One step forward, one-and-a-half steps back. U.S. markets are having a hard time getting traction these days, and the volatility has been kind-of extreme lately. Big rallies have been followed by even bigger selloffs, which is exactly what we see when we look at historical bear markets searching for the bottom. The downward turn is particularly evident in the S&P 500 and the Nasdaq. Both market cap-weighted indexes ended last week lower by 1.5% and 3.1%, respectively. But last Thursday gave us one of the sharpest price reversals in history, as both of these indexes bounced off of steep losses following the release of the Producer Price Index (PPI), rising more than forecast.
That was hardly a reason to celebrate, but maybe they found some support after four straight days of selling. It was the fifth-largest intraday reversal from a low in the history of the S&P 500, and the fourth-largest in history for the Nasdaq Composite. The S&P 500 closed 5% off the lows and was coming off a 52-week low. As for historical similarities, our pal Ryan Detrick at the Carson Group notes that also happened in March of 2009, December of 2018, and March of 2020. History does not repeat, but it does rhyme—will it again this time?
The Dow Jones Industrial Average (DJIA), on the other hand, is making some progress. While it fell 1.3% on Friday, it still ended the week higher by more than 1%. And that’s noteworthy. While the Dow is only 30 stocks, and they are not all industrials anymore, it is a price-weighted index as opposed to a market-weighted index like the S&P 500 and the Nasdaq. It’s less tech-heavy than the other major averages, which may explain its recent momentum. The Dow climbed out of its bear market a couple of weeks ago, and—as our pal JC Parets points out—it actually has a pretty tight correlation coefficient with the S&P 500, which has 500 stocks. In other words, they do tend to move closely together, even though the trends within the indices may not start and stop at the same time.
Let’s dig up a little more market history on bear market trends. The current bear market is down 28% over the past nine months. The median losses during a bear market since 1929?—down 29% over 12 months. We still have two-and-a-half months to go in this trading year. And if we look back at the years that the S&P 500 was down more than 28%, 198 trading days into the year—it happened in 1931 during the Great Depression; 1937—the other depression of that ignoble decade; 1974—during a period of extremely high inflation, which led to a recession; 2001—following the bursting of the Dotcom bubble, and then 2008—during the Global Financial Crisis and recession. In three out of those five years, the market bounced back more than double digits the following year. The outliers?—1930 and 2001. We know there was a deep depression in 1931, but we also know that most CEOs and a lot of economists think that we have yet to enter a recession. So, which scenario is the current one most like, in your opinion, 1930 or 2001?
Meet Bob Pisani
Bob Pisani is a nationally-renowned financial news reporter and Senior Markets Correspondent for CNBC, where he has worked for over 30 years. Bob Pisani has covered Wall Street extensively since 1990, and reported on the stock market for 24 years. Pisani covered the real estate market for CNBC from 1990 to 1995, moving on to cover corporate management issues before becoming On-Air Stocks Editor in 1997.
In addition to covering the global stock market, he also covers initial public offerings (IPOs), exchange-traded funds (ETFs) and financial market structure for CNBC.
In 2017, Pisani was honored with a Lifetime Achievement Award from the Security Traders Association of New York for “dedication to the Association and the Industry.”
What’s in This Episode?
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Professional sports has its sideline reporters, broadcast news has its field correspondents, and financial news has its markets reporters. These are the people who bring us the action from the trading floors and commodity pits around the world where money is moving faster than the speed of light. Billions of dollars are trading hands, including our money.
In the pantheon of legendary markets reporters sits CNBC’s Bob Pisani. For 25 years, he’s roamed the floors of the New York Stock Exchange (NYSE), bringing us the trading action, the sentiment, and the real feel of the movement of money across capital markets. He doesn’t just tell us what’s happening. He tells us why. And he helps us, as individual investors, understand why it may be important to our investments. No one does it better than Bob Pisani, and he is our very special guest this week on the Investopedia Express, live from the New York Stock Exchange. Welcome, Bob.
Bob: “Thank you, Caleb. Great to be with you, and great to have you down on the floor with me.”
