Power Lunch - The Inflation Threat Rattles the Market as Corporate Profits Get Squeezed 5/18/22

Episode Date: May 18, 2022

The market sell-off intensifies in afternoon trading. Power Lunch goes commercial free to deliver you minute-by-minute market coverage. One expert calls this a “perfect storm” for the market. Another expert is finding opportunity in unexpected places. Plus, why Target is contributing to the inflation scare. And where gas prices go from here now that they’re averaging more than $4 a gallon in every state. Don’t miss veteran market watcher Art Cashin on whether there’s more selling ahead. 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, everybody. I'm Tyler Matheson. The sell-off is intensifying this afternoon. The Dow dropping 1,100 points or thereabouts, the inflation threat looming. You can't talk it away. It looms large over corporate profits now and economic growth. This hour, we're going to look at the impact of rising prices on retail. Hit hard today, housing, and energy. How you can protect your portfolio and the stocks to own in an inflationary environment like the one we're in right now. Now, first over to Kelly and a check on the markets. Thank you, Tyler. Hi, everybody. And we are right near session lows right now.

The Dow was briefly down more than 1,100 points just off that level. The Dow's gains of the past three sessions are now gone. It's 31,588. The S&P is down 3.7%. It's below 4,000 in trading today. The NASDAQ is down almost 4.5%. It's below 11,500. Let's get right down to Bob Bassani, who's got more on what's driving these losses today.

Bob? And it's essentially straight down for the S&P 500. Slow but steady descent, straight down. I think what's most surprising to everyone is the reaction of the defensive names. Consumer staples considered defensive stocks. Everyone has to buy consumer staples, right? They'll be fine. Well, Walmart is considered a consumer staple, but maybe shocking some people to see Campbell soup among the biggest losers in the S&P 500. Kraft Heinz, General Mills, Kroger, all of things that you consider defensive, relatively safe plays, even if the economy slows down, apparently not so much. Consumer discretionary, and here's where it gets very confusing. Is Dollar Tree a consumer staple store or a discretionary store? It doesn't really matter.

For our purposes, Target and Walmart are impacting virtually all of them, not just Dollar Tree, but even Best Buy, which is clearly a discretionary, auto zone. You have to fix your car, but I guess you consider that a discretionary too, all of them equally weak. Now, remember something about the housing business. That was the first industry to downturn in the beginning of January. These stocks are down 25, 27, 28%, including Whirlpool, including Carrier Global, which is the air conditioning company that you're seeing, and yet we're seeing another leg down here today. What's the gainers? This is very curious to me because the gainers have one thing in common, the stocks that are up, Verizon, Con Ed, American Electric, Philip Morris, these are all relatively

high dividend payers, energy NRG, for example. They all pay yields three, four, four and a half percent. So there might be a little bit of interest in buying high dividend yields. As for where we are in the S&P 500, remember the closing low last Thursday. It was 3930. We are essentially sitting right on that closing low. That was the 52 week low last week. So that's sort of an immediate reference point. I think, guys, what we're seeing here is the consumer staples are really weak because Walmart and Target are telling us essentially that there is very big risk to earnings here from the consumer reacting to these higher prices and maybe adjusting their spending. That's what we heard from the Target CEO today.

And I anticipate now they're going to start taking out some of the estimates, the earnings estimates, for some of these names today. Guys, back to you. All right, Bob. Thank you very much. Let's drill down a bit further here. Our next guest says we're now seeing a perfect storm in the markets, P.E. multiple compression, profit margin, compression.

worries about slowing revenue growth. For more, let's bring in the always cheery Peter Bukvar, he's chief investment officer with Bleakley Advisory Group. He's a CNBC contributor. Peter, that is a trifecta of trouble for equities, multiple compression, revenues, perhaps slowing, and profit margins getting squeezed. Hi, Tyler. Well, those are the three drivers of equity prices at the end of the day. It's what the P multiple is going to end up being, and where to earnings go. And we know through rate hikes, interest rate increases, and quantitative tightening about to begin, we've seen this multiple compression that really started last year with the most expensive parts of the market.

Now on the east side, the earnings side, well, we're now seeing profit margin compression. We heard that writ large this week. But keep in mind that profit margin compression is coming off new record highs. So there is a lot more room potentially on the downside. the revenue side, now we're obviously worrying about the economic downturn and slowing rate of growth as we progress through the year, particularly in certain parts of the economy. So that's what gets to this perfect storm of compressed multiples at the same time, have earnings at risk. I don't want to linger on it and make this the point of our conversation today, but wouldn't

one rather have profit margin compression when profits were high and margins were high than when they were low. I mean, so in other words, I'm trying to turn the, I'm trying to turn the argument inside out a little bit. Well, the one challenge with that is you're trading it 17 times earnings right now, even with this pullback in the market. And that 17 times earnings estimate is embedded with record high profit margins. Right. So if you see a reduction in earnings estimates and earnings that are eventually realized at the same time you're seeing this P.E. Multiple compression, that's the toxic combination. Peter, Jeremy Grantham last hour when we spoke, said he would recommend resource names.

He actually recommended climate change plays. It basically thinks that that's going to be one area that does see huge top line growth in the decades you could call it ahead. Commodities are notoriously difficult to invest in and can be very fickle over time. but I know you've been a fan of this kind of trade as well. Can you give some people some specific ideas? I mean, should they buy companies or are these names looking too crowded or could energy have another couple of years to run?

I mean, Pioneer today said they think oil is going to be over $100 a barrel for a couple of years. Energy stocks, I still think, have room to go, particularly the European oil stocks that are barely above their pre-COVID levels. And the group as a whole, as part of the S&P 500, is only, about 5%, which while that's twice as much as we're bottomed out at, I think that that ratio is going to go higher. So it's one of my highest conviction ideas, and I remain very bullish on precious metals. I just think it's a safer place to be in this very uncertain environment, gold and silver, and you can buy that through ETS or you can buy the individual miners. And with energy, I'd be

buying the companies as opposed to speculating in the futures market on the actual price, which I do think will go higher. What would you say about the S&P 500 broadly right now? Well, as I said to Tyler, 17 times earnings on near-record profit margins, I think, is a risk. I think the P&Multable continues to compress, probably something 15 or less,

with quantitative tightening and interest rates going up at the same time, at the same time that earnings estimates I expect to fall as the year progresses. So in other words, the multiple still has a couple of handles to drop, but the earnings, the denominator, is falling as well? Yes, unfortunately. Prices go down, earnings go down, multiple goes down. You got a, what sell-off does this sell-off remind you of? Does it remind you of 2020?

