The Dividend Cafe - The DC Today - Monday, April 1, 2024

Episode Date: April 1, 2024

Today's Post - https://bahnsen.co/4cDHCqg There is a lot of good stuff in the podcast today and, as always, we welcome your questions and curiosities. Dividend Cafe looked at a number of things around the Fed, market valuation, inflation, and more on Friday. We have some very exciting things in the works about our plans for daily and weekly content delivery, with even more additions and refinements coming. Meetings are underway and nothing will be ready to announce imminently but we are excited to bring what we are doing to another level. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to another edition of the DC Today, starting off the second quarter of 2024 today on April 1st. No April Fool's Day jokes or anything like that. We're just right into the market. I do hope everyone had a wonderful Easter weekend and I'm very excited to be into Q2 now. It was a heck of a ride in Q1. Clients are going to be receiving a lot of information from us on Wednesday this week, recapping the first quarter. And there's a handful of things I'm going to say here today

about the broad market and where we are with Q1. So we'll get into it. I think today is going to be a little more market heavy, but we'll, of course, as we do every Monday, go all the way around the horn. Last night, and I always take futures on holiday weekends with a grain of salt, the market had been closed on Friday, but futures opened up up about 75 points. And then early this morning, they were pointing up 100. And then by the time the market opened, it was pretty much dead flat. And it only took about an hour for the market to be down 250 points today. And it kind of got down there and then stayed there after about an hour and a half,

pretty much flat for the rest of the day and closed down 240 points, which was only 0.6% on the Dow. S&P was down 0.2%. The Nasdaq was actually up just a tiny little bit. But the main issue was the bond market. You had bond yields. The 10-year was up 12 basis points. And so a lot of this looks to be kind of quarter end and quarter beginning rebalancing and asset allocation related activity. And if there had been some selling pressure in bonds today, then it stands to reason it would have brought stocks down with it, which is kind of one of the big points I want to make today. And I have a chart at the dctoday.com indicating that we're right now at the highest correlation that we have had between stocks and bonds ever.

And that is a very unique thing for asset allocators. It's challenging, but you can look at the chart to see what I mean. The correlation between stocks and bonds this high means that you're not getting a big diversification benefit from owning both asset classes. It's really that simple. And nobody really cares about that on the upside. I mean, if both stocks and bonds are going higher as they were in November, December, people don't care as much. I feel some of that correlation having broken down a little bit in Q1.

But until we see the kind of trailing 12 correlation come down, and when you have down days where bonds sell off as they did today as the yield was up 12 basis points, and you see stocks go down with it, it seems to me that correlation is still in place to the downside. That continues to be a big story in markets. But when you just isolate to the stock market, 86% of companies in the S&P 500 are above their 200-day moving average right now. That's extraordinary breadth and improvement from where we had been. And in fact, really some of the out-of-favor sectors, what you would consider kind of laggards, had led in the last few weeks. This is evidenced in the fact that like energy is the top performing sector in the market on the first quarter on an even weight basis.

Now even cap weighted, it's right there in second place. But think of the difference when communications services was like the seventh or eighth best performing sector even weighted, but the top performer cap weighted. There's still a lot of top heaviness in tech, but you see a real broadening out in a lot of these other sectors. On the quarter, by the way, real estate's the only sector that was negative. It was only down about 1%. Utilities were not a strong performer, but I mean, they were up 3.5%, a pretty darn good quarter. So most of the top heaviness is still pretty much in technology and communication services,

which are kind of cousin sectors that exist in the index. The S&P, by the way, is up 25% since the November FOMC meeting, which is really where markets begin to price in the fact that J-PAL was telling them, I'm done raising rates and I'm going to be starting to cut rates next year. And that rally that we closed the year with and have extended here into Q1 it's 25% now from the low point in the S&P to where we are that amounts to 10.9 trillion dollars in increased market value in the index almost 11 trillion of increase and even bonds are up over two and a half trillion dollars in that period of time. Pretty, pretty remarkable.

