance Royal Caribbean down 3.4%. Carnival down 5%. Tyler. It's interesting. I have been exploring a trip for the holiday season, and this week alone, the fares came down by several hundred dollars on the trip. Finally. And from Wednesday into yesterday by an additional $200 per person. So what you just reported on, I have experienced and you see it in the marketplace. So if you're thinking of booking, watch those fairs.

Thanks for watching, Power Lunch, everybody. Have a great weekend. Thank you.