ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Bill Griffeth and Sue Herera.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Stocks tank. The Dow falls 800 points, it`s worst day of the year, as the bond market flashed an ominous sign and fears of a worldwide economic slowdown took hold.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: We`ll explain what it means, why it happened and what it all could mean for your investments and your money.
We have those stories and much more tonight on NIGHTLY BUSINESS REPORT for Wednesday, August 14th.
And we do bid you a good evening, everybody, and welcome.
This says it all right here. As Sue said, it was the worst day of the year for the Dow Jones Industrial Average. It was ugly before the opening bell as investors remained on edge about slowing global growth after new reports out of China showed the world`s second largest economy is hurting and a separate report showed that Germany isn`t doing much better. That set the tone.
Then, our bond market gave the loudest signal of all, yields inverted. That means that shorter term treasuries paid out more than longer term treasuries, and that doesn`t happen very often. But when it does, it has been a good predictor of recessions.
And from there, investors pulled money out of stocks today with the Dow plummeting 800 points, it was the low of the day at 25,479, the Nasdaq dropped by 242, the S&P fell by 85.
Now, a lot of this is technical. We know a lot of it is complex, but we`re going to do our best to try to explain it and describe how it could impact you.
We begin with the market sell-off and Bob Pisani at the New York Stock Exchange.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The stock market is getting punched in the gut from all angles, including the bond market, which is now flashing warning signs of a possible recession. As it concerns yesterday`s tariffs delays maybe isn`t the secret sauce that will improve the markets after all, but the immediate driver of today`s weakness was more signs of a global slowdown.
Overnight, China released its industrial production figures for July, which showed industrial output in the world`s second largest economy slowed to its weakest growth in 17 years, and Germany`s second quarter GDP shrank as well, meaning Europe`s largest economy is on the verge of falling into a recession. Growth in the eurozone all slowed down significantly from the first quarter.
Now, naturally economically sensitive cyclical stocks like financials, retail, energy and tech led the markets lower. Banks got beaten up from pressure on bond yields and falling crude prices weighed on energy names like Chevron (NYSE:CVX) and Apache (NYSE:APA). But really everything sold off except for gold and utilities and a handful of consumer staple stock.
A basket of retail stocks and energy stocks dropped to bear market levels, meaning they`re down 20 percent or more from their recent highs. It has been a tough day all around.
So, where is the bottom? Some are looking to the 200-day moving average for the S&P 500 for short-term support. It is still a ways away from today`s close of 2,840.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
HERERA: Bob just mentioned the weak report out of China which shows just how much of a toll the trade war is taking on the Chinese economy.
Let`s go now to Eunice Yoon in Beijing.
EUNICE YOON, NIGHTLY BUSINESS REPORT CORRESPONDENT: The tariff dispute is squeezing the economy here. The data out today missed July industrial output, came in at the worst level in 17 years, retail sales sank, hit by weaker auto purchases. The Chinese Statistics Bureau says the economy is facing increasing downward pressure but that the impact of the trade war should be controllable.
As for President Trump`s tariff reprieve, the interesting part is that Beijing didn`t officially respond. State news agency Xinhua reported on the phone conversation between trade negotiators but only said that China lodged its opposition to the tariffs that will kick in September 1st, which suggests that China doesn`t see the move as particularly meaningful.
I spoke with suppliers who sell to the United States, and many said that President Trump`s relief wouldn`t have a major impact since many Christmas shipments are already out, though it does give them extra time to adjust pricing into 2020.
For NIGHTLY BUSINESS REPORT, I`m Eunice Yoon in Beijing.
HERERA: And now to that warning sign from the bond market. The last time the yield curve inverted was more than a decade ago and we all know what happened soon after. That is why Wall Street had such an intense reaction to this market phenomenon.
HERERA: It doesn`t happen often, but when the two-year Treasury bill begins paying more interest than the 10-year note, recent history indicates there`s a recession coming. This morning, the payouts on the notes crossed — an ominous warning to investors and market watchers.
Think of it is tame way you would think about how your bank pays interests on certificates of deposit or CDs. A six-month CD is lower risk and it ties up your money for less time, so the interest paid on that CD is typically less than the amount paid on a longer term CD, like a three-year or a five-year.
So why is it imp
ortant? The last five times it has happened since the late 1970s, a recession has followed, sometimes a year later, sometimes almost two years later. The inversion itself won`t cause a recession, but it means markets, the Federal Reserve and consumers will all be extra sensitive to economic data in the coming months.
