Power Lunch - A sell-off on Wall Street 9/29/22

Episode Date: September 29, 2022

Stocks hit session lows in afternoon trading. Finding places to hide is becoming more challenging. Our market experts explain where they’re finding safety and what they’re buying amid the volatility. Plus, why retail investors are watching Apple’s decline this week. And, the parts of the tech trade that are getting hit the hardest. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. I'm Tyler Matheson, along with Contessa Brewer, a sell-off on Wall Street. Stocks are tumbling, the NASLAC getting the worst of it, as Brian just pointed out. Finding places to hide is becoming more and more challenging by the day, by the minute, by the hour. Our market experts will tell you where they're finding safety, such as it is, what they're buying, and how much more selling may be ahead. But first, to Contessa for a quick check on the markets. Hello, Tyler. Hello, everybody. Stocks are at session lows now, giving up all of yesterday's gains. you can see the Dow Jones Industrial's down more than 2%, 642 points, the S&P 500, off 2 and 3 quarters, and you've got the NASDAQ just dragging down, losing 404 points off by more than 3.5%.

The stock market driven by big swings in the bond market yields climbing again. The 10-year yield about 3.7%. And there is a lot of focus on Apple, which is down about 5% following a rare downgrade to neutral by Bank of America. There you go, down 5.6%. The firm says slowing demand for the iPhone will cause the stock's outperformance to end. Tyler. All right, our next guest says the uncertainty created by the Fed is causing the market to revalue stocks and future growth, creating an environment where earnings, cash flow, and balance

sheets matter like they haven't for a little while. Sarat Setti is managing partner at DCLA. He is also a CNBC contributor. You know, Sarat, it seems to me. that as we look at the market, which is really a weighing tool between risk and reward, there's a lot of risk, but there doesn't seem to be much reward anywhere these days. Am I wrong? No, you're right on that, Tyler. And I think one of the things that investors have figured out that compared to what it was two or three years ago, there is an alternative now. You don't have to be in equities.

You can be in cash where you can get even short-term treasuries close to two and a half three percent, and you can be in bonds that can give you 3 to 5%. So for those looking for that margin of safety in a time like this, you do have other alternatives. You don't have to have your cash sitting there idly. Yeah, no, that is really the case here. Bonds are investable again, both in terms of where their yields are. And if you go in and buy it to your treasury at 4 plus percent, and you just hold it, you take all of the duration risk out, and you get a nice 4 percent yield, which looks

pretty nice in today's market. You do have a couple of stocks that you think are sort of stable enough, beautiful balance sheets, yields are nice, returns are steady, and they are both in the pharmaceutical area, the health care area. And they are entirely. The other thing to think about stocks like this, Bristol Myers and Jay and Jay, which are the two of them, they are not correlated to the stock market in the sense that they're not dependent on what the Fed is going to do with interest rates. They're not cyclical depending on what in demand is for industrials or semiconductors and technology. These are companies that have secular growth. Bristol's nine times earnings. It's got a huge amount of products in its oncology, immunology, cardiology group. It's got a dividend

yield of 3%. It's been out of favor, but guess what? It's up over 10% for the year. And that's because it actually has its own secular growth. Jay and J.J, similar story, but is a little more complicated. It's got pharma for 60%, 60%, 30% Med-Tag and 10% consumer, which they're going to spin off. Trade's a little more expensive, close to 15 times earnings, but you're getting 2.75% dividend-deal. The thing about both these companies, their dividends are also increasing over time. You want that to keep up inflation. So while people do go into bonds, remember inflation is something that people have to worry about their portfolio for the long term. Bonds are good.

Think of them as an anchor in your portfolio, but you do need pricing, you do need earnings to grow, You need dividends to grow, which will keep up with inflation and help you kind of get ahead. Okay, can I ask you about the cash part sitting on cash? If you're somebody who's got cash sitting on the sideline, Sarat, at what point do you think, okay, I need to just go ahead and buy a two-year treasury with it just so that the inflation is not killing the value of the cash that I have on hand? So a couple of things to first think about the risk profile. If you've been sitting on cash, is it because you were scared of the market? Did you need it for the next two or three years?

if you had cash thinking, hey, it's part of a diverse-wide portfolio, then I completely agree. You know, buy the two-year treasury, but you can also buy corporate bonds, you know, that can get you a little bit higher than that as well. But I would only put it in bonds if that's what you wanted to do before. I wouldn't do it to say, hey, I'm going to park it there. And then I come back when the market bottoms, we just don't know when that is. But I think putting that cash in there, if you don't need it for two years, it's not a bad thing. There are some good bonds out there that you can buy.