So today, worst performer was real estate. Just on the day, it was actually down one and three quarters. Pretty bad. Communication services up almost one and a half. Another chart that's in the D.C. today, by the way, and there's a lot here on markets today, but I think it's for a good reason. The Citigroup panic euphoria model, it's an ongoing model we watch quite closely. And you do see markets right now into a state, a kind of early stage entry into what the model classifies as euphoria, all things being equal. I really love buying in panic and

we had a bit of that about a year ago and and then you kind of had a rally then a big sell-off almost got down to panic again rallied high off of that as I just mentioned 25% from trough to peak and now into a more euphoric environment and and again this is all based on a model that is measuring a number of different things. You can agree with the inputs to the model or not, but it's historically been pretty useful. Okay, what else do we want to cover? The first core, I hate saying these historical stats. I share them with you because I care about history,

and I just do everything I can to qualify what I'm sharing that you know these things are not predictive, not even close. When the first quarter of a calendar year is up like 10%, you know, a really robust Q1 in markets, the average second quarter return is up 3.4%. The average final nine months of the year, the remainder of the year, the remainder of the year is up 7.4%. But then within those data points, there's outliers that pull it away high or way low, and therefore I think is rather unhelpful predictably because of those outliers. On the policy front, watching Speaker Johnson's interview last night and reading a lot of analysis that I've been reading through some of this stalemate between the House and the

Senate about Ukraine, and then reading more analysis this morning in the aftermath of Speaker Johnson's interview, I'm increasingly of the opinion that they may be able to thread something through that helps get support to Ukraine, which is difficult given the current political environment. And it appears some combination of some of the funding being structured as a loan to Ukraine, some of it being funded by seizing Russian assets that are either in Europe or the US and presenting those to Ukraine as part of the funding. And then also some kind of policy tradeoff, which is obviously how the sausage is often made. But there's more conversation about some allowances for natural gas exports being used as a quid

pro quo to help get some Ukraine funding done. So that's three different variables I just presented. I think all three of them are on the table and all three could lead to some kind of Ukraine bill. But, you know, nothing's done till it's done. So the PCE, the Fed's preferred inflation number, the personal consumption expenditures came out on Friday and got kind of missed when the stock market, bond market banks were all closed. But nevertheless, the month over

month was 0.3% when 0.4 had been projected. The year over year is down to 2.5%, and therefore quite close to the Fed's target of 2%. The month over month had been 0.5 in January. So that disinflationary move month over month, 0.5 to 0.3 was the largest we'd seen in a year. I'd also point out personal income was up 0.3% for the month, is up 4.6% over the last year. So but spending levels have exceeded income, but price growth has been higher with wages than with expenditures,

which is a good thing. Real wage growth, in other words. China is reporting stronger than expected factory activity in March. Their manufacturing went positive for the first time in six months, speaking of which U.S. ISM manufacturing expanded for the first time in 18 months. which U.S. ISM manufacturing expanded for the first time in 18 months. Barely, but it did go into positive territory first time since October of 2022, with a big jump in production being the primary reason a lot of unfulfilled orders got filled in the month of February. A Redfin study I read this weekend, 36% of Gen Y and Gen Z people either have received or plan to receive support from mom and dad for the down payment on a home purchase over a third. Do with that what you want. I'm keeping my mouth shut.

We're at a 96% chance of no rate cut at the May meeting, which is right on May 1st, by the way. So a month from now, we're expecting no, and this is in the Fed Funds futures market, no move at all. But there is a 69% chance of a rate cut by the June 12th meeting. And of course, there's 10 weeks between now and then, so a lot can change.

We're at 100% chance of some cut, anywhere from two to four cuts taking place by the end of the year. That's the state of the Fed Funds futures market now. By the way that PCE report that I talked about from Friday Chairman Powell gave a speech Friday and said that report appears to be and I quote pretty much in line with our expectations. I'm getting more chatter about, oh, the Fed reported that they lost $114 billion last year, largely on the fact that they pay out a certain level of interest on bank reserves, and then the assets and liabilities do not match up, and they brought in less income

than that. Just note, you they paid out 281 billion dollars so that means they might have brought in about 160 billion in interest income on their bond portfolio and again that that mismatch is is purposeful but it resulted in a cash flow differential. So what they do is they carry that negative number as an deferred asset on their books. And you go, why? That just seems like they're papering over a loss. But let's be real here.