Does it remind you of 208-09? Does it remind you as it does me a little more of 2000, where it began with sort of a cascade in the Internet names? Here you can say it was part. partly the meme names, partly the fashionable pandemic, stay-at-home plays, what? And what can we learn from that, if anything? Well, I agree with you 100%. When you think about that time period, tech topped out in March 2000.

Correct. Similar to the meme stocks topping out in February 2021. And in 2000, the S&P 500 actually made a fresh high in September of 2000, even after the tech stock started to implode, similar to the S&P 500, hitting a record high just in January, well after the frothy part of the market started to sell off. So this reminds me very much of that time frame. So what does that imply for the future and imply for how investors can both protect themselves and maybe shuttle into sectors of the market where they could eke out a little game? Well, the cheaper stuff, the so-called value stocks, I still think are going to be a

much better place to be. While it's not necessarily going to immunize you from losses, embedded in a value stock is low expectations. And there's still a lot of sort of P.E. multiple handles to come off the high-flying stocks, the tech stocks, the areas of the market that everyone has loved over the past five plus years. And I'd more attracted to think, that people haven't cared about. And it's the same thing that happened in 2000 to 2002, where a lot of the value stuff actually stopped going down at the same time to stop, the tech stocks, stopped going up. Peter, what do you think is the catalyst for this sudden return to the kind of capitulation moves we saw last week? Was it the comments from Powell yesterday

that seemed to indicate he was going to stick with their plans for tightening and saw no reason yet to back off? I think so. I mean, I wouldn't be surprised if in the short term, notwithstanding today's self, that we do bounce to maybe 4,200-ish in the S&P. But what has really, is only beginning to get priced in is the economic impact of this inflation and higher interest rate world that we're in. You know, up until this point, it has been mostly on the P.E. side that has seen this adjustment. It has barely been on the east side, which I think, as I said earlier, is to come. All right. Thanks, Peter. Peter, always good to see you, my friend.

Thanks for having me. Peter, Bookbar. Our next guest says those recent Fed moves could result in inflation that is too high or a contraction in the economy that is beyond what's desired. But he is still finding opportunities. Let's bring in Dave Smith, the chief investment officer with Rockland Trust. Dave, good to see you again. Let's just start with your advice to investors right now.

Yeah, well, we're telling folks what we always do that as uncomfortable as this period of time is, you really think long-term, you know, I'm not sure if this is going to last another month, another six months, another year. But I think for our clients, when we think three, five, 10 years out, now this is an interesting entry point. And I don't know that it really at the end of the day is going to make that big of a deal. We want 10 years from now is to kind of whether or not you wait for a week or a month before you get started to invest. And you need to remain invested. It's as most people would suggest it's time in the market, not timing in the market that results in success ultimately. What gives you the confidence?

that this won't be a chronically, a period of chronic underperformance for stocks? Well, I guess at the end of the day, we have some degree of confidence that the Federal Reserve will be able to manage their way up to an okay outcome. I think the Fed Chair has kind of laid the groundwork for not optimal, but something that's not dramatically bad. And it's a very challenging time for them. I mean, if you think about what's going on, unwinding the quantitative easing, with quantitative tightening to the level that we've had, we've only done this once before, and never at this size and scope. So it's clearly challenging for them to calibrate that

at the right level of precision to nail down the perfectly smooth landing. But we don't need to get a perfectly smooth landing, I think, for our economic system to kind of prevail. And in the meantime, we look for companies that have the ability to manage their way through these kinds of environments and have done so in the past with some consistency.

So looking for companies that can grow their top lines and manage the cost side and ultimately grow their earnings streams at a reasonable clip. I wonder what you think of how consumer behavior is going to play out over the next, say, six months. We're going to hear from MasterCard survey in a few minutes, Dave, and it's going to tell us that that consumers are spending a lot, and they're spending on experiences, and their airline

bookings are above 2019 pre-pandemic levels, and some other areas of expenditure are higher as well. But I wonder what is going to happen when consumers. have that ultimate reckoning that they have, on the one hand, declining wealth. A lot of wealth has been destroyed here or transferred and increasing prices. That is the anti-wealth effect. That is going to, I can't imagine that it isn't going to catch up with and dampen consumer behavior as we move into the summer and fall.

Tyler, you're spot on. And it's very, very murky to sort of suggest what's going to. happen here. I mean, a lot of the data that we look at is backwards looking. And clearly there was some pent-up demand, and we're seeing that in the statistics on the travel on MasterCard's transaction activities and so forth. You know, what we peered through in some of the earnings we've seen this week from some of the retailers. And it seems to be the lower-end consumers, the one who's most challenged here, even in T.J. Max's. As always. Yeah. And this morning, even in T.J. Max, if you read through the fine print, they said in their lower end demographics, it's a little more challenging

than their higher end demographics. And so I think there's a tale of two stories here. On the wealth effect side, I think it's important to keep in a context that, yes, this has been a challenging start to the year. But we're coming off three very strong years. So the wealth effect is, you know, it's certainly a mental and psychological thing. But I think people, if they think back to where they were two, three years ago, they're still very much ahead of the game and have experienced returns that are well above long-term averages. So I think most people are still feeling. pretty good so long as this doesn't continue and persist for too awful long. Let's talk about some individual names, Dave, that you'd be recommending here.