But again, don't think of it as, hey, I'll sell out of their entire time to market because that's one of the hardest things to do. Where do you think, I know it's impossible to pick the low point in the market. But we're seeing really, this has been a really bad month for stocks. I think the worst since March of 2020, which was, of course, memorable because of the pandemic at that time. Where do you think we are in this sell-off? Are we in the sixth inning, the seventh inning? what? So I would look at it two ways. I mean, look, when the Fed said terminal value is going to be close to 4.5 percent, that was a signal that, hey, multiples have to come down. Secondly, we are not

even through started earnings season. So I think that's going to bring the S&P earnings down. So I think we're close to seventh inning. We've got a little more of a bump to go down just as earnings get rebased. But I'd be selective here. I mean, you can nibble here. It's not a question if you're a long-term investor. But could the S&P break 3,600? Absolutely. And then, you know, depending if you think earnings are going to be around 200 for the S&P, you could get a 32 to 3,400.

But that's cheap at that point because now you're saying there's going to be no earnings growth going forward. So I think you're going to get that opportunity to start now looking at specific companies and then those that are kind of just taken out to the woodshed because, you know, investors are scared at that point. We've talked quite a lot about how earnings. sort of took a backseat to what investors were thinking when they were putting their money to work. I'm just curious now that you, Sarat, and a lot of our experts who are coming on are saying earnings are very important now. But don't these companies have tough comps against last year? I mean, so many of them, especially in the consumer discretionary space, they had incredible years

last year. So when we're looking forward to earnings, they might be on a great path, but compared to last year, going to be a struggle. Yeah, and some of them have reflected it already. I mean, companies like PayPal have already been discounted because they had so much pull in. So I think it's going to be the guidance going forward to say, hey, this is where we think the next, you know, three to nine months is going to be. Not that you want to buy it just off that, but if companies say, look, we think things are, you know, better for us, whether it's, you know, in terms of if you look at the Visa MasterCard or you look at the consumer part. But I do think, you know, there are no short-term catalyst that are going to make this market go forward. It's only when the market looks ahead

12 months and says we're through the storm. That's really hard to tell. You know, sitting back here at Baxi driving in 2009 and 10, it was, oh, yeah, that's when the markets came back up. But it came back up when earnings were still going down. So we don't know when that trough is going to be. So you just have to be selective and patient. And again, be diversified because if you're going to try and time it go all in, you could go another 10, 15% down. There's no kind of button that says we're going to stop here. Sirot, thank you for bringing us some perspective here. You've got the Dow Jones industrials off about 618 points right now and across the board. We're seeing the markets at their session lows. Volatility is not just hitting the stock market, though, but also what is normally

a very sedate U.S. Treasury market. For more on what this signals, Rick Santelli is with Pimco's Jerome Schneider, who manages one of the largest actively managed ETFs. Hi, Rick. Thank you, Contessa. Yes, I'd like to welcome Jerome Schneider from Pimco. Jerome, Contessa just said something that I want to throw back at you, especially nowadays. You know, the volatility in the marketplace and you're the noise in the background

is ramped up a bit. But I certainly wouldn't think that the Treasury market is necessarily a boring market. I think it's the same market. It's just something has changed. What do you think has changed? Fundamentally, what we're seeing is a higher cost of capital in the marketplace. Transition transitory mechanisms which really helped to allocate risk throughout the market have fundamentally gone to a higher cost of capital, meaning bid offers are wider,

functional markets are a little bit wider, and intermediaries want to make more on their capital. So what we're really witnessing is a recalibration from the low rate regimes we've witnessed for the past 10 to 20 years into a more normalized one, maybe one that we're familiar with in the 1980s and early 1990s as a result. It's the great reset. And what you're pointing out doesn't mean the market, It's broken.

It doesn't mean the market's flawed. It just means under the current conditions, big ranges are necessary. Well, and investors have to adapt to it. And so they're going to think about it in terms of volatility in their portfolios, having longer holding periods, maybe even have a higher cash amounts in their portfolios. But fundamentally, from a transactional point of view, when you think about the world of liquidity and transactions, what we have to be recognizing the fact that the visibility out there is the ultimate cause as well, the lack of visibility is the ultimate cause of well of why there

is volatility in the market. And until investors get comfortable with the shorter sighted volatility or shorter sight of visibility, then they're going to have to live with some volatility. Everybody's talking about the Bank of England, and everybody is very critical of the Bank of England. Yet when I look at what they've done, here's what I see. I see a country that's still in a problematic, unique situation between COVID and Brexit. Okay? And their debt to GDP is less than ours. It's, what, 86%? And quantitative easing while they were trying to do quantitative tightening, Christine Lagarde has the same play sheet. So very quickly, do you think the Bank of England ought to be singled out?