Caleb: “So good to be here. You’re out with a new book, Shut Up and Keep Talking, and I want to talk about that in a minute. But you’ve been working down here for a quarter of a century, Bob. How did you get here in the first place? How did you wind up as a markets reporter on the floor of the stock exchange?”
Bob: “Well, I started CNBC in 1990, a year after it first came into existence, and I was the real estate correspondent for the first six or seven years. My father was a very successful developer in Philadelphia; he had taught real estate at the Wharton School, and we wrote a book on real estate development. CNBC hired me as the real estate correspondent in 1990, but by 1996, we had started getting real ratings around this new hot thing called the Internet, particularly the Netscape IPO in August of 1995, really ignited interest in the Internet—ignited interest in tech stocks, and CNBC was hot and new, and our ratings started going up—in direct correspondence to the volume at the Nasdaq.”
“So I saw that and said, “Gee, I want to make the change and become a stocks reporter.” And I became the on-air stocks editor in September of 1997, came down on the floor. At that time, there were 4,000 people down here on the floor. They did 80% of the volume right here on this trading floor—it’s hard to believe. And if you want a sense of what technological disruption is like, Caleb—today, there’s 225 people on the floor doing 15% to 20% of the volume. That’s technological disruption right there—that’s electronic trading, the effects of it.”
Caleb: “And about 50 broadcasters and people working for different financial news networks, and I’m down here quite a bit. You and I started roughly around the same time—it was the Internet boom that brought me into business news as well. You’ve seen a lot of changes here. You alluded to some of them, a lot of historic events, Bob. But for the folks who have never visited the exchange, what actually happens here today and in these trading booths all around here? Let’s talk about how that has changed, because I know you’ve covered a lot in your book, but this is something you’ve had a front row seat to.”
Bob: “Yeah, again, it’s technological disruption. So in 1996, when I was down here temporarily, they were trading in “eighths”—spreads was an eighth. In 1997 they went to sixteenths, six-and-a-quarter cent spread, and then in 2000 they went to penny spreads. That very much disrupted the overall model. It was extremely profitable model. You can imagine trading stocks with increments of an eighth—that disrupted things. And then electronic trading disrupted things, when—all of a sudden—you could successfully execute orders by electronic means.”
“And there were also alternative trading venues that were established at that time, outside of not just the NYSE, but even Nasdaq, which had very serious competition. There were various rules that prevented people from trading off of the floor, up until 1999. But when the trading rules were changed, the dam burst, and there were many alternative trading venues that were created. This was later codified in 2005 of 2006. But the bottom line now, is—instead of a couple of exchanges in 1997, and a few off-exchange venues like Instinet—now there’s 40 dark pools, 15 different exchanges. So very, very wide variety of places you can trade these days.”
Caleb: “So, take us through your day. A lot of the traders, the market makers, the specialists that are working here, they get in well before the stock market opens at 9:30 a.m. Eastern Time. When are you getting in? What are you checking? What are you reading throughout the day, and who are you checking in with?”
Bob: “There are many different ways you can do this. I used to—I found my 1999 trading list and there were 500 people there that I was talking to in 1999—that’s hard to believe. Today, I probably talk to a fifth of that. First off, I looked at that list—80% of them are gone—if you want to know where Wall Street’s gone in the last 30 years. A lot of people have left the business, particularly on the sell side.”
“But I concentrate on small groups of people. I look at a few analysts and strategists, and I’m rather harsh on analysts and strategists in the book. A lot of them, I feel, don’t add much value anymore because of the nature of the way the analyst business has changed. I’ll call a few of them, I’ll call a few sell side people. The most important thing to do is to find people who, in your opinion, will know what they’re talking about, and can give you an honest opinion. They’re not necessarily the same thing. But one of the things you get with seasoning—you’ve been around a long time—is Ernest Hemingway once said, “A good reporter has a built-in foolproof crap detector,” and you get good at that. You get seasoned at that. I’ve been doing this 32 years—longer than most of the people I talk to. And you get to know how to build a narrative.”