GRIFFETH: And, in fact, according to Credit Suisse, a recession usually does occur on average 22 months following such an inversion and often the S&P is actually higher one year after an inversion. So now that this warning signal has been flashed once again, what happens next?
We`re joined tonight by Kathy Jones. She is chief income strategist at Charles Schwab.
Kathy, it`s always good to see you. Thank you for joining us tonight.
KATHY JONES, CHARLES SCHWAB CHIEF FIXED INCOME STRATEGIST: Thanks for having me, Bill.
GRIFFETH: Janet Yellen said today it was possible it was a false signal by the bond market. What do you think?
JONES: Well, there have been instances where we`ve had the yield curve invert in the past and it hasn`t led to recession, so there have been a few false signals. I think what she was referring to was the fact that in this particular case the reason short-term rates are above long-term rates is that long-term rates are falling rather than the reason being that rates are rising and the Federal Reserve is tightening policy by raising short- term rates. So, because it`s being led by the longer-term rates, she may be implying that this may not be consistent with the past.
HERERA: So what could change the situation? Because this inversion came, as Bob mentioned earlier, against weak global growth, the numbers out of Germany were bad, the numbers out of China were bad, which complicates the situation, does it not?
JONES: Absolutely. I think the falling long-term yields in the United States and all around the world are reflecting that slowdown in global growth and that fear of a global recession compounded by the trade situation.
So I think the risk of recession certainly is rising for those reasons. I think what happens next is we probably will see the Federal Reserve lower short-term interest rates to try to offset some of the impact of the slowdown in the global economy.
GRIFFETH: And, of course, the $64 question, what does the individual investor do with all of this right now?
JONES: Well, you know, first things first, is if you are an investor, take a deep breath, take a look at what you own, and are you comfortable with where you are in terms of the risks that you are taking. And do you need your money in the next one to two years?
So, if you do, that money should be in a safe place like a CD or a treasury bill. And if you have that tucked away and the rest of your money is for long-term horizon, then, you know, you may be OK. But if it is uncomfortable, you might want to rebalance. He you might want to move into less volatile securities, have more bonds than stocks.
It`s really about having kind of a financial plan laid out where you can ride the ups and downs of the market. But you have to have the capacity to do that, to take the risk.
GRIFFETH: Kathy Jones with Charles Schwab. Again, thank you for joining us tonight, Kathy.
JONES: Thank you.
GRIFFETH: And a little later in the program, we`ll look at some other investment opportunities that are taking shape in this market right now.
HERERA: Concerns over the global economy rippled into the oil market, both benchmark Brent and domestic crude settled 3 percent lower today.
Here to discuss oil prices, John Kilduff, founding partner at Again Capital. Good to see you, John.
JOHN KILDUFF, FOUNDING PARTNER, AGAIN CAPITAL: Good evening, Sue. Good to see you.
HERERA: Where do we go from here? Do you think that the drop will continue?
KILDUFF: Well, just a couple of weeks ago we tested potentially breaking the $50 mark for the U.S. grade WTI. All of the economic data points that Bob Pisani spoke about earlier in the program go right to the heart of the demand side of the equation for oil prices. It is the key.
Given how much the U.S. is producing, given how hard OPEC is trying to hold back on supplies, the crucible of all of this is Asian demand. And the fall-out from the U.S./China trade war affects the major Asian economies you have been talking about the most, Japan, South Korea, China itself. And, of course, Germany, the other main manufacturing and oil demand center, because they manufacture so much and sell into the Asia region which is weakening. So, it`s a really bad card for the oil market we`re having this trade war persist, not get better.
GRIFFETH: What do you expect the producers to do about it, not just OPEC? U.S. producers are a major portion of this equation now as well.
KILDUFF: No doubt. I mean, we are certainly seeing signs of financial strain within the pure play shale drillers. None have gone down yet although we had a bankruptcy last week and there`s probably more to come, and we`re seeing the U.S. rate count slowly creep lower and lower.
There`s still a bounty. We are still providing 12.3 million barrels a day, exporting upward of 3 million barrels a day. We`re a major, major player.
And to the point that the Saudis have said the past week they`re going to do, quote, whatever it takes. Sound familiar? To try to balance the market and get prices stabilized, which is Latin for them back higher. So — but they have their yeoman`s work cut out for them and I don`t think they can do.
HERERA: OK. In they can`t do it, that begs the question as to where oil prices go from here. Key levels are 50 certainly on the oil market. Where do we go?