Isn't this all coming home to roost because central bank subsidized rates for so long? Ultimately, central bankers' banking professions have moved from being a dull profession to a dynamic profession. And what they're doing is ultimately being dynamic in trying to reconcile the inflationary expectation of the economy with fiscal policy, et cetera. So being responsive is what we should be expecting from almost every central banker around the world. Whether it's the right or wrong thing, time will tell. But coordination. They coordinated one. They were all going down to zero.

zero. But the multi-speeds, whether it's Europe, whether it's Japan, who's out in left field, or it's the U.S., they're never going to be able to coordinate with the upside. But the prosyclicality is a very different situation at this point in time. And so when you think about it from the timing perspective, we are in playing different games and different endings of the event. So when we think about it right now, the U.S. is in a very different situation, perhaps later in the game than the Eurozone as well as the Bank of England, and the situation that's being dealt to them is going to have to be dealt with a variety of different factors. Hence, the inflation fighting powers of the Fed might be viewed in a very different lens than

those of the Bank of England. All right, let's ask the only question that viewers want to know, but let's whisper, okay? Like the president, what do you think inflation's going to be one year from today? So you're going to see inflation gradually come down from what we see over this point in time. And I think one of the issues is, is that while we might not necessarily get to the 2% PC that the Fed is going to be, quote, comfortable with, we're going to see is that trajectory moves slower. However, it might take a little bit longer than people expect, which ultimately means that front-end rates in the U.S. might have to be a little stickier than people would expect. And where we are right now with a terminal rate wavering between.

If I magically beamed three and a half to three-and-three-quarters inflation right now to the U.S., would the yield curve be okay with you? Are rates where they are right now, would they be okay with a three-and-half, three-and-three-and-three-quarters that's still above the inflationary target. And I think, unfortunately, we don't live with a magical element in the economy. We're going to live with a longer railroad line that takes us into 2023 and 24, which means the Fed is going, to have to be in the position to maintain a rate posture to be defensive and inflation a little bit longer.

What do you think about rates? So ultimately, the front end of rates is where we want to be focusing on right now, primarily because the terminal rate is fairly priced in the vicinity of four and a half to four and three quarters percent right now. We see the volatility on an interday basis, but don't worry about that. The precision exactly where you're seeing in the two-year note, even the short end of the yield curve, is irrelevant at this point in time, because what we have found is the massive recalibration that you alluded to has also happened to the rate markets.

So cash being defensive at those rate levels, even being more agnostic about where the Fed is going to be in the short term, the precision is less meaningful than looking at the overall carry. Like T-bills, like front-end bonds, and more importantly, diversification within those realms. Because the visibility, once again, over the next one to two years might be clouded by internal or external events that may not necessarily be smooth. And so investors want those degrees of freedom. Do you think the Fed ought to pay more attention to global issues two months ago? Two months ago, I pointed out how the guilt started to move quickly about how a energy-induced recession was obviously on the way. Is the Fed sticking it too close to the vest at home?

Should they pay more attention? Your final thoughts? You ultimately have to look at what the Fed mandates is. And focusing on the global economy is important, but not necessarily in the context of where we are today with the inflation fighting that's going to be in the foreseeable future. Jerome Powell made a clear in his last class conference that he wants to be focusing on the inflation metric until they actually see some. signs of weakness in other parts of the economy. And that might be for the next couple of quarters. So unfortunately, volatility is going to remain here to say, and investors need to find a home to be safe. That's the front end of the O curve.

Jerome, it's always nice to talk to somebody that can talk faster than me. Thank you for joining me in Chicago. Contessa, back to you. You know what? That was very self-aware of you, Rick. It's true. You're a fast talker. But you know what? Sometimes you've got to get a lot of information in in a very little bit of time. And Rick Santelli download. Yeah, absolutely. Lots of megabits per second. Coming up, stocks sell off, sentiment.

to emerging markets hits a record new low, and there's new research on which nations are at risk, potentially defaulting. Plus, the Russell 2000 versus the S&P 500, why one strategist says it's a historic opportunity to own small caps. And before the break, the mortgage ETF hitting a new 52-week low and down about 25% this month on pace for its worst month since March 2020. Power Lunch is back in two as we continue to monitor the market sell-off. All right, the rapid rise in rates and the dollar, along with high inflation, causing collateral damage in emerging market countries making life tough there. A number of emerging market ETFs, 52-week lows.

There you see some of them, a selection of them. Sima Modi has new reporting on which countries are most at risk in the EM world and potentially may need financial support. Sima. Tyler, that's right. We know higher rates were coming, but Goldman's top emerging market strategist says the speed at which rates have risen in the U.S., that's put more pressure on emerging markets. They also yield about 8 to 9%.