Yeah, so, you know, we're looking to try to kind of pick through the rubble. One of the companies that we're really positive on right now is meta, formerly known as Facebook. I mean, as most folks know, it's been a hit pretty hard. The first quarter of this year was a challenging one for them due to some changes in the technology in the way they're able to track their ad spend. And they seem to be making some progress on that. And the stock, in the meantime, has come off on what was sort of above market multiples down to levels that are now below the market, which is remarkable to think about.

A company that with a growth rate like Facebook three or four years ago was trading at substantially higher multiples in the market, sometimes as much as 2X the market. Now it's trading at a discount. So we're interested to kind of take a closer look and invest in and own our Facebook meta platforms. Another one we're very focused on today is Chubb. You know, interest rates have moved up. They've been bouncing around this 3% level now up and below for about two or three weeks. But ultimately, higher interest rates are beneficial to all financial services companies, generally speaking, but particularly to banks and insurance companies.

The difference between a bank and insurance company is if you get the economy wrong and there's credit challenges, the banks are going to have some issues with regards to their underwriting history. that doesn't really impact the property casualty insurer like Chubb. So you kind of get the benefit of the interest rate rise without the risk of, you know, a substantial impact from a slower economic environment, particularly for Chubb, who ends up insuring, their insured skew a little wealthier, and so less impacted by that. And your other pick, your final one, we have to move along is T-Roe Price. You like their conservative management. You like their cash flow and you like their dividend.

Yeah, and the multiple is incredible right now, 13.3 times. Now, maybe the multiple earnings are going to come down a little bit, but 13.3 times, great entry point for a great long-term holding, and so we're very bullish on T-Row. Dave, thanks very much. We appreciate it. Thanks for having me. Dave Smith. All right, now to Brian Sullivan with what may be actually causing much of the entire inflation story, energy costs from oil to gasoline, natural gas, all taking a toll,

and gasoline is now averaging more than $4 a gallon in every state for the first time ever, even in Texas, Brian. What's going on? Even in Texas, yeah, 452 national average, Tyler, via AAA, obviously in parts of California, they're watching and listening to us and laughing at us because I saw 650 a gallon in parts of L.A. When I was out there recently, you might have lower in parts of the South and Southwest, but overall, guys, prices are very high and creeping up toward five bucks a gallon here in the Northeast as well. I mean, Tyler, you know this. You've been doing this a long time. is the ultimate regressive tax. The reality is that we all pay the same for a gallon of gasoline

roughly, depending on where we live, it doesn't matter how much we make or what kind of car we drive, we're going to pay about the same. And so when you look at prices going up like this, the average driver, even now driving about, using about 50 gallons of gasoline a month on average, so just do the math on that, multiply that maybe by two cars, a household, kids, etc. Even going to the store or soccer practice gets more expensive. So for those who can afford Ford electric cars, which are still incredibly expensive by most accounts. They're just driving right on by. But if you are going to the station, it is inflation nation. It is also inflation nation when you look at diesel prices, whether you have a diesel car, which typically get better

per mile, per gallon mileage. But the diesel costs are way off the roof, and that affects the transportation sector dramatically. You're in 1981, our family briefly owned a Huzo diesel wagon when they were available in America, belched smoke like the dragon from the Hobbit. It lasted about six months. It's cleaner now. But listen, if you're a trucker, Tyler, this is tough. And for most of the country, I get it, is not the United States. There's not New York area, by the way. But here in the New York area, Patrick Dahon of Gaspud, he was showing some prices of diesel around the New York area in Brewster, New York, Long Island City. I understand that's not representative of the country. It's a logistical challenge to get things here. But the price of

diesel was $7.50 per gallon. Tyler, if you back that out, there's 42 gallons of fuel in a barrel of oil. That would be the equivalent of $315 per barrel oil. Now, it's not one to one. You write, the price of gasoline is only about half the price of a barrel of oil is taxes, marketing transport. I'm just trying to make a point at how expensive it is. There's also concerns about shortages, so no doubt distributors have a lot of pricing power right now. Oh, and by the way, Tyler, you guys were talking about retail and margin compression. Everything in that Walmart or Target is probably trucked in. It probably came on a ship using diesel fuel from China.

It probably got on a train at some point. That's why energy inflation is the macro story in many ways. And Brian, we're also seeing a lot of pressure across the transports today. I think the last check they were down like 7%. So this hits them especially hard. We always watch it as a bellwether, but just as a supply chain story, if nothing else, just about the most frustrating thing that could be happening right now. It's brutal. I mean, and the trucking companies, and I talk to some, I've got a good buddy of mine who runs a small trucking brokerage firm there, and they do a lot of the flatbed type odd load, so he's not hit quite as much. But he's talking about, you know, they add surcharges, and you're going to find ways to charge it back. The trucker and the trucking company are not going to hold thing, the whole thing. It goes along. the whole lines, by the way. Very quickly, natural gas. It's not getting the attention it deserves. We were in London in November of last year trying to tell their inflation story. Everything focuses

on gasoline. I get it because we see it every day. Do not lose sight, please, of utility costs, natural gas over eight bucks. The utility bills that all of our viewers are going to face, if they're on a fixed rate plan, it's going to reset much higher. And to make stuff, You need a lot of power to manufacture cars, solar panels, everything. So the fossil fuel inflation story is going to hit a lot of other parts of even the ESG story, guys. This may be the story, utility costs heading into summer. And with that in mind, I'll just call you attention. S&B Global drop Tesla from their ESG index today.

And Tesla's Elon Musk tweeting out, insane. ESG is an outrageous scam. So Musk back on the record this time going after ESG. Good luck, America. All right. Thanks very much, Brian Sullivan. Our next guest says gas and diesel prices are headed even higher. You might not be surprised to hear that after what you just heard from Brian.

He expects gasoline will approach $5 a gallon nationally, and diesel will average $6 a gallon. Let's bring in Bob McNally, founder and president of Rapid Ann Energy Group. He's also former energy advisor to President George W. Bush. Welcome, Bob. Good to see you. Did you hear anything in Brian's report that you disagree with? No, not at all. And I feel the pain. You know, these gasoline and diesel prices are enforcing the iron rule of economics that you can't consume what you're unable to produce or draw from inventory or import.