“And journalism is very simple. You come in in the morning and look at the wall, and think of it as like 50 yellow stick pads on the wall—stick ’em notes—and there’s an individual fact on each note—that’s what you come in with. There’s whole piles of facts, and your job as a journalist is to connect those pieces of information, to create a narrative, to tell people a story, essentially, that makes some kind of sense. And you just get better at it if you’ve been around long enough. So it’s a combination of analysts, strategists, buy side, sell side, people, reading a lot of notes, and just being able to understand what kind of narrative the public wants to hear.”
Caleb: “Yeah, that leads to my next question, which is how do you decide what to say every day? You’re obviously watching market movements; you’re following some of the biggest companies; you’re hearing from folks within your source group here. But you’re also talking to both individual investors like me, and like our listeners, and to institutional investors who are watching CNBC, so how do you thread that line?”
Bob: “Right. So the important thing when you start in the morning, like I’m on usually right after the market opens, and usually I’ll have three, four, or five minutes to talk about what the trends are. The most important thing that people want to know is momentum—who’s winning and losing. We used to call this the horse race, but by and large, I tend to watch broad sector movements. So, stocks in sectors tend to move together. Semiconductor stocks tend to be up, not all the same, but if there is an up day, they tend to mostly be up; down day, they tend to be mostly down.”
“Watch the trends, and that’s what people who are watching want to know. Even people who are not professional traders—and most people who watch CNBC aren’t trading all the time—they’re just watching their money. That’s what they’re doing. They’re not trading. And, they want to know, “all right, what’s the direction, what’s the trend, is market trend up or down, are certain sectors winners or losers?” And overall, “what is the feel of the street right now?” And, most of the time, people are interested in short-to-intermediate term. Short-to-intermediate term is a week to the next month, or so. I call that the intermediate term, where you can talk about long-term trends if you want—what it’s going to look like three-to-six months from now.”
“And I will do this at least once a quarter for a couple of weeks, where I will talk about the earnings trend. “What’s the earnings for the quarter? What’s the earnings for the next quarter looking like?” Because remember, Wall Street looks ahead three, six months down the road. For example, right now we’re done with the third quarter. The earnings are coming out, but the market’s really trying to figure out the fourth quarter and the first quarter of next year. So the trends, for me, are to talk about what’s happening in the fourth quarter and the first quarter of next year, and where I think the CEOs are going to comment—where their commentary is going. It’s not X, Y, Z company reporting third-quarter earnings that’s going to move the stock. It’s the company’s body language on the fourth and first quarters that’s going to move the stock. That’s what you want to talk about.”
Caleb: “Yeah, it’s that guidance, and the words that they’re using which are so important. I know we pay a lot of attention to—”how many times did they say inflation, how many times they talk about the Fed, how many times do they mention recession?” These are all real feels you get, when you read those reports or listen to those executives. So we’re in a rough bear market right now. You know, I’ve seen a few of these in our careers. But what makes this one feel different to you than 2000 or 2008?”
Bob: “The big difference is just the fact that the Federal Reserve has spent a lot of time and effort pumping money into the economy. After the Great Financial Crisis in 2008 and 2009, the Fed under Ben Bernanke made a decision to really pump a lot of money. And the reason they did is Bernanke was a student of the Great Depression. He just won the Nobel Prize for this, and came to the conclusion that the Great Depression of the ’30s was not caused by the stock market crash of ’29. It was caused partly by adherence to the gold standard, but largely because the Federal Reserve of 1930 did not act under the powers it had to help prop up the banking system. And when Bernanke had the opportunity, he moved very aggressively to help the banking system by providing money, liquidity and support. They had the TARP program as well—the Troubled Asset Relief Program that Congress passed.”
“So they pumped a lot of money into the system, and between 2010 and 2021, the S&P 500 went up 15% a year on average. That is rather extraordinary. The long-term average for the S&P 500 since 1926 is about a 10% gain, including the dividend, so 15% is a lot. And it’s not unreasonable when you ask, “well, why did it outperform by five percentage points over 12 years?” It’s not unreasonable to say that the Federal Reserve pumping liquidity into the system was a part of that outperformance. Just think about it—liquidity on that level is just more money. When there’s more money around, some of it will find its way into risk assets. And the Federal Reserve said they wanted that. And that’s reasonable to assume that that helped prop up asset prices.”
