Stocks closed near session lows Monday, and the S&P 500 entered bear market territory, hitting a new 2022 low. Investors are waiting to see what the Federal Reserve does at its meeting this week, but many are pricing in a 75 basis point hike. David Nelson, chief strategist at Belpointe, joins Closing Bell to discuss today's close, whether and when the U.S. will enter a recession, why investors need to watch the movement of the two- and ten-year yield curves, and more.

Closing Bell

Stocks Close Near Session Lows, S&P 500 Enters Bear Market Territory

well, as we await the results from Oracle, I do want to turn back to the major indexes again, the S. And P 500 closing in an official bear market down 20% from its high at the start of the year, of course inflation, higher interest rates, concerns about a potential recession. All weighing on the major indexes with the NASDAQ underperforming As that 10-year Treasury yield does reach its highest level since March of 2020. So joining me now is David NElson, chief strategist at Bell point. David, Good to see you your thoughts on today's market action. Could we fall further from here? Uh, sure we could you and you really set it at the top of the show. The setup for today's selloff really started on friday with that worse than expected. CPI I kind of cemented the fact that the Fed is well behind the curve and I think the mood of the nation could be summed up by just looking at some of the headlines that we saw $5 gas, the highest ever and about five a.m. This morning, just briefly, the yield curve that spread between 10 and two year yields actually turned negative. Now we have to see that on a sustained basis. But a lot of economists would point to that as an early sign that recessions down the road. You know, I'm just curious, David us in the financial world focused so much on the yield curve. We know that the higher the yield curve goes at least in this market, on the more downward pressure that we actually see on stocks, explain to our viewers what the yield curve is and why it matters to investors. It managed for investors because the, the, The spread between the 10 and the two year paper long history here and very often in advance of recession. And the front end of the curve starts to move higher. And you saw that play out in the tape today, very recessionary tape. It wasn't just expensive technology that went down a lot of deeply cyclical value stocks in particular. Consumer discretionary financials, industrials and materials. It's an indication that the economy is starting to slow. We're even seeing it in some jobs markets as well. You've seen some tech companies like Microsoft, actually say that they're freezing hiring in certain divisions. So clearly what we see in the tech sector doesn't feel good, especially for investors who are hoping that the technology names stay at home stocks could continue to grow at the rate that we had seen even pre pandemic. And the first year and a half of this pandemic, What does this mean for the Fed on Wednesday, David? Obviously this two day meeting starts tomorrow. The decision from the Fed on borrowing costs actually hits on Wednesday. And some concern it seems like that the Fed could even act more aggressively this week. You know, it's kind of surprising that that here we are, you know, well into inflationary spiral And the Fed is still at 75 basis points and only just beginning to wind down the balance sheet. Uh the odds are going up that it could be 75 basis points and but we're certainly gonna get 50 with another 50 at the next meeting and possibly another 50 in september. Unfortunately, the Fed can only handle the man side of this equation. Uh coming out of Covid, our supply chains were quite fragile and now they're broken. And a big part of that inflation picture energy and in particular, touches every line item of the income statement. So I don't care whether you're an industrial complex, somebody running a business at home or you're just driving to and from work. These higher energy prices are hitting your bottom line. So morgan Stanley ceo James Gorman, of course, he would have his pulse on the state of the american consumer and the overall economy due to loan growth and credit card transactions saying the odds of a recession are now 50 50. What do investors need to prepare themselves for? David the rest of this year? I think some people wondering, do I stay in the market, Do I sell at these levels? Even though stocks are down dramatically from their highs or do I try to dip my toe back in? It's a, it's a tough call. It really depends on who you are, the bottom. The problem with trying to time the market per se, even for professionals, is is Down down another 10% from here is likely not to be a trigger for you to add capital to the market. Most people, if they pull out here, let's say you get that right and you pull that at the beginning of the year. What's gonna be the trigger for you