That makes that yield less attractive when you have the 10-year treasury yield at around 4%. Goma Sachs highlighting the countries at most risk pointing to Egypt and Ghana that are currently engaged in discussions with the IMF. Pakistan also attempting to avoid a default, which has already occurred in countries like Sri Lanka and Russia this year. Capital economics also pointing to Turkey and Chile, two countries sitting on high levels of dollar denominated debt. Now, as these challenges escalate, an HSBC survey revealing investor sentiments surrounding

emerging markets has hit a record low. Institutional investors in total managing $460 billion in dollars in dollars in assets management said they're trimming positions across regions except for equities. They prefer Latin America for now, specifically Brazil. Worth noting Brazil has outperformed the broader emerging market ETF, that country, its citizens there, head to elections. this Sunday. Even if you don't have exposure, Tyler, to these stocks overseas, it still affects your portfolio. According to IMF, emerging markets now make up about 58% of global GDP. So when

they slow down, the rest of the world feels it. But the Brazilian election, I mean, so people like Brazil, there is a possibility of unrest in Brazil after this election. A lot of emerging markets, including Brazil, because of food inflation, Tyler, you've seen, more concerns around the prospect of riots or protests as food inflation nears a 10-year high in countries like Brazil. That really hits consumers on the ground, and that's certainly been a key agenda item going into this election this Sunday. We will talk a little more about Brazil, I'm sure, here with the next guest, whom Contessa will introduce. Meantime, Seema, thank you very much.

So we really want to dive into how you trade emerging markets, given the global uncertainty. Our next guest has some names to buy as well as some to avoid. David Riedel is president of Riedel research. Normally, we like to start our interviews with a big broad view, but because we were just talking about Brazil, David, what's your take on Brazil? Do you think that this is a good time to invest? Absolutely not.

I would sell everything you have in Brazil today just going into this weekend. You do not want to own Petrobras. You do not want to own Brazil going into this weekend. The incumbent there has indicated a willingness to use violence, has indicated he may not leave office quietly. I think there's real possibility of unrest there this weekend, and there's definitely going to be uncertainty. So I mean, that's a pretty stark warning to say whatever you own right now in Brazil, you need to sell right away. So you would be willing to sell it a steep loss just to be out of that position. You have to be out. You're going

to be down 10, 15 percent in the beginning days of next week. You can buy it back next Wednesday if you choose, but sell it today. We've got the EEM down 28% year to date, down 13% over three months. We've been through a little of this, the issues that are facing international markets and especially emerging markets. Give me a sense of where you think it's safe to put your money, where you may get a return on that investment. Absolutely. I'll be buying a large global multinational Budweiser and that's sorry, Anheuser Bush in bed, ticker BUD. They get about 60% of their revenues from developing economies. They're very good at working in those emerging markets. It's a good way to get broad-based exposure. Beer is a bit of an inflation

hedge. They are doing a good job managing their costs around the world. So that's a good way to get diversified exposure. For people looking for an individual country, I noticed that Indonesia wasn't on that hit list of countries that are going to get hurt in the current rate and currency environment, they were top choice during temper tantrums in the past. They've done a really good job stabilizing their macro-level economics. They've been very much better on their borrowing. And I would buy Indo-energy, I-N-D-O-U-S-listed. It's a way to play Indonesia, which is a great regional powerhouse for Southeast Asia. I see that you're also advising that people get out of U.S. listed Chinese names. Can you explain why? And are there specifics there that you think are especially

dangerous? I'm still concerned about a renewal of the attacks that Beijing had on some of the data heavy names, GDS holdings, full truck alliance, YMM, 360 finance. These are U.S. listed Chinese names that could come under the scrutiny of Beijing regulators once again. And I'm still not convinced that the audit controversy between Washington, the SEC, and Beijing is really settled. I think the proof's going to be in the pudding there. I'd avoid those three names for now and wait for a better time to come into China. So what you've just talked about there, David, is really tremendously helpful for sophisticated investors who buy individual shares like a petrobras or some of the ones

you just mentioned there. But as I look at trying to get some exposure to emerging markets, what is the smartest way for an individual investor to play? Is it through an ETF, if so, which kinds? Or is it through individual company names where you have specific security risk and country risk as well. Those are great questions. I think the recommendation on Anheuser-B-B-B-B-B-U-D answers some of those questions for you. You've got strong corporate governance.

You've got a U.S. dollar-denominated company that's benefiting from some of those things, and you've got pretty broad-braced exposure. That sort of serves, like, as a mutual fund in a way, to many different markets around the world. Also, if you don't want to go into Indonesian individual names, though you can buy them in the U.S. It's quite simple. You can buy the E-I-D-O. It's up 2% year-to-date, a significant outperformer of broader-based weakness in emerging markets. Very interesting discussion, David.