They've generated per year for 20 years an average of $63 billion of positive result of income over what they're paying out that gets remitted on to Treasury. So it's not if, but when, and even the when is sooner than later, that now they will recapture that 114 billion and bring that deferred asset current on their books before they remit another payment to Treasury. Oil is up near $84 a barrel, 1% of the day.

It's up 18 and a half percent on the year. Midstream energy, I'm not doing too much today on a lot of the Q1 summary because I'm doing a longer recap of that on Wednesday. But you had the midstream space up 13% year to date. And that's despite a 30% drop in natural gas prices and the fact that bond yields are up about 40 basis points since the start of the year. So really resilient behavior from MLPs and the midstream sector. By the way, MLPs in April have been up 23 of the last 28 years. And by the way, that means nothing. Against doomsdayism, you've got to go to thedctoday.com to see the picture.

My 13-year-old son, Graham, was my inspiration for this image and announcement as his evidence that indeed all is not lost in the world. In Ask David, someone asked me about trade deficits and the comment that trade deficits largely have helped hold the US dollar's reserve currency status in place and wondering does this mean trade deficits are a good thing and I want to clarify that I'm describing something not saying what ought to be but just simply saying what is that when countries receive more dollars than they do goods in exchange for the goods that they sell or export, they have to do something with those dollars.

And the fact that we run at a current account deficit has resulted in a lot of dollars going to other countries that then have to be invested back in the United States or held as a reserve currency in the foreign exchange reserves of these other countries, China being most substantial in that regard. You can say it's a good thing or a bad thing, but it just is what it is. And it's most certainly helped reinforce the dollar's reserve status. Now, maybe you think there's some other country out there that is going to now be selling more, excuse me, importing more products and having to have other countries hold their currency and massive reserves. But suffice it to say, that would not be my view. Does this mean that the trade deficit's been a good thing because it's helped reinforce our currency status? Look, you can have,

the problem is you can't answer it that way because you can look at countries like Venezuela and Russia that own, that run trade surpluses and are very destitute, poor countries. And you can look at very rich countries that run surpluses because they are oil rich and they obviously export a lot more than they import. Saudi Arabia is a pretty good example. Other countries can be pretty rich that run trade deficits. You may have heard of the United States, but Turkey and Pakistan are relatively poor countries, and they run big trade deficits too.

The delta between what is exported and imported is not the biggest issue. The total trade, exports plus imports, not exports minus imports. It speaks to overall activity. And then what is driving the deficit, where there are comparative advantages at play that explain some of the trade differentials. That to me is the key issue. So I don't think it's a black and white question of trade deficits good good trade deficits, bad. What I do know is that more or less

foreign countries fund countries with fiscal deficits when those countries run trade deficits because they have to buy the debt of that country. So you can say that these things are good or bad or what have you. But when one feeds the other, it becomes descriptively unavoidable to point out that the trade deficit has been a byproduct of the fiscal deficit. And I think a lot of people can pretend they don't like that, but they wouldn't have liked the alternative much either. I hope you follow what I'm saying. Okay, we have a jobs report from BLS on Friday.

And in the meantime, there's a handful of links of different things that if you go to the DC today, you'll see why it's a pretty robust Monday edition. And then in the meantime, we have all the way to this weekend for the final four, but I want to congratulate Purdue, NC State, Connecticut, and Alabama for making it to the final four here in March Madness. And for those of you that had those teams in your bracket, congratulations to you as well. With all that said, reach out questions at thebonsongroup.com anytime and look forward to a full week kicking off quarter two here in New York City. Thanks for listening. Thanks for watching. And thank you for reading the DC Today. The Bonson Group is a group of investment professionals

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