KILDUFF: I think we`re going to go back down and test that 50, probably go back down into the 40s. This is bad news for the U.S. oil patch, but nothing is better for helping to stimulate the economy, prop up the U.S. consumer, who is two-thirds of the economy with lower gas prices. They will be usually smiling as those gas prices can somehow in some communities can dip below $2 a gallon and you will see that.
HERERA: All right. John Kilduff of Again Capital — thank you, John.
KILDUFF: Thank you.
GRIFFETH: See you later, John. Now, as bond yields have been declining so have mortgage rates. And as a result homeowners rushed to refinance last week, no surprise. The Mortgage Bankers Association said this morning refinancing volume surged to the highest level in three years. Refinancings can support the economy by leaving households with extra cash and overall applications for new mortgages, they were up more than 20 percent last week compared to the prior week.
HERERA: It is time to take a look at some of today`s “Upgrades and Downgrades”.
Bristol-Myers was upgraded to overweight from neutral at Atlantic Equities. The analyst cites upcoming data on some of the drugs in second half of the year. The price target is $63. Shares fell nearly 2 percent to $45.64.
CVS (NYSE:CVS) was upgraded to buy from neutral at Bank of America (NYSE:BAC) Merrill Lynch. The analyst cites the deal with Viacom (NYSE:VIA) and the new company`s strategic positioning. The price target is $63.
GRIFFETH: But not all firms agreed. Bernstein downgraded CVS (NYSE:CVS) today to underperform from market perform. This analyst says that CVS (NYSE:CVS) stands to lose more from inheriting Viacom`s structural problems than it would gain from any synergies. The price target there, $46, and that stock was down 8 percent today to $44.65, part of the sell-off today.
Meanwhile, Ferrari was upgraded from buy to neutral at Goldman Sachs (NYSE:GS). The analyst cites the luxury automakers strong backlog and solid demand. Price target, $182. Shares fell 3 percent to $155.90.
HERERA: Still ahead, why the magic of Macy`s (NYSE:M) may just be an illusion.
HERERA: A tough quarter for Cisco (NASDAQ:CSCO). The company is forecasting first quarter profit below Wall Street estimates as it tries to transition away from selling routers and switches. Earnings in the most recent quarter came in slightly better than expected and revenue was higher from a year ago, but investors focused on the outlook, sending shares lower in initial after hours trading.
Josh Lipton has more on Cisco`s quarter.
JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Cisco (NASDAQ:CSCO) is a tech bellwether, giving us a good read into the health of enterprise spending. That`s why investors pay close attention to the company`s results.
RBC`s Mitch Stevens, who covers Cisco (NASDAQ:CSCO), says the report itself was basically in line, including its so-called infrastructure platform segment that refers to the company`s core networking offerings related to switching and routing, but guidance he said was weak on the top and the bottom. That tells us, Steve says, that more broadly overall I.T. spending could be slowing down here too.
For NIGHTLY BUSINESS REPORT, I`m Josh Lipton in San Francisco.
GRIFFETH: And the quarter wasn`t any better for Macy`s (NYSE:M) either. It is facing a number of issues from higher costs from tariffs to deep discounts that eat into profits. The department store chain missed profit forecast for the first time in two years and cut its full-year forecast at the same time. That stock sent — it sent the stock down 13 percent today in the session.
Courtney Reagan has more on the mess at Macy`s (NYSE:M).
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Macy`s (NYSE:M) quarter didn`t go as planned. Some of the department store`s women`s clothing disappointed shoppers, sales of warm weather apparel was slow and international tourist spending was down. International tourists typically buy full-price merchandise and make few to no returns.
As a result, Macy`s discounted merchandise more than planned to entice consumers to buy and that took a big bite out of earnings.
CEO Jeff Gennette told me, quote: We took our medicine, we took almost a full point of margin with the additional mark downs. Adding, we needed to protect fall.
Still, there are headwinds and uncertainty ahead. Macy`s (NYSE:M) lowered its annual earnings forecast to reflect this quarter`s miss, but it doesn`t include the impact of tariffs on September 1st and December 15th. The retailer is still evaluating its plan to address those higher costs.
Gennette told me he learned from the last round of tariffs going from 10 percent to 25 percent in May that, quote, the customer has no appetite for price increases, and that right now, we are expecting that there won`t be price increases, at least with new tariffs at 10 percent. If tariff rates increase to 25 percent, Gennette says he will have more work to do to figure out how to manage the higher costs without raising prices.
Macy`s (NYSE:M) stock plunged on the disappointing earnings and on the more persistent concern for department stores in general, which Gennette addressed as he tried to reassure investors on the conference call.