And the supply side is really stretched, both the crude oil market and the refining sectors. And so I wish I had better news. I really did. It's not a not a happy forecast, but these prices just have to go higher because there is no sign yet of real demand capitulation, real demand declines. And they will go higher until that happens, unfortunately. Has there been any effect from the release of gasoline or petroleum supplies from the strategic petroleum reserves? You know, not really. One could say that the release of the crude oil from the reserves made prices lower than they would have been otherwise crude. But the problem isn't so much crude anymore. Crude at $110, $113. The problem is shifting now to the refining sector, the margin

between the product price, diesel and gasoline and crude is now $50, $60 a barrel, two or three X, what normally it is. And so it's that refining bottleneck, which is now something that the SPR really can't address too well. And so, no, it has to be. hasn't had a big effect. Proof oil prices might have been a tad higher had it not been used, but it's not the big deal. It's refining right now. Bob, do we need a recession in order to balance the energy markets? I hate the word need, but you know what? Not every recession began with an oil price spike, but every, and I mean every oil price spike led to a recession. I mean, they just are there at the scene of the crime. The price of energy keeps rising until it's

crushes consumption. Now, you can have like from 03 to 07, 08, you can have rising energy prices with a growing economy, but in the economy we're in right now with inflationary risk, central banks withdrawing liquidity, et cetera, et cetera, geopolitical risk. I'm afraid this one's not going to end well. So yes, I'm afraid it's going to end with demand slowdowns at least, and possibly let's hope, a mild recession. As Brian pointed out there, Not only does virtually everything that you buy out of a Target or a Walmart or a Best Buy arrive, get transported somewhere by a truck or a train or a ship that uses diesel, but an awful lot of the products themselves have petroleum products in them. So is there any way that you see consumer product inflation declining in the near term? It can't, not without a recession. No, and that's absolutely true. Diesel, you know, we talk about gasoline. It's what we see. It's what we pump. But diesel is really the economic fuel. It's the lifeblood of the economy, transportation, power in some cases, and so forth. So it really is embedded in economic activity, and it filters through so many goods and services. So no, I'm afraid we're going to have to march higher here. It'll affect broader consumer price inflation. Energy in a way,

is the tail kind of wagging the dog here. All right, Bob McNally, thanks very much. We appreciate it. Always good to see you, Bob. Thank you. Impact certainly showing up in shares of Target. There results, one reason the market is selling off deeply today. They warned of unusually high costs that are eating into profits. Courtney Reagan is here with the details. Court. Hi, Kelly. Yes. So Target and Walmart's results are key examples of the challenges that inflation inflicts on companies, even when consumers are still spending, at least on some categories. So both Walmart and Target had stronger than expected sales, but profit took huge hits as costs soared well above levels anticipated even just a couple months ago. So Target and Walmart push vendors to keep the prices that they charge as low as possible in order for the retailers to keep prices low for consumers.

But with decades high inflation, there's really only so much that can be controlled when it comes to those prices. The cost of transporting goods was significantly high. for Walmart and Target this quarter and took a big brett bite out of profits. Target now expects $1 billion in incremental freight costs this year. That estimate has changed markedly in the last three months. Walmart CEO Doug McMillan called out inflation, particularly in food and fuel and the higher costs for containers and storage. While both Target and Walmart say the U.S. consumer is holding up,

Shoppers did buy less discretionary, higher margin categories like TVs and appliances that target, while food, household essentials, and beauty were top categories there. Kelly and Tyler. And you still wonder how much read-through there is. For example, as Dom mentioned, we get BJ's reporting. Dollar General was selling off sharply, and yet some of the home improvement names are holding up relatively better. Absolutely, yeah. It is really interesting to try to see what this means for all of retail.

And generally what this means about the consumer and Lowe's results were very different from Home Depot's results. I think it's really about who can operate well in this inflationary environment. Often a Walmart and a Target may be grouped in the same bucket as some of the dollar stores and the off-price players like a TJX and a raw stores when it comes to potentially being beneficiaries in this environment. But we know that Walmart and Target did not manage those costs well, even if they were unexpectedly higher than they had first thought. TJX, on the other hand, largely facing some of

those same external cost pressures. But they said actually freight came in about what we expected. And those shares are actually much, much higher today, Kelly. Yeah, they're much better. Absolutely. Courtney, thank you very much. Courtney Reagan. Higher costs are also hitting the housing market. On that note, let's get to Diana Oleg. Diana. Well, Kelly, inflation is in both materials to build a home and then everything that goes into the home. So it's hitting both builders and consumers equally. Building material prices are up just over 19% year over year and close to 36% since the start of the pandemic. And that's according to the National Association of Home Builders and part of why they reported a huge drop this month in builder's sentiment to a near two year low. For example,

the price of softwood lumber is up 60% from its latest trough last September, concrete up nearly 9% year over year and gypsum up 18%. That's your wallboard. For consumers, furniture prices are 15% from a year ago. Appliance nearly 8% overall furnishings and decor up 8% as well. And finally, for home buyers, talk about inflation in the price of a home, up 21% from a year ago. And then add into that the rate on the 30 year fixed. It was 3.15% a year ago, now around 5.45. So no wonder mortgage applications to buy a home dropped 12% last week and single family housing starts.