Really on point. We really appreciate it. I personally have found that beer is a good hedge against many things. And as a brewer, I concur. You're a brewer. That's right. David, thank you so much. Really insightful.

We thank you. And before we head to break, check out Peloton. A lot of names in the red today, but this is a headline worth highlighting down 16%. Can it go lower? After announcing a new retail partnership with Dick's sporting goods, Peloton is down 80% this year. Plus, Kevin O'Leary, Mr. Wonderful, looking to buy one area of the market that he's never bought before. He joins us with a look at what it is, a shark, at work.

The down near the lows, once again, we're back. in two. Look at the Dow. It is off, what is in 660 some points. We'll be right back. Welcome back to Power Lunch. I'm Dominic Chu. As markets remain much lower at this hour, there are a few bright spots out there and actually include some names that are in the reinsurance and insurance type business, even as we start to get some of the pictures of the damage down in Florida that Hurricane Ian has left behind. We're talking about names like Everest Reinsurance, also W.R. Berkeley, Chubb, Travelers, all in positive. territory right now, as you can see, despite having some of the highest catastrophe exposed lines

in Ian's path. Of course, it will likely be weeks before we understand the full impact of Ian on Florida and other states. But some of the analyst estimates are looking at the damage right now already. Tyler, I'll send things back over to you. Dominic, thank you very much. Let's get to Christina Parts of Nevelas for a CNBC news update. Christina. Thank you, Tyler. Here's what's happening at this hour. We actually have some new video of the severe damage from Hurricane Ian right now. Sanibel Island cut off from nearby Fort Myers after roads were washed away on the island itself. You have some buildings that collapsed as well. Others were piled into heaps of debris, and you're seeing a car right now.

Ian's winds are back up to 70 miles per hour as a gain strength across the Atlantic and is expected to come back ashore as a hurricane in South Carolina tomorrow. The Senate is voting on a spending bill to keep the federal government from shutting down tomorrow. The bill is expected to pass and then get approved by the House before being signed by President Biden. The US has imposed fresh sanctions on Iranian oil exports. The move comes as talks have broken down over reviving a pact to limit Iranian nuclear weapon development.

And switching gears completely, another music mega deal. Phil Collins and his Genesis bandmates are selling their music rights in a deal reportedly worth more than $300 million. The buyers say they will seek to reintroduce the catalog of 80s hits to younger generations. Just another day in paradise. Back to you guys.

Well done. And she didn't sing it so the lawyers won't get all up in arms over how much money we're going to have to pay for the license. I've had this experience. You see, I can tell. Ahead on Power Lunch, whether it's big tech, momentum stocks, housing, financials, retail, just every corner of the equity market is struggling today. Our next guest says if you're looking for opportunity now might be the time to bet on small caps. She joins us next.

Well, we're in a market sell-off right now. Less than 90 minutes left in the trading day. We want to get you caught up on what the markets are doing in today's power rundown, stocks, bonds, commodities, and the case here for small caps. Let's begin with Bob Pisani at the New York Stock Exchange on this market sell-off. Bob. You know, Contessa, we're just off of the lows, but it doesn't matter. We're down 100 points. So just take a look at the two days here.

We've given up all the gains we had yesterday. More importantly, we're essentially at two-year lows on the S&B. P-500. We've got about 750 stocks at new lows here at the New York Stock Exchange. That's about maybe not quite a third of the NYSC, but it's getting there. Important thing is we had some not very good earnings commentary this morning from CarMax. So if you take a look, all the autos are down right now. Higher rates they're talking about, higher prices, and that means affordability problems. That's not a typo down, 23%. GM's down, Ford's down, all the part makers. Borgwarners at a new low, Aptiva, also.

So add a new 52 week load. For once, big cap tech, speculative tech, it doesn't matter. Everything's large, small. It's down three, four, five, even six percent. Look at that. AMD, down seven percent right now. That's a new low. NVIDIA.

120, that is a new low on top of that, waiting for micron earnings to come out. And Apple was 176, just a few weeks ago. So we've already seen a significant decline in Apple on top of everything else. I've been talking about REITs at new lows. We had a lot of them down there, but the mortgage rates, particularly, you have mortgage rates go to 7%. These companies buy and sell mortgage-backed securities. They're notably weak. They're speculative tech, by the way.

Roku, Teledoc, Zoom Video, and Block here. New low for almost all them except for Square. And there's your mortgage rates. I mentioned that earlier. New lows there. And these companies, Contessa, when they buy and trade these mortgage-backed securities, the value of them, of course, much lower. And that's a big problem for all of them.