“If you believe that and I believe it, I think that’s reasonable, then the Fed withdrawing liquidity would reasonably be expected to lead to a period of subpar returns, which is exactly what we’re seeing this year, with the S&P down about 22%. I have no idea if it’s going to be down again next year. I know what the long term trends are—if you want, we can talk about that. But it’s certainly not unreasonable to expect some kind of subpar return this year and maybe even the next year too. By subpar, I don’t mean necessarily negative—if the long-run average is 10%, it’ll likely be below 10%.”
“By the way, this doesn’t happen very often. The S&P 500 typically goes up. Since 1926, it’s up three-out-of-four years. Think about those odds. This is why long-term, it’s good to stay with the market, and it’s up a lot. The S&P will move 10% or more in a given year 56% of the time, since 1926. Fifty-six percent of the time, the S&P is up 10% year-over-year. Only 12% of the time is it down 10% or more. This is why people ask me about playing the odds. The odds, long-term, are very good that the stock market is going to go up over time and outperform most other assets.”
Caleb: “Back in the day, the NYSE, the New York Stock Exchange, used to be a place where news started, or at least caught fire. You put a little kindling out here, you put a little news out there, and it would spread very quickly. There’s less observable activity down here, because of the reasons you mentioned. But the financial shows are still here—they’re right in front of us. But what do you learn by talking, listening to what’s going on in these booths; talking to the specialists, talking to the market makers? What are they talking about now? What’s sort of that drumbeat that’s going on?”
Bob: “Again, these are sell side people here. So what they’re interested in, and also what the options traders in the other room are interested in—it’s all about volume and volatility. And that’s how they make their living—they watch trading activity. So it’s the sell side that you’re dealing with here, not the buy side. And, even though the floor activity is greatly diminished, many of these designated market makers are still the largest traders in their stock. And so, they have significant positions—they’re sitting here watching. Now a lot of these trades, they’re done on the floor, they’re done with algorithms, but people are watching. And I always tell people outside, “believe me, there are people who are sitting in here watching the stock market every day.”
“And that fact alone—this idea that there are only computers running the stock market—it’s not true. There is no single computer that owns an algorithm—none. The algorithm is owned by somebody who owns the stocks, and there’s always somebody there who’s writing the algorithm, and probably writing it as it’s being executed. So, artificial intelligences do not exist in the market and do not own stock. People exist who own stock, who write programs. And believe me, if it didn’t work, they’d change it. Artificial intelligence does not lose or make money in the stock market—people do. So there are still people down here and you still talk to them.”
“But that being said, as I said before, technological progress is what you want to invest in, long-run. And we have seen better efficiency, higher-level efficiency, better business markets—a good deal for the average retail investor right now, still.”
Caleb: “Yeah. For those trading it, on the daily or on the minute, it’s a little bit more challenging. They need that volatility—they need that action. So you’ve been down here for a lot of historical events—9/11, sadly—a huge tragedy down here. But also, this was sort-of the place where New York was reborn from—the New York Stock Exchange. I was down here the day it re-opened too. That was a very big deal. But how did it change you, personally and professionally?”
Bob: “You know, after 1999, which was probably the greatest year of my life, when we had more fun down here than ever. I tell people, I wish there was a year in everyone’s life and career like 1999, when the wind is at your back and everything seems like it’s going right. And you know it’s a little bit of luck—you know you just stand largely in the right place at the right time—and you’re smart enough to know that.”
“That was the year when Bob Zito, head of marketing here, had enormous success with the opening and closing bell. The most famous people in the world came here in December of 1999. I met Muhammad Ali that year, standing right here. And let me tell you, that was an imposing man to meet, even greatly diminished in 1999. I’m six feet, he was six-three, but it wasn’t the three inches that was the difference. His shoulders were wide, and when he shook my hand, his hand went around my hand. I mean, I felt it. And, standing right at eyeball-to-eyeball with him, he was a very imposing, impressive figure. And Walter Cronkite was here, my hero, the great broadcaster; and I met all the great baseball stars. And, Jack Welch, the head of General Electric, my boss at the time—he owned NBC. And it was a wonderful moment.”