We just got to read on that down 7% last. month, affordability for buyers and costs for builders, all taking a serious hit. Back to you guys. All right. So, Diana, are house prices likely to come down? I imagine maybe they would at the entry level where buyers might be most sensitive to rising interest rates? Well, that's the million dollar question, but then you've got this problem of the housing shortage, which keeps overcoming all of the real historical fundamentals that we usually gauge the market. which is that when sales fall, prices start to ease up too. But we've seen sales down for five months plus,

and we haven't seen any ease up yet in home prices. We're going to get the existing home sales report for April tomorrow morning, and maybe we'll see something there. But so far, what I'm hearing from realtors on the ground is sellers are still not lowering their prices. They're having to have some tough conversations with them because there's still all this demand out there. But buyers right now, they're getting to the point where they may want that house,

but they're not willing to bid up for it. And finally, we got a report from Redfin today saying that they're seeing a pretty big drop in bidding wars. So perhaps prices will cool soon, but we have not seen that yet, Ty. Yeah. All right, Diana, thank you very much, Diana Oleg. Meantam, let's get to Adam Chu for a market flash. All right, so Tyler, Kelly, a key part of the market to watch. We want to check on some of the hardest hit areas in the sell-off,

and it's the chipmakers we're focusing on right now. Constituents of that Vanek Vector Semiconductor ETF ticker, SMH down more than just a lot of folks out there. You've got giants like Nvidia, Qualcomm, AMD, all off by 5% or more. You can see there in trading so far. Elsewhere in technology, it's the cloud stocks, also enterprise computing, extending recent weaknesses. You've got Z-scaler, Octa, Datadog, among some of the biggest laggards so far today. All three, by the way, you're down 30% just in May alone.

And then you've got giants like Adobe and Salesforce. also in negative territory today. So watch those mega-cap names, especially in software and semis. Ty, I'll send things back over to you. All right. Thank you very much, Dom. Kelly? Big tech stocks, also getting rocked in today's sell-off.

Amazon down 6%, Apple down 5%, and Microsoft down 4%, and Alphabet, down about 3%. Which is one of the stocks Wall Street is looking to for steady returns. Dear Jabosa, standing by with more on that in just a moment. Let's do a quick check on the NASDAQ as we go as well. 4% down today. Deirdre and no selling relief in mega cap tech. Yeah, well, with today's drop, Callie, Alphabet shares, they are within striking distance of its 52 week low,

just two and a half percent off of that level. And you're right, this is a name that Wall Street looks to for steadiness and consistency. So today's move is indeed jarring, but if the ad market softens in an economic downturn or recession, Google will get hit. When I spoke to CEO Sundar Pichai last week, he was cautious, but he was still optimistic. saying that investment and hiring plans remain on track.

The question now is, has that macro picture changed in just a week? Walmart and Target raising more concerns about inflationary pressures than consumer demand. We talk to venture capital investors all the time on tech check, Kelly, who are warning their portfolio companies to scale back on marketing and ad spent. And that is typically the first area that companies, public or private, scale back on in a downturn. And advertising revenue, that is still Alphabet's bread and budget. despite efforts and successes to diversify revenue. Wall Street, however, believes that Alphabet is less vulnerable to these factors than other

players like Snap and meta, not to mention they love that quickly growing cloud business that may be less susceptible to the macro backdrop. It's hard to think of that, pay attention to that on a day when everything is falling, including those mega caps. But that is the bullish picture that still largely remains intact among analysts. If today a bit in the shadows, Deirdre, thank you very. much, Deidre Bosa. Less than 30 minutes left, excuse me, 90 minutes left in the trading day. Maybe you wish it was 30 minutes. Stocks are near session lows. Let's go to Bob Pazani for a full

report. Bob? Well, the important thing here is we're off of the lows, but we're near those closing low of last Thursday. Let me just show you the Dow Lagerds today because it is a very rare day when you are going to seeing Walgreens down this much. All of the consumer staples and defensive names down so much. That's a new 52-week low for Walgreens. It's also a new low for Walmart. Not Coke. Coke's one of the few performers still up on the air. It's up about 4%.

But Procter & Gamble, 5% down. Folks, I've been doing this for 25 years. It's a rare day when you see Procter down 5%. You can go years without that happening. That is one of the lowest volatility stocks, lowest beta stocks in the S&P 500. It just doesn't move that much on a daily basis. For it to move 5%, that's quite extraordinary.

In times of the outperformers, a curious group here, pharmaceutical stocks have sort of become the new consumer staples and that they considered relatively safe. Merck's at a 52 week high right now, for example. Amgen's doing very well. Verizon's having a decent day. Travelers as well. Do they have anything in common?

Slightly on the higher dividend yield side of things, some of the utilities also doing a little bit better. So higher yield definitely has a little bit of cachet today, although not that much. If you look at the S&P, remember, 3930. that was the old closing low last Thursday. We are just above that level, as you can see, scraping along the bottom for the last half hour or so. One thing that kind of watch is for the VIX to get to really extreme levels to see if we have any kind of short term. And I emphasize short term bottom.

What is an extreme level for the VIX? Oh, 35 to 40. Usually when you get up in that territory, you get short term bottoms. We're not there yet. I don't know if there is a bottom right here. I'm just saying right now, considering the fact that we're down so much, is not that dramatically high. Keep an eye on this going into the close. Guys, back to you. All right. Thank you, Bob. Now to the bond market where yields are falling a little bit as

inflation concerns linger. People buying bonds. Rick Centellie tracking the action. Hi, Rick. Hi. You know, yesterday our chairman, Powell, had very tough talk at a Wall Street Journal event. Keep that in mind. Because as you look at a 24-hour chart of two-year no yields, most associated with the Fed, wow, it's moving down as well. It's down about three and a half basis points. But when you hook it into yesterday and do a two-day chart, you can see it's still in the upper end of that. And that's significant.

His tough talk left a lasting impression on short maturities and Fed Fund futures. They haven't moved much. But as you move down the curve, look at the 24-hour tens. It looks a lot like the 24-hour chart of twos until you tag on yesterday. You can see how much more damage there is in the long end,

which is acting more like a hedge to equities like it used to prior to all the inflation issues and supply chain issues that have arisen. And if you look at the dollar index historically noted for a flight to safety when things get dicey like the Dow and four-digit down territory, well, the 24-hour chart, yes, it's going up. But when you pair that with yesterday, you can see it hasn't gone up enough to negate the session yesterday, which is all very important because the yield curve is flattening, Fed Fund futures, percentages aren't changing much. so the tough talk has had a lasting impression in treasuries.