to get back in for most most investors? That trigger is when we hit another all time high, it'll happen at some point in the future. We're probably more than a year away from something like that. It's gonna be a long slog. But a recession doesn't have to be a draconian event. It's already, we're in a bear market right now. A lot of this has been discounted already interesting. Now, I guess my other question is with supply chain challenges. Still persisting the Fed trying to engineer lower inflation but obviously not being able to control what happens in china with the zero tolerance policy and then Russia's ongoing invasion of Ukraine. You know, David. It would seem like we could easily actually have a recession and that higher interest rates could be here to stay for a while. Forget just aggressive rate hikes to begin with. But that higher rates could stick around. What does that mean? Well, I didn't hear the last part of that question, but in terms of higher interest rates, I would expect that we've had, you know, close to zero, very easy monetary policy policy for a decade. And for a lot of investors and portfolio managers, they're gonna have to unlearn a lot of what they took as gospel for the last decade. You know, we're challenged right now and the Fed is trying to engineer a soft landing and they're saying that they can engineer this back to 2% inflation. I find that unlikely. I would say five is likely the new two and that means tighter financial conditions and there's gonna be other competing asset classes right now, putting putting capital on the short end of the curve to and 2.5 year paper is pretty attractive for somebody who's risk averse David. I do want to take a break just for a moment because oracle earnings crossing the tape here, that technology name actually rising in the after hours, it had fallen about 4.6%. Oracle stock up 8.5% in the after hours. So clearly a positive reaction earnings per share exceeding expectations at a dollar and 54 cents. Wall Street had expected a dollar and 37 cents and revenue pretty much in line with expectations. 11.8 billion Wall Street had expected 11.7 billion. Some comments from Safra Katz, the ceo of Oracle we continue to improve our top line results. The total revenue growing at 10% in constant currency. These consistent increases in our quarterly sales typically have been driven by our market leading fusion and netsuite cloud applications. But during the quarter, the company also experienced a major increase in demand and its infrastructure, cloud business, which grew 39 percent. So this is pretty astonishing. David clearly a positive reaction after what was a down day in the stock market. What's your reaction? Yeah, it's a it's a pretty big top and bottom line beat. I'm not seeing the cloud revenue and if they beat on that as well, I think these these these these trays in the aftermarket will hold I don't think, I don't think oracle gives the full guidance until the call. So we'll have to see what comes out there. I'll have to read the transcript in the morning. But this is obviously very positive numbers for the company. It is interesting because a lot of these growth companies, um, some concern that with higher interest rates, they won't be able to simply grow as fast as they were pre pandemic. And with money so easy and so cheap. Right the first year and a half of the pandemic, they were able to continue that stride. But I think what's interesting here is Safra cats again, the oracle ceo noting we believe this revenue growth spike indicates that our infrastructure business is now in a hyper growth phase. So hyper growth, I think certainly a phrase that investors are holding on to couple of high growth rate in our cloud infrastructure with the newly acquired certain applications business and oracle finds itself in a position to deliver. Excuse me, stellar. Those are Stafford's words, revenue growth over the next several quarters. So despite all this concern about slowing growth, David, that hyper growth I think might be something that investors are keen on. What's your take? That's a pretty exciting word. Look campaign all cloud stocks with the same brush, Oracle is what I would call a value stock, you know, certainly, you know, certainly under price compared to other cloud competitors. A lot of cloud companies grow the top line but effectively have no bottom line. So even if they get cut in half, their evaluation really hasn't improved. The PE ratio, hasn't, hasn't improved. Oracle doesn't fall into that camp into that camp. It's been a slower grower. And then it looks at this point that they've actually successfully made that transition to the cloud. So pretty exciting numbers. I'm gonna have to look at this company in the morning. Alright, David, nelson, chief strategist at bell point better than expected. Report from Oracle stock up 8.5% in the after hours and what was otherwise a pretty down day, David, thank you