JEFF GENNETTE, MACY`S CEO: While we know there is negative sentiment on our sector, we are confident in our plans. There is strong consumer demand for high-quality, affordable fashion. We are strengthening our relationship with our current customers and bringing new customers into the brand.
REAGAN: Macy`s (NYSE:M) comparable sales grew slightly. It just logged 40 straight quarters of double digit online sales growth and its back-stage discount department at the stores that have it. The retailer is experimenting with consignment clothing and its Bloomingdale division is piloting a clothing rental program.
But there may be external forces more powerful than even the right strategy.
JAN KNIFFE, JAN ROGERS KNIFFEN WORLD WIDE: I think he is doing all of the right things. I don`t think there`s something Macy`s (NYSE:M) really could be doing different than what they are doing. I just think the environment as a mall-based retailer is really tough and not going to get easier.
REAGAN: Especially if broader concerns about a recession become a reality.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
HERERA: Teva and Mylan (NASDAQ:MYL) are getting pressure from Washington. That`s where we begin tonight`s “Market Focus”.
U.S. lawmakers want the pharmaceutical companies to hand over documents as part of an ongoing investigation into generic drug price increases. The probe was initially launched in 2014, and in May, 44 states filed a lawsuit against both companies, alleging price fixing. Teva shares dropped more than 10 percent to just about $6.30. Mylan (NASDAQ:MYL) was off more than 8 percent to $18.04.
Outer wear maker Canada Goose saw its sales grow in all geographic regions which helped that company top revenue estimates, but the retailer reported an earnings miss and it plans to maintain its prior full-year outlook. Canada Goose shares dropped more than 7 percent to $39.97.
GRIFFETH: Disney (NYSE:DIS) and Charter Communications (NASDAQ:CHTR) have reached a multiyear carriage deal, avoiding any blackouts of Disney (NYSE:DIS)-owned networks on Charter`s cable service. Charter will also now include Disney`s new streaming network in its package to subscribers. Disney (NYSE:DIS) fell 3 percent today to $132.85. Charter shares dropped more than 1 percent to $375.18.
And Starbucks` main rival in China, Luckin Coffee, posted the first earnings report since going public. The Chinese company beat revenue estimate but fell short of earnings targets. Luckin has been aggressively discounting prices and it has found success with several smaller pickup stores. Shares plunged though by 16 percent to $20.44 today.
HERERA: With recession fears creating steep declines in the stock market, you are probably wondering if there are still opportunities in the market. Our next guest, Ben Phillips, joins us now with some ideas. He is founder and chief investment officer at EventShares.
Ben, nice to have you here.
BEN PHILLIPS, EVENT SHARES FOUNDER & CIO: Thanks for having me, Sue.
HERERA: Quite a day to have you here actually. What did you make, first of all, of today`s sell-off? And what did you do during the sell-off?
PHILLIPS: Well, we`re long-term investors which I think most of your viewers are as well so we`re not reacting necessarily to the news, but we are looking for opportunities. I think that`s why you`re having me on. We are looking for areas, though, and I think that`s why you have me on. We`re looking for areas of the market that maybe are being dislocated because it does look like it`s just broad-based selling.
So, it`s not necessarily — there`s no rhyme or reason to it. It`s just everyone is de-risking, they`re selling stocks overall.
GRIFFETH: So you are looking for sectors that didn`t deserve to be sold off, those not necessarily as exposed to the global economy as others. So, what sectors are we talking about here, do you think?
PHILLIPS: Yes. So, we like telecom, particularly the 5G, the fifth generation of telecom roll out. We like health care as well, certain areas of health care, even some of the managed care which has been beaten up. We are generally more cautious on pharma and the drug distributors.
And we like some renewable energies. We like some, you know, some infrastructure names as well. So, there are pockets of opportunity out there, but you do have to know where to look.
HERERA: Right. Perhaps just as importantly, what would you be staying away from?
PHILLIPS: Well, we`re more cautious probably on technology, both from more policy-based investors looking at policy changes and how that`s going to influence sector economics and the fundamentals of different companies. Our view on technology is going to be continuing challenge the regulatory environment. We are seeing it more and more in the headlines but we expect it to continue.
We also think that individual investors are generally overexposed to technology, given the run the tech stocks had over the past few years. So, you see the tech stocks are becoming a bigger portion of the portfolio but people are not necessarily selling and rebalancing back to lower weightings or more appropriate weightings.
GRIFFETH: And with yields of multiyear lows, do you see any opportunity in fixed income right now, Ben?