Tyler, back to you. Rick, thank you very much. Let's look at the energy complex, which is closing for the day. Volatile session for crude. Pippa Stevens with the numbers. Pippa. Hey, Tyler, oil down more than 2% today, proving that it's not immune to broader selling in the market,

even as supply concerns persist. We got inventory data this morning that showed a drop in oil and gasoline stocks, although there was a modest 1.2 million barrel bill. in distillates, which includes diesel. Rebecca Babin from CIBC private wealth, noting that this data was broadly supportive, but maybe not quite bullish enough for the big gains we've seen recently. So the market is still tight, but maybe not as tight as some were anticipating. Let's check on prices. WTI and Brent ending the day down about 3% at 109. Natural gas, though, is up about 6 tenths of 1% at $8.35 per MMBTU. And gasoline futures retreating now

down 6% protruding from that $4 level that we saw earlier in the week. All right, Pippa, thank you very much. Let's continue watching the markets here with our next guest who says the problem isn't just inflation itself. It's the expectation that it is here to stay for a while. Transitory, well, that was so 2021. Let's bring in Ann Barry, Wheelhouse, CIO. Anne, welcome back.

Good to see you. Thanks, Tyler. What has to change for inflation to go away? We need to start seeing the big distributors of consumer goods, start saying that they anticipate supply chain blockages and other factors driving up prices coming down, Tyler. So when I look at something like the Walmart earnings or I look at the target earnings, here's where I start to worry. You've got two of the biggest distribution channels of consumer products in the United States saying our margins have been compressed. We don't see light at the end of the tunnel yet, which means in my mind only one thing. They are going to be putting up prices and or they're going to be squeezing their suppliers to get their margins back, both of which signals that there's going to be inflation, both to the retail customer and through the supply chain for the foreseeable future.

It's the expectations that aren't coming down in the wake of these news items any time soon. We're looking at the down now at session lows off 1113 points at 31,000. And I asked one of our earlier guests, it seems, who mentioned the idea of a perfect storm. I wonder how you react to this. On the one hand, you have declining wealth. As people look at their portfolios, their 401Ks, and they see the effects of the dramatic gnawing away of this sell-off. And on the other hand, you see rising prices, airfares, clothing.

These prices are going to get passed along and already are being passed along. Higher food, higher clothing, and so forth. Is there any way that this doesn't end in a recession? I'm hopeful that if there is a recession coming, and I think the market, if you look at recent analyst reports, there's about a 70% chance of recession priced in. I'm in that camp. I do think it's coming. And so when I look at that dynamic, Tyler, and asking myself where to put money, I at this point think some of the consumer staples are oversold. I've been in Walmart for a while now, and I think Walmart's oversold today. I think these big scaled businesses that aren't

going anywhere anytime soon, whether it's food, whether it's health care related, I think those are pockets to start looking at in this recessionary environment, despite or even because of the sell-off now, somethings are trading at very favorable price to earnings to growth ratios, even accounting for a slowdown in the macro economy. And where are the best opportunities right now, as we've seen so many different asset values deflate, whether it's tech or media or, you know, everywhere you turn these days? Well, Kelly, one that I've liked is Google and Alphabet. I've liked that in recent weeks with the sell-off. I like it even more now. And there's a couple of reasons why. Alphabet suite of products essential like utilities to the modern consumer and to the

modern business, they're not going away. We are going to continue to pay for their services, whether it's cloud services or whether it's some of the consumer products. It's also a business with phenomenal free cash flow. Goldman Sachs is anticipating for this year over $9 billion of net cash flow, even after $30 billion of CAPEX spend, even after $55 billion of share buyback and return of capital to investors. That's a business I saw CFO. Ruth Porat speaking relatively recently at Milken, and they're still investing behind productivity enhancing tools to try and get their cost-based down and to provide cost-saving tools to their enterprise clients. That's the kind of business where there's still going to be secular growth,

but also trading now at less than one-time's price to earnings to growth. That's the kind of ratio I'm looking for in this market. I think it's attractive. So let's say I am a devoted investor in index funds, as opposed to individual securities. If is now, a time to start dollar cost averaging in, if I've, even if I have not stopped doing, if I'd stop doing that, should I get back in here? On the theory that in five years from now, while there may be bumps in the short term, the overall market is going to be higher and maybe even significantly higher. Tyler, to your point at threading that needle between feeling as though asset value has come down in the 4 oKs, we're seeing it, and also having the patience to

ride it out. I do think this is a good time. And one area that I've invested on the index from the ETF has been in the high yield space, HDB is an example of what I put my capital in over the last 12 months. I do think if there is patience, I do think if there is a willingness to ride out the cycle, history has shown over and over again that, and it's the old cliche, it's timing. It's not timing the market. It's time in the market. We hear it over and over again. I do think that's true. And I do think this is the time to start thinking about redeploying capital towards either indices or towards ETFs where the volatility and the heartburn of stock picking goes away, but actually being in this market over the longer term is important.

Interesting answer. Anne Barry, thank you, as always. Great to see you again. Thanks, Tyler. Thank you. Let's take a quick check of markets with the Dow near session lows right now. The Dow is actually about 200 points below its year-to-date closing low right now. So again, if we closed here, that would be a new year-to-date low.

It's about 1122 point drop at the moment. The S&P 500 at 3928 is below its year-to-date closing low of 3930. That's again from May 12th. We're two points below that right now, and the NASDAQ is down almost 4.7 percent or 559 points, and it's only about 60 points above its closing low so far from 2022. Let's get right over to Dom Chu now for another market flash, Dom. All right, so some of the individual areas of the market that we are tuned into, investors often turn towards for safety in times of turbulence.