“But then the Dotcom hit, and then the year after—9/11, and downtown was transformed into a smoking ruin. It’s very hard to describe what it was like here. All of us lost friends and family down here. And it smelled bad for a year and a half. It was hard to describe how difficult and anxious and depressing it was. There were concerns about additional terrorist attacks, which didn’t happen, but that was a worry. And many people considered leaving the business—some did. Everyone, though—in those first six months—came to work anxious and depressed, and it changed me. I considered leaving, and a lot of my colleagues did leave.”
“But what I ended up doing was—I learned to meditate. I joined a Buddhist Meditation Society in Midtown. And, what it taught me was “calm the hell down,” that what had happened was not my fault, it was an external event. And meditation teaches you that you may not be able to change something that happened to you. If you stub your toe on a chair, you can’t change that fact. But you can change the way you react to it. So you can pick up the chair and throw it through the window if you want, or you can find some way to stop worrying about stubbing your toe.”
“And that’s what I did—I learned not to worry about blaming myself or, you know, being anxious. The world had changed. And the Buddhists say you can’t step in the same river twice, because it’s not the same river anymore. So you sort-of accept change, in a way, and that’s basically what happened to me. And I decided that I still love the job. I still love the bell ring. I still love going out, having drinks with the traders. And I decided to stay. So that was my home. And I describe how difficult that was, that horrible year, 2001 and 2002, when everyone just felt awful, and I almost left.”
Caleb: “Yeah, it changed all of us. And I remember that—the smell you’re talking about, I remember the feel down here. But thankfully, you stayed with it, because you’ve really done so much good work for all of us, as individual investors and just as a fellow member of the media. I’m just honored to have worked alongside you and watched you along the way. So you mentioned Cronkite. Who are your other greatest influencers, whether it’s in broadcasting, business news or life?”
Bob: “Well, when I wrote this book, one of the things you had to do—when I met with the publisher, they said, we don’t want you to write a memoir, but we want you to explain your intersection with the NYSE and why you stayed all these years. It’s very unusual for a journalist to stay 25 years in one spot. So you have, what we call inch-wide, mile-deep. I’m very well known for a little area called the stock market. And when you think about it, you have to sit back and figure out what you want to tell people. “What do I think I know, but what do I know?” So you make a list of the things you really believe in strongly. And then you think, “well, when did I come to believe these things?”
“And it turns out there’s a small group of people that greatly influenced me. Jack Bogle, the founder of Vanguard—I met him in the mid-1990s—changed my life, influenced me on indexing and the value of keeping costs low. Jeremy Siegel, Wharton professor, wrote Stocks for the Long Run, looking at the history of the stock market and why it’s a good investment. Other people—Charlie Ellis, wrote Winning the Loser’s Game, which is about why professional stock pickers do not outperform the market. Burton Malkiel wrote A Random Walk Down Wall Street, about why the stock market tends to do what it does in efficient markets. Robert Shiller wrote Irrational Exuberance in 2000 and was one of the founders of behavioral economics.”
Bob: “No, but I have to say, Investopedia is a go-to source when I need a better clarification on a definition. I talk about some of my sources. Morningstar, I think, is a great source of information. There are certain blog posts that I will go to; ETFs.com when I’m doing basic, simple, fast research on ETFs. And I think you’ve built a wonderful site at Investopedia. One of the things you know how successful you are, is type in a definition—type in efficient market hypothesis on Google. Go ahead and do it. You’re going to be the first hit on the top. That’s telling you something right there. That’s success right there—when you’ll appear on the top. Type in efficient market hypothesis, type in modern portfolio theory, you know, type in Laffer Curve, Investopedia will show up at the top.”
Caleb: “That’s that’s because we’ve been around since 1999, and we have editors that put a lot of work into that. We will take the compliment—if you don’t want to give us the term, we’ll take that and run. Legendary financial journalist and broadcaster Bob Pisani, and author of the book Shut Up and Keep Talking. I can’t wait to point people out to where they can find it.”