Some of these, Invesco, 60% decline this year. that. Contested back to you. All right, Bob, thank you for that. Let's get to the bond market where yields are resuming their climb now. The 10-year yield is off highs of the session about 3.7%. It's at 3.761 now for the 10-year. It briefly touched 4% yesterday before pulling back. But look at the volatility here. Big moves for the 10-year. The yield on the two-year remained solidly above 4% at 4.184%. And a volatile day in the energy markets as well. Lots of speculation. here about next week's OPEC Plus meeting and whether they'll cut output. PIPA Stevens at the CNBC Commodity Desk.

What are you hearing, Pippa? That's right, Contessa. A lot of chatter about what might happen at that meeting next week. Given the recent volatility in the energy markets, we'll have to wait and see what happens there. But we did get the latest look at how oil and gas executives view the industry via the closely watched Dallas Fed Energy Survey on average respondents see WTI at 8874 by the end of this year. With forecasts ranging from a low of $65 to a high of $120 per barrel,

executives pointed to a number of challenges facing the industry, including inflation and supply chain issues, as well as criticisms from the Biden administration. Let's check on prices here. WTI down 9 tenths of a percent at 81,48, brand crude at 8883 for a loss of half of 1 percent, and we're continuing to follow the latest from the Nord Stream pipeline leaks. The operator saying just now that it will begin assessing the damages as soon as it receives the necessary permits.

The company adding that it's not possible to predict the time frame for restoration until the initial damage assessment is complete. Contessa. All right, Pippa Stevens, thank you for that. Despite the recession risks, our next guest says this is now a historic opportunity to own small caps. Here to make her case is Jill Kerry Hall of Bank of America Securities. Jill, it's great to see you. let's just tell the audience and admit how and our conversation began. We were on a plane together and you said to me, normally in times of uncertainty and volatility, people run from small caps.

Explain why you think that might be a bad move. Yeah, good to see you and thanks for having me. I think, as you say, normally small caps are not the size thing that you want to own. If you're in a downturn going into a potential recession, our economists are looking for a mild recession next year. But I think today there are some fundamental differences in the backdrop, and I think importantly, small caps have been pricing in a lot of the risks already. So, you know, when you look at the forward PE multiple of the Russell 2000, it's trading it, you know, around 11, 12 times recessionary lows. It's the only size segment within the market, equity market that's, you know, very cheap versus history right now. You know, large cap multiples have come down more to in line with average, but they're still not historically cheap. cheap. And, you know, when you look at that relative multiple of small versus large caps,

trading almost the lowest levels we've ever seen outside of briefly during the tech bubble. So I think, you know, small caps are pricing in a lot of the recession risks already. The equity risk premium of small caps when you look at the Russell 2000 is at record highs, whereas for the S&P 500, it hasn't risen as much as it typically does even in a mild recession. So, you know, especially for investors with longer time, Verizon. this looks like a really great opportunity to own small caps, overweight small caps relative to large. And that was really what we saw during the early 2000s after valuations were last time

this cheap. That was a great decade to own small over large. And do you think now is the time to get in? Are you willing to go in and deploy cash right now in small caps? Well, I think, you know, there's obviously risk that the market remains volatile near-term. you know, the consensus economic forecast have not really been fully beaking in, you know, what we're expecting, which is a mild recession next year. We think earnings forecasts still have room to come down, although at this point, you know, again, even small-cap earnings have been

more quickly adjusting to reflect that expectation than large-cap earnings have, which have remained much stickier. And I think, you know, we could see further volatility near-term, but we actually think there could be more downside risk to large caps than to small caps. You know, once the markets bottom out, typically early, early cycle environments tend to be the best phase for small caps. But I think there's still fundamental reasons that small caps could hold up well in this current backdrop as well. We've seen CAPX spending and CAPEX guidance by corporates hold up really well, even in the most recent earnings season. And small caps tend to benefit from CAPX cycles in the U.S. more so than large caps.

They should benefit from reshoring of U.S. manufacturing. And the guidance for small caps has held up during the most recent earning season. So certainly room for further cuts to estimates. But we think that small caps have been pricing in these risks. Let me jump in with a sort of final question here, Jill. You know, we don't see as many small cap managers as we do large cap stock folks here on CNBC. But a lot of your brothers and sisters in your business say what's really important right now are strong balance sheets and reliable, if not growing dividends. And I want you to talk about that within the context of small cap shares.

I'm guessing that a greater percentage of them do not have fortress balance sheets than some big cap stocks. Not to say that big cap stocks are immune to that problem. and I'm guessing that they are less inclined to pay plump dividends, right or wrong? Right. So I think, you know, you're right. Typically a lower proportion of small caps are going to pay dividends. And the Russell 2000, when you look at it as a benchmark, is going to be a lower quality benchmark in terms of, you know, the number of stocks that are actually profitable. About a third of the index are non-earners. They don't have profits. But I think, you know, what's interesting is, number one, if you look at the S&P 600, small cup index. That's when we've been highlighting as a higher quality area of small caps.