You look at the consumer staple sector overall. It's, yes, one of the worst performers in a down day today. The retailers in that sector are taking hit on some of the same inflationary concerns that are impacting companies like Target and Walmart with Costco. You can see down about double digits 13% in trading so far today. And the food staples, we're talking names like J.M. Smucker, also Kraft Heinz, Campbell's Soup. You can see there are firmly in negative territory as well, down between 8 and 10%. Smokker and Campbell's, by the way, we're at fresh highs less than 10 days ago,

but have fallen around 10% from those levels, similar to what's happening with General Mills and Kellogg. So those consumer staples, usually a safe harbor in some of these storms, not performing that way recently, guys. I'll send things back over to you. All right, Dom, thank you very much. Let's check now on what the options activity is telling us about where the market could be headed next. For that, we bring in Chris Murphy. He's co-head of derivative strategy at Susquehanna.

Chris, welcome, and what do you got? Well, you guys keep talking about the Staples, and Bob Pisani mentioned PG being down 5%. So the XLP, that's the Staples ETF, that's down over five and a half standard deviation. So we mentioned how typically these products don't move that much. A five and a half standard deviation move, that's supposed to happen once every couple of years.

You know, you just don't see. that very often. And this all follows earlier this month a lot of bearish options flow in the Staples and a lot of the individual names that we had been highlighted. What does that tell you? Well, you know, when we're down about 10% in the XLP and the Staples since we highlighted that a couple weeks ago, you know, I'm looking for some of those trades to start to be closed down, to start to be monetized. And that might tell me that this, this hedger, who has been very right,

is seeing the end of this move. We haven't seen any of that yet. They are not closing. They seem to be riding this position out. So, you know, until we start seeing some monetizing of that position, some of these hedgers might think that there's more downside. Wow. So let's, that's on the staples specifically.

What about the transports? I mean, talk about other areas where we seem to be seeing pretty big standard deviation moves. transports are down 7% today. Yeah, so another thing that we've kind of been looking for is that, you know, broad selling everything type move. And when we were looking at the staples earlier and the transports as well, they're typically a little bit lower volatility. You know, those were a little bit less expensive to buy options compared to, you know,

a high growth tech. But now we have an instance where it's somewhat of a buyer strike. Everything's being sold at once. And so we're seeing some outsized moves. in a lot of those other areas, just because everything's being sold together. So you actually get a little bit more value in some of those typically lower volatility sectors of the market when you're looking at a hedge. Are you surprised that the sell-off seems to have metastasized into so many of the sectors of

the market, almost all of them, including those consumer staples, the bulwarks like Walmart and Target and so forth? That's number one. And typically, I gather, if you, if you're... If this were really the bottom, you would see a real surge in volume. Have we seen that yet? Okay, so the first point, not surprised. You know, if you want to think we're closer to the end, you'd really want to see everything

sold together. And that is happening, but you make a great point about the volume. So it's just recently looking at the volume for the S&P components today. It was about 5% below its 20-day average. So in a day where the S&P selling off three and a half. 4%, you'd expect a lot of volume. We're seeing less volume than the average from the last 20 days. And spy was even lower.

So if you're looking for a volume spike and a lot of turnover to mark a bottom, you're certainly not seeing that. Chris, would you offer a parting word as we go out here? You know, we saw obviously some pretty poor trading behavior last week. We had three relatively better days. Now this. What does that tell you? Well, you know, everyone was talking about an expect.

the bare market bounce. Everyone's also talking and expecting, you know, we're going to need to see at least a bare market for the S&P. It's not even down 20% from its all-time highs. We're getting pretty close, but that could potentially be a sign. But I really watch out for that volume. We're going to need to see that volume spike before and a lot of turnover before we really feel comfortable from a trading side. All right, volume, volume, Chris, thanks so much. We appreciate it. Chris Murphy. Let's get a check on what the charts are signaling here with our next guest who says even with today's weaknesses, the averages are still positioned for a bounce. Ari Wald joins us now. He's managing director and head of technical analysis at Hoppenheimer. Harry, great to have you here today. Tell us more about this. Yeah, so I think the evidence is that the market is in a bear market. I don't think the evidence is

compelling that this is a regime shift. And I bring that up because if you look back through history, going to 1932. The median bear market in a longer term bull cycle has lasted seven months. You typically drop the peak to drop 21%. So at the recent low point, market was down 20% over four months. So I think we hit a lot of the magnitude, but we do think more time is needed. I think you need to fill out that base. And I think rallies should be considered bear market rallies with that said. But a lot of our indicators have reached some subtle extremes, not as deep as we'd like, but just given kind of feels like we overshot to the downside. A lot of our sentiment indicators are at pessimistic levels.

And I think we could be set up for a bounce back to the S&P 500's 50-day average at 4,300. But would that be a head fake? I think that should be the assumption, Tyler. I think the damage has been done. Our indicators are about 85% to a full reset. And until you see some sort of a multi-month W pattern, I think upside is limited at that 4,300. And I think you could ultimately see a final Q3 low ahead of a resumption of the secular market, possibly in the fourth quarter when midterm year, the cycle, the presidential cycle does

typically improve in the fourth quarter of a midterm year. I think you could see a resuming bull market in the fourth. The S&P, I'm not sure what it is to the minute, but it's something like 18 percent as a broad index off its 52-week high, which was back in, I think, the first week of January. But if you take that index apart and you look at the average stock in it, a large percentage of those stocks are well more than 20 percent off their recent highs, correct? That's right. And that's really been the key technical warning throughout this, is how bad internal breadth has been that New York stock exchange advanced the Kleinline, didn't confirm the S&P's January peak. It was showing that the

headline cap-weighted index was masking weakness underneath the surface. And one indicator we like a lot, Tyler, is to look at the percentage of NYSC stocks above their 200-day average. I think it's a great internal breadth indicator. It got down to 22 percent. Only 22 percent of the NYSC was above their 200-day. So that's a pretty low reading. I think it's got to get a lower. I think you want to see a mid-teen reading there. Historically, readings that has marked your major low point. And so what that indicates to me is that there's still some surrendering that's needed in some of the leadership names, possibly in some of those value areas of the market. Ari, where would you tell us to look for the best opportunities right now?