Bob: “And I have people ask me what it’s like to work down here, Caleb, and we’re standing right under the podium here where they ring the opening and closing bell. And I tell everyone, what would you give to meet all your heroes? Every rock star, every politician, king or queen. There’s been 10,000 bell ringings here in the 25 years that I’ve been here, and I’ve met most of my heroes. It’s been a great privilege to work down here, and to work for CNBC as well.”
Caleb: “Thanks so much for joining the Express. So good to talk to you.”
Bob: “Thank you, Caleb. Always a pleasure.”
Term of the Week: Collateralized Debt Obligation (CDO)
It’s terminology time. Time for us to get smart with the investing term we need to know, this week. And this week’s term comes to us from Caleb Jervais, who hit us up on Instagram. I didn’t just pick him because he has a cool name—he’s got a good idea for a term, and that is a CDO, or collateralized debt obligation.
According to my favorite website, a CDO is a complex structured financial product that is backed by a pool of loans and other assets, and sold to institutional investors. A collateralized debt obligation is a particular type of derivative because, as its name implies, its value is derived from another underlying asset. These assets become the collateral if the loan defaults. Though risky and not for all investors, CDOs are a pretty viable tool for shifting risk and freeing up capital in more boring markets than the one we’re currently sailing in. Michael Milken helped make those famous back in 1987—a very ignoble year, as we’ll learn about in a couple of minutes. Milken, the so-called junk bond king, and the bankers at Drexel Burnham Lambert, created these early CDOs by assembling portfolios of junk bonds issued by different companies and selling them for tidy profits. Cut to today, and activity inside CDOs, particularly collateralized loan obligations, which are a version of CDOs, has been pretty intense.
Collateralized loan obligations, or CLOs, are single securities that are backed by a pool of debt, and often contain corporate loans with very low credit ratings. Well, according to the Wall Street Journal, in recent weeks, trading of CLO bonds most commonly held by pensions and insurers hit its highest level since March and April of 2020. The average daily trading volume in the first week of October was around $1 billion—twice the daily average over the past 12 months. A lot of that activity was happening in London, as its bond market came unwound following Prime Minister Liz Truss’ plan to cut taxes. She reversed course on that on Friday, and fired her finance minister at the same time. Good suggestion, Caleb. We got a twofer out of that, and you’ll be getting a pair of handsome and stylish Investopedia socks for your smart suggestion.”
Special Mention: Louis Rukeyser and the Stock Market Crash of 1987
We’re going to let the late, great Louis Rukeyser take us out this week. Rukeyser was a legendary business news broadcaster who hosted the show Wall Street Week with Louis Rukeyser on PBS for 32 years. We’re going to go all the way back to October 19, 1987—we’re coming up on that anniversary, a day known on Wall Street as Black Monday. The Dow fell 22.6% that day, the largest one-day drop in the more than 126-year history of the index. To this day, it’s still the largest percentage drop ever, but it now ranks as the 97th-largest point decline—that’s the law of large numbers, don’t you know?
There is no one reason for the market crash of 1987. Stocks were selling off days in advance. Some people, including Rukeyser, blame program trading. The advent of electronic trading was in its early days, as we discussed earlier with Bob Pisani. Currency markets were on edge, and there were rumblings in the bond market that spilled over into stocks, as they often do. Well, back to Rukeyser, who broadcast his show on that following Friday, and this is how he opened it:
“Okay. Let’s start with what’s really important tonight. It’s just your money, not your life. Everybody who really loved you a week ago still loves you tonight, and that’s a heck of a lot more important than the numbers on a brokerage statement. The robins will sing. The crocuses will bloom. Babies will gurgle. And puppies will curl up in your lap and drift happily to sleep, even when the stock market goes temporarily insane. And now that that’s all fully in perspective, let me say “OUCH!”
The great Louis Rukeyser, ladies and gentlemen. Two years after Black Monday in 1987, the Dow hit all time highs, and so it goes.