Only about 10% of those stocks are non-earners. So it's a higher quality benchmark, less exposure to areas like, you know, healthcare and biotech where health care is still ranked, you know, much more weekly, you know, worse. Is that where you do most of your stock picking? Do I infer from that that that's where you do most of your stock picking from that higher quality benchmark? Yeah, we do like quality as a theme overall within small caps. I think, you know, within small caps, we would focus on quality stocks with strong free cash flow. Interestingly, the S&P 600 dividend yield has been trending above the S&P 500 dividend yields. And dividend paying stocks within small caps have been rewarded this year.

So even within small caps, there's, you know, been a big performance dispersion between dividend payers and non-dividend payers. You don't always think about owning small caps for dividends, but I think right now that's a theme that's going to work. So overall, that's interesting. That's a benchmark. So the S&P 600 has a higher dividend yield than the 500, the S&P 500. Did I hear you right? Yeah. Boy.

Interestingly. And you, once again, you told me something I didn't know. It's not that that's a really high bar, Jill, but feel good that you educated me on that. Jill, Carrie Hall, we appreciate it. You see why it pays to talk to the passenger next to you on the plane. Yeah, no, that's right. Because she can come in and like really, I learned a lot sitting next to her. So I thought maybe she could share what she knows.

It was great. All right. Big Tech there. I'm thinking about some of the passages. I'm sat next to. I don't know anyone to talk to them. All right, big tech, the real laggard amid this market turmoil. The NASDAQ sinking about 4%.

Apple is the big loser today. As Wall Street debates, what is next for the tech giant. B of A downgraded it. Rosenblatt upgraded it and reports a remain of slowing demand for those phones. I guess. But retail investors still seem to think it is a bastion of hope in the market. We will discuss Apple and more when Power Lunch returns in a couple of minutes. All right, welcome back everybody to Power Launch Apple. Let's take a look at it down more than 5% after Bank of America downgraded the stock. You don't see that all that often. Cut the price target there. Shares are also

underperforming the market this week and that could make skittish retail investors even more so. Let's get to Kate Rooney with more. And of course, Apple Kate is a stock that a lot of retail investors own, and some own it but don't even know it because they got a lot of it in mutual funds or ETFs. You're so right, Tyler. And the average retail investor right now is heavily indexed to Apple. So any more pain in that name could really add to an already tough year for most investors and increases the chance that they'll throw in the towel altogether and sell. According to Vanda Research, the iPhone maker accounts for about 20% of those investor holding it's by far the most widely held stock out there ahead of Tesla.

And Vanda calls it a last bastion of hope for retail. This group has been relatively resilient and buying the dip lately. That is slowing down a little bit this week, which Vanda says is a sign of deteriorating confidence in the market's ability to rebound. You can see retail buying had been pretty steady since June, but a drop-off started on Monday. This is a very important group to watch. Some analysts say that retail investors have been the ones, quote, cushioning the market in recent weeks. The chart here from Banda shows a spike in retail right alongside some of those recent

recoveries in the S&P. And if this group does decide to sit on the sideline or sell, it could be more trouble for the market. One silver lining, though, sometimes retail capitulation, as they call it, or selling is a sign of a bottom. There's another sign that mom and pop investors may be losing a bit of interest in the market, a decline in Google searches. Those are back at pre-pandemic levels after being relatively stable.

Through the last year or so, our colleague, Jeff Cox, says a lot more on that story on CnBC.com. Make sure to check that one out. Back to you. All right. Thank you very much for that, Kate. Up next, Kevin O'Leary has never had a wonderful feeling about investing in the bond market. He tells us until now he's going to tell us what he's buying and what he's staying away from. Welcome back to Power Lunch, everybody. Another down day on Wall Street, as stocks lose all of yesterday's big gains. Our next guest says he's buying one investment that he's never bought before. Let's bring in Kevin O'Leary, Chairman of O'Shares Investments,

CNBC contributor. Kevin, welcome. Good to see you. I haven't seen you in a while. Welcome back. Let's talk about the markets generally and what you're buying specifically. What do you think?

Well, the markets are obviously in a very tough place. And one of the major reasons that I don't think we talk enough about is that there's alternatives to equities for the first time in decades. So if you're a typical fiduciary and you've got a bogey of 6% to distribute, let's say, in a pension plan, for the last 20 years, it's been extremely difficult to use treasuries to help you achieve that goal. And so generally speaking, people put less weighting into fixed income, particularly risk-free risk income, in a two-year treasury, which was under 50 basis points for a long time. That's not the case today.

