The Dividend Cafe - Monday - December 23, 2024

Episode Date: December 23, 2024

Today's Post - https://bahnsen.co/407yd5Z Market Recap and Insights Before the Holidays In this episode of Dividend Cafe, Brian Szytel discusses the market activity as of December 23, just before Christmas. The episode covers various topics including recent market movements, interest rate changes, major inflows into ETFs, credit spreads, the state of household versus government debt, public policy updates, inflation data, durable goods, and housing market trends. Brian also touches on the Federal Reserve's policies and their impact on asset prices. Listeners are reminded of the upcoming schedule and seasonal wishes are extended to all. 00:00 Welcome to Dividend Cafe 00:14 Market Overview and Recent Trends 01:15 Interest Rates and Economic Momentum 01:59 Credit Spreads and Risk Complacency 03:18 Household Debt and Financial Health 04:35 Public Policy and Government Debt 05:20 Economic Indicators and Market Reactions 07:53 Federal Reserve and Asset Prices 09:50 Holiday Season and Upcoming Reports 10:30 Final Thoughts and Holiday Wishes Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, welcome to Dividend Cafe. This is Brian Seitel with you here. This is Monday, December the 23rd. We're a couple of days here before Christmas. What you can imagine is a fairly quiet market day and what will ultimately likely be a pretty quiet market week. Last week's Dividend Cafe on Friday went through the market sell-off we saw last Wednesday in a little bit more detail. But for today, we actually had a market that opened up down slightly, at least on the Dow, to start the day off. And we kind of grained most of that traction back through the rest of the day. I'm actually recording this a little earlier than the close just for my own Christmas travel and in things myself. But both the S&P and the NASDAQ are positive by over half of a percent. The Dow is just flirting with it

with a flat number here after being down a little bit more in the morning. So we've got a decent day and again, light volume, not a lot going on, at least today from a volatility standpoint. The 10-year yield was up five basis points on the day. So we're at 458, which is actually a little surreal when I think about it. Just where rates have gone since even just September of this year. September, they were below 4%. So rates have risen, not quite 100 basis points, but pretty close to that in a pretty short period of time. And a lot of that is baked in from positive economic momentum.

And that's not necessarily a bad thing. And I've written about this a few times. But it's one thing if you've got to ramp up an inflation in slowing growth numbers. That was what we ended up seeing in the 70s and what at one point people were worried about. And that's not what we're seeing here. We have growth that's positive. And so interest rates don't need to come down quite as much because inflation has already come down. So not all bad. A couple of comments in there, just about some extremes. There was a big number that went into ETFs in the month of November. We know what happened last week in markets, although they're still positive since this, but a lot of money is chasing the market right now. There was $150

billion worth of inflows. That's a pretty big number. I added a comment in there as well about the spread of, about credit spreads, because this is another indication of risk complacency. The spread between a high yield bond, which you'll get for junk bonds, and where Fed funds is typically has a positive correlation, meaning you should get paid more than cash in order to own below investment grade paper. But that spread hit a low originally back right before the financial crisis. This was right before the housing bubble of 05, 06 era, and the difference was just under 2%. Well,, take it up forward another 15, what is that, 17 years, and we're back now to all-time new lows. So the risk or the fear of

credit default is actually lower than it was right before the housing bubble. We're at 1.27% that spread between where Fed funds is and junk bonds. So basically, this is a sign of risk complacency inside the credit market. And along with some equity exuberance and some animal spirits, they're just things that we pay attention to. And I think you should, too. And I've written about this a lot, but it is going to come down to income and asset allocation in the year 2025 more than maybe some of these other years. There was a good comment in there, I thought, about debt. We talk a lot about government debt, kind of a topic du jour, but what we don't talk about is actually household debt.

And coincidentally, my comments around the great financial crisis are relevant to this because the actual debt to asset ratio today in 2024 is only about 11%. So if you looked at a chart of that, and there's one included in the dividend cafe, you can see where things peaked and where they troughed. This is the lowest debt to asset ratio since the mid seventies. You saw it go up a whole lot. And then right around 2009, since the mid-70s. You saw it go up a whole lot. And then right around 2009, 2010, you saw it go the other way. And if there was another chart that was juxtaposed on there of, say, the government debt, you would see that chart start to exponentially grow. This is when QE started. This is when the Fed's balance sheet expanded. This is when we had to save the financial world, basically. And so essentially, essentially had default and transfer of debt

from people and private sector to public sector. So those two things are interrelated. But nevertheless, the fact of net worth at all time highs in this country is what we're talking about here. So yes, debt is a big concern in the country. But when you look at total debt, meaning consumer debt, it starts to paint a little different story. And you can see how that transfer happened. Public policy, Biden signed over the weekend a bill from Congress to avoid a shutdown, keep spending going through March. This is a formality that they do. It's used sometimes for political ploy. There's a lot of talk, at least in the Trump administration, about repealing or getting rid of this mechanism to kind of keep checks and balances on how much money is being spent. But for now, we're going to continue spending at least through Q1. Also, the Trump administration named Stephen

Mirren to the chair of the Council of Economic Advisors. This is someone that David knows personally. He's been on David's podcast, Capital Record, and there's a link in there, and I'd encourage you to watch it. But a friend of TPG and a smart guy and I think an attribution for the cabinet in the Trump administration. Economic side today, there was some inflation out on PCE. It was up 0.1% on the month. So below expectations, you had things like goods prices deflating now at 0.4%. You have energy down, it was down about 4%.