You know, it really depends on your time horizon, Kelly. I'd say our top three sectors, are technology, utilities, and materials for three very different reasons. You know, I think obviously in a bare market, you want to have some defensive exposure. I think utilities look best for that. I still think this tech-led secular bull market is intact. I don't think the evidence is compelling enough to suggest that has ended, at least on the large cap side. I think for longer-term rotation, once we get a turn in the market, growth is going to rally a lot. And I think for positioning towards that you want to be on the large cap side. I think the small cap side is probably dead and done, and you just really get a speculative bounce there. But I think a lot of those mid-cap names are still

structurally intact. And if you have a long-term time horizon, that's what you want to be picking at here. Again, they're in the penalty box. They're going to continue to back and fill with the market through the summer. But as we think about that turn in the back half of the year, I think big cap tech is really a great place to be. It's interesting. I mean, you mentioned three things. And it's kind of which one of these doesn't belong and you sort of think technology doesn't belong, but you explain why you think it's a good place to go right now. Erie Wald, thank you. Appreciate it. My pleasure. All right, let's get caught up on where the market stands right now. The Dow is off at 1142, off or is at its lows,

excuse me, now it's a little bit off at now 1122. The S&P solidly below 4,000, as you see, there 3927, I believe it was Steve Grasso, who said he could see a low somewhere in the 3,800 neighborhood, 3,850 for the S&P. NASDAQ, off 4.5%. This is getting to be Kelly, a somewhat familiar story with NASDAQ, down 560. Transport's worst day since June of 2020, and we remember what was going on in June of 2020. Nothing, honestly. Big Cap Tech also selling off Amazon. down 7% Apple, down 6%. As Kelly, you came into the studio today, they're taking my Apple, they're taking my Amazon,

they're taking my Walmart, Target and Walmart getting punished, target down 28% after saying higher costs are eating into profits. There are bright spots, always are, as Jim Kramer says, there's a bull market somewhere. Verizon is higher, that's not a bull market, but Verizon, one stock, there it is, up two-thirds of a percent. Con Ed, doing all right. draft kings and EA, top performer in the NASDAQ, EA, Electronic Arts.

My son plays a lot of games. He's single-handedly holding up this market, then. He's on draft kings. He's a player. All right, for more on the market sell-off, let's bring in our friend, the market veteran Art Cashin, Director of Floor Operations at UBS Financial Services. Art, it is great to hear you. How have you been?

Well, I've been okay. This is an interesting day. take me with a grain of salt, Tyler. I wrote this morning that I thought it would be a down day, and I thought that the Dow might get down about 400 points or so, and then we'd close down 225, so I got the direction right, but I seemed to have missed the amplitude. Well, we've still got an hour to go, Art. You could be righter than you think, because as we all know, this last hour has often been where the tale is told. What can investors expect? over the next few months as you look at how the indexes are performing and how individual

sectors of the market are performing? Well, I have been somewhat suspect of, you know, I thought this bounce that we got on Friday might last for a couple of days, maybe even the week. That doesn't look true to form. But I think we've yet to see the true lows, Tyler. I think they're coming. we've got to work through it. I think there's a couple of things that have bothered the markets for a week or so now.

One, obviously, the yield on the 10-year. That gets up above 3%. The market gets very nervous in itchy, particularly the high-cap tech stocks. And then the other thing, strangely, is Bitcoin because they were shocked with that so-called stable coin, which proved to be unstable. And I think that left the fear of a systemic crisis in everybody's mind. A kind of long-term capital management or, you know, Orange County, California. So when you get weakness in Bitcoin, the market gets edgy again.

So I think you get a couple of those things going on. I think what you heard from Target, you know, everybody's saw the Walmart thing and said, how could they have missed things so badly? And yet, Target, now here you have two of the greatest retail merchandisers in the world. And they both admit that they miss some of this, that the systemic inflation is there, and that the shipping problems continue to be a problem. And most importantly, Tyler, they brought up the idea that the cost of diesel and other things are going to begin to eat heavily in. And I think that shocked the market to a degree here. And as you say, I think this last hour is going to be critical.

I think, you know what? We've heard a lot of talk today, but you're the first one I've heard who mentions the deep, deep sell-off in Bitcoin and cryptocurrency and the disappearance of that so-called stable coin and the idea that we could be looking potentially. at some kind of systemic risk like those aerudite references to Orange County. I remember that bond crisis out there or long-term capital. It's very interesting the linkages in the market or in market psychology, Art. Yes, well, you know, when you've been around 1,000 years as I have, and you get to see these things over and over.

And you could watch almost by the tick in Bitcoin over the last couple of days. So I think what the viewers have to watch now, we're at a critical point. If we go with the free fall or if we get much weaker, I think Bob Bizani noted that the S&P closing low is 3930. And if you get below that, or God forbid if we go with the free fall, 3860-ish is the intraday low. So you don't want to make a lower low. that will make a lot of people who hadn't been nervous, even more nervous. Art, one of the great benefits of speaking with you is to draw on the cycles you've been through. Give us some thought of what analogies pop to your mind here.

You know, 2000, 1970s, there's a million, we could route up, 1987, you know, the financial crisis. I mean, what comes to mind for you here? Yeah, no, I hear a lot of people talking about 2000, but to bore you, hopefully briefly, the 2000 was like nothing else. Do you remember the phrase Y2K, watch out for Y2K, and computers were going to fail, and your bank account was going to disappear, and the Fed decided that people would wind up hoarding money,

and they pumped money into it, and what happened was if the computers were going to fail, everybody bought new computers. So you had a big rush into tech stocks with a bubble of money that the Fed had put in, and when Y2K came, and the Fed called up and said, how much money are they hoarding?

And the bankers laughed and said, they're not hoarding anything. They're using your money to buy computers. They started to take the money out and we collapsed. So that I don't think is analogous. What is a bit more analogous is some of the surprise events. You know, if you look at the Orange County, California, I usually get an event like that. And so I think you want to be very careful here. All right.

Let me just sum up by saying, viewers, never bet on the end of the world. It only happens once. And that's pretty good odds. And we're going to leave it there, Art. Thank you so much. Thank you so much for your time and insights today. And thank you, everybody, for watching Power Lines.