And for the first time in the last couple of months, I, like many others, have started to tiptoe through the tulips back into what I did decades ago. Corporate credits, single, double, triple B, bonds again, even two years, because frankly, preservation is my mandate. Performance is important, but preservation is the primary mandate. And right now, 400 basis points plus change looks pretty good for the next 24 months, given the uncertainty on the Fed's decisions coming up. and how deep and how long the recession will be. And so that is part of the reason today you see these dramatic sell-offs because people just like me are spending up to 40% of their day like I did looking at bonds.

It's been so long. Yeah, no, it has been really long. Let me go out on a little bit of a tangent. I know you were aware that we had our Delivering Alpha conference yesterday. And the tangent is this. Quite a few of the investors there were talking about eventual, maybe not immediate, but eventual huge opportunities in distress debt, which is a whole other vector than what we're talking about here, about capturing a 4.1, 4.2% in a treasury. What do you think?

Yes, eventually, not yet. We haven't seen those spreads blow out enough yet. I mean, if you have real guts and you think that we're going to have a soft landing and you think the Fed may pause in Q1 of next year, there's money to be made in stress but not for me i mean i'm not going to take that risk because when those when those credits blow out they really blow out they blow out in absolutely stratospheric ways blood in the streets that's when you have great opportunity we're talking about 20 30 percent returns and you've also got to look at the covenants you have a little you know people forget there's a lot of work in stressed corporate debt you've got to look at the covenants you got to figure out the litigation the chance of bankruptcy

I've done that before, but I've really got to dust up my chops. It's been so long. Right, right. Get your primer out, I guess. So let's talk about the stock draft because actually it's been very illustrative this week talking about the stocks that, the picks that were made when the draft happened and where people are now. You're in fifth place, middle of the road. Your performance is down, what, 20 percent?

Would you stick right now for, say, one of your choices, Moderna, Kevin? Yeah, I would. I mean, you know, the thing about the draft, and I'm. been privileged enough to have won it once. You have to take outlandest bets to get to the top of the heap. Now, right now in the horse race, I'm happy to be sitting in the middle because it won't matter till April when I plan to win this year again. And I'll tell you how I'm going to do it. Right now, ARC has been decimated, down almost 70% on the year.

Kathy Wood has a very concentrated, in my opinion, very difficult mandate until things turn around in her incredibly volatile stocks. Now, if you want to get a chance to win, you've got to get a funky chicken position like that, because when it turns, it just sweeps by all the other horses. Does that mean that you think it's going to turn before April? Well, I'm optimistic that what will occur is we will bottom up. What we needed to happen is happening.

Apple broke 150. That's going to be baby with the bathwater, throw in the towel, all the analogies you want. That stock's going to 120 where I'll buy it again. It's going to be brutal. Grown men are going to weep in the streets because that is the most indexed stock in the world. Everybody owns it as you just detailed in the form of piece. And so do I.

Everybody owns Apple. But now it's broken that 150 support and it did it really concisively. And it's going to go south. And so when that occurs, we need something like that to bottom tech. And that's the granddaddy consumer slash tech stocks. So that would be a good thing. So the producers correcting me, the stock draft ends in February, not April. So hopefully all of this turns even sooner.

Then if that's true, all bets are off. All right. Kevin O'Leary, thank you for joining us. Appreciate it, Mr. Wonderful. Thank you. Take care. Bye-bye. Up next, the NASDAQ down close to 4% right now.

It's off 10% this month alone. We're going to take a look at some of the names getting hit hardest ahead. Look at the NASDAQ off 4%. Almost 4%. Power Lunch, back in two. back to power lunch the NASDAQ down more than 3.5%. But some parts of the tech trade are getting hit harder than others. Dom, too, back with us, Dom. The reason why it's important is because at these levels, Ty Contessa, we are talking about new 52-week lows for the NASDAQ 100 and NASDAQ composites. So if you take a look at the reasons why, there are a number of stocks that are trading at least 30% below their average price on a rolling basis for the last 200 days.

So their longer-term trend. Check out these names. We're talking names you know. Meta platforms, Adobe, some of these ones, and Zoom video, each trading around 35, 36, 37% below their 200-day moving average. So bigger hits than others compared to their average. One more place to look at some of the semiconductor stocks, also taking a bigger hit. Take a look at some of these names as well. Look at Advanced Micro, Intel, Nvidia, anywhere from 37 to 39% below. So 16 stocks, at least 30% in the NASDAQ 100 below their 200-day average price. I've posted the rest of those 16 up on my Twitter feed at the Domino. You can see them there, guys. All right, Tom, thank you. Don, thank you very much. And thank you very much for watching Power One. Closing while starts right now.