And then food was only up about 1.4. So the narrative of a ramping up or a resurgence in inflation just isn't materializing. You also have wages that are positive on the year now at 5.7%. So if you end up getting inflation somewhere in the twos, let's call it two and a half to maybe even three, but wage growth in close to six, then that's a positive dynamic, meaning that the people are making more than things are increasing in price. And that's a good thing. Durable goods were also out today, down more than expected, although most of it was transportation, which is more volatile. It was down about a percent, 1.1 on there.

which is more volatile, was down about a percent, 1.1 on there. So housing side, we had existing home sales that were up 4.8% for the month of November. That's good. Year over year growth and volume is up a little bit, 6%, moving in the right direction. Some lower interest rates may be starting to affect that. Although with rates backing up here, that's going to come out of that paradigm as well. But I added a comment in there just about the price per square foot. We know that the prices on residential real estate have slowed. They're still positive, but price appreciation has slowed. I'd call that healthy and good because I think they were ahead of themselves. Our take on it is that once volume picks up a little bit more, you're going to get some

more price discovery and potentially some lower prices. But to put it in context, the price per square foot on residential right now is about $2.36 per square foot. And if you did a CAGR on a trend line over 10 years, it would have it somewhere around $2.28. And I'm saying that just because it has come down towards trend line. It's still above it, but it's not above it all that much, really. So a couple of things on the Fed. We've had Fed futures adjust since policy meeting here on the 18th. So there's now basically no cut priced in for the month of January and only a 50% cut for the month of March. But one of the more interesting things is there's still a 50-50 chance now that we only get one more rate cut by the end of the year of 25. I would take that's

a little ahead of itself. So long as employment does normal things and inflation continues to come lower, we'll have to see what growth does and where earnings come in. But I'd be surprised if there was just one more rate cut in 2025, but there's a 50 50 chance priced in right now. So that's how much things have changed. And again, most of that is rooted in pretty good things. It's that growth is stronger than expected. There was an Ask a TBG question in there, and David did this, and I like the way he wrote it. But the question was related to quantitative easing from the Fed or Reserve. Does that speak to asset prices going higher, like stocks, real estate, things like that, if they're going to be able to expand the balance sheet. And so is that one of the

reasons that's supporting these high valuations? So the answer is that yes and no. Yeah, I mean, the Fed being the buyer of last resort, I think will be here to stay for at least the foreseeable future. But I wouldn't chalk that up into an indefinite and perpetual rise in asset prices. There's periods of time when we were doing quantitative easing and markets were both good and bad, mainly good if you look at like the 2009 to 2014 era. But there's periods that we're doing quantitative tightening, which is now. We're technically rolling off the balance sheet. So that's the opposite. So if that theory was true, then that should mean that stocks should go down. And they, of course, have not. They've gone up now big years, two years in a row. So keep that in mind. And valuations will always matter, by the way. But I'll even add one more thing, which is

what the Fed has done with expanding the balance sheet and not just doing it with mortgages and treasuries, but doing it with municipals or below investment grade bonds or exchange traded funds, which is what they've done in different periods of time. Yeah, it supports asset prices in a time of crisis, and that's what they're trying to do. It also distorts long-term risk reward in markets, which I'm not a fan of. And if anything, it probably ended up maybe not killing the bond vigilantes, but certainly defanging them in some sense. Because if you get things that are bad enough, at least on the rate side, the Fed's going to be there to buy it. And I think that takes those yesteryear bond vigilantes, as they were called, where they attack longer in parts of the curve or any part of the curve or the entire curve and send rates higher

based on fundamentals as they're supposed to. That part has been a little neutered with some of these things. So there you have it. That's my around the horn on the day. Obviously, we're right into Christmas time, right into holiday time, New Year's, things like that. Markets were probably going to be slow. They're certainly acting better today than they were a few days ago last week. But we'll have another dividend cafe for you on Monday, which is the 30th. And then we'll have another dividend cafe for you on Friday, which is the third. In the interim, there won't be WPHR, weekly portfolio holding reports for clients. And then we'll be back into our normal rhythm

more on the sixth, that week, January 6th. And then lastly, David will have his annual white paper the year ahead, a year behind, which is always a huge hit. I love it myself. I can't wait for it. I know he'll be out writing that in the weeks ahead. So with that, I am going to wish you a lovely holiday season. A Merry Christmas and happy holidays. Happy New Year. I'm still around working. I'll be maybe working from another location with my family here over Christmas time. But I'd still love to hear from you.

So reach out with all your questions. And if I don't speak to you, have a lovely holiday. Talk to you soon. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC.

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