PHILLIPS: Well, we do. We have — we think the ten-year will go close to zero and could dip into the negative territory in the next recession. There are opportunities in bonds, particularly U.S. treasuries, municipal bonds as well. We are more cautious on corporates, investment grade and high yield both, but there are opportunities in the U.S.
HERERA: Do you think the longer term investor should perhaps increase their cash position if, indeed, we still have the headline risk of the trade war slowing global growth, especially in Germany and China?
PHILLIPS: Yes, absolutely and great question. I think a lot of people forget to view cash as an asset class. You can use cash. It creates a lot of optionality in your portfolio.
So, people who are sitting on a lot of cash right now probably feeling pretty good when they look at the volatility and they may be able to dip in sooner and buy some of the bigger dips. You know, this is not the beginning of a recession we don`t think, but it is good to be raising the dry powder, raising cash balances, have maybe two years on reserve plus four times when the markets get really volatile and everyone says, don`t ever own a stock again.
HERERA: On that note, Ben Phillips with Event Shares — Ben, thank you.
PHILLIPS: Thank you.
GRIFFETH: And coming up, the airline industry is facing a number of challenges and now it is dealing with one more.
GRIFFETH: Yes, the sun will come up tomorrow and here is what we are watching.
Walmart reports earnings amid questions over the impact of tariffs. Retail sales overall for July will tell us if the consumer is still spending, and we will find out if the home building industry is feeling confident in this falling interest rate environment. That`s coming up Thursday.
HERERA: WeWork is expected to go public as soon as next month. Today, the company released the most detailed financial report to date and we learned that the workspace rental company lost $900 million in six months on $1.5 billion in revenue. WeWork`s business was valued at $47 billion after its last funding round. In a year full of public offerings, it is expected to be one of the largest of the year.
GRIFFETH: And concerns over a global slowdown pressured the airline sector today. American, United, Delta, they all fell about 3 percent to 5 percent in today`s session. Add to that the ongoing grounding of Boeing (NYSE:BA) 737 MAX, and that`s creating an additional headache for the industry as it starts to plan for its next big rush, the holiday travel season.
Phil LeBeau has more.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: There`s no slowdown in demand for air travel. Great news for airlines. But with hundreds of 737 MAX planes grounded, setting schedules has become a juggling act.
Just ask Vasu Raja, head of scheduling for American Airlines.
VASU RAJA, AMERICAN AIRLINES VP: This is probably one of the more hard, if not the hardest scheduling problem that the airline could have. We`re making a lot of changes to the schedule which impacts literally every part of the airline.
LEBEAU: Since the FAA grounded the MAX in March, American has pushed the return of the plane from April to June, August, September, and now, November.
Here is the problem: All airlines set schedules up to a year in advance, coordinating flight crews, maintenance themes and airport operations. For American, that means planning almost 7,000 daily flights with more than 1,500 planes flying to 365 destinations. Not just in the U.S., in 61 countries around the word.
Lock in a schedule so customers book trips with no last-minute changes.
RAJA: Most of our customers, certainly in our domestic system, start booking their travel at about 90 to 100 days from the time they actually plan to fly. The point at which we would like to be able to make that decision is the 90 to 120-day window.
LEBEAU: Ninety days from now is early November, when American and United plan to fly the MAX again, while Southwest has pushed it off the schedule until January.
But if the MAX is not ready to take off and American has to cancel more flights, again, then many travelers who booked flights for Thanksgiving weekend that were supposed to be on a MAX will have to be rebooked on other flights, and the scheduling headaches begin again.
SUSAN DONOFRIO, MACQUARIE RESEARCH: The last thing the airlines would want is to have a schedule that they have to all of a sudden change and then people, you know, have to cancel their plans.
LEBEAU: It is not just the impact on passengers but also on the bottom line. Take Southwest. It`s cut flights for later this year because it won`t have as many planes as originally planned, and at American, it`s delaying the retirement of older, less fuel-efficient aircraft in order to have enough seats to cover its schedule.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Before we go, here is a look at the day`s final numbers on Wall Street. The Dow plummeted 800 points. Nasdaq, down 242, and the S&P 500 skidded 85.
That is NIGHTLY BUSINESS REPORT for tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffeth. Have a great evening. See you tomorrow.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2019 CNBC, Inc.
<Copy: Content and programming copyright 2019 CNBC, Inc. Copyright 2019 ASC Services II Media, LLC. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of ASC Services II Media, LLC. You may not alter or remove any trademark, copyright or other notice from copies of the content.>