The Dividend Cafe - The DC Today - Monday, August 28, 2023

Episode Date: August 28, 2023

Today's Post - https://bahnsen.co/3Pe4vqK Brian Szytel takes on DC Today through Wednesday, so we leave you in his capable hands! 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. Hello and welcome to DC Today. It is Monday afternoon, August 28th. I can't see that, can I? August 28th. It's good to be with you all here today. I'll be hosting DC Today most of the week, at least Monday through Wednesday, with David traveling, and I'm happy to do it. Today was the little longer form version, which I always kind of enjoy doing. It gives me a little more time and chance to go through some topics. Markets Friday were up and closed up on the day, basically at the highs. There was Powell comments out of Jackson Hole Friday that moved markets. Actually, they sold off initially, basically said that further rate hikes are still on the table, depending on the data. And there's enough data coming where we're not going

to tell you exactly what we're doing because we don't know yet until we get the data, which is basically in line with what markets were already expecting. And so initial sell-off led to a rally. And then over the weekend, obviously, everything was closed. And then Monday morning, early, futures were up not a lot. They were up a quarter of a percent or something like that, 75 points. We actually built on that a little bit right into the open. We were up about 150 points in futures. And then, of course, markets did open up and traded upwards

of 160 right away and then moved up from there. High was something like up 300 points, about an hour, hour and a half into the open. We held on to the gains for most of the day. We ended up closing up 213 points on the Dow. Interest rates were a little bit lower on the day. The 10-year was down two basis points, closed at 421. Two's 10 spread is now about 86 basis points. So actually, the curve is getting a little more inverted. And whether that is saying something is good or bad, I could argue both sides to that. But for now, that's where we are. More of the same on the yield curve. We had at this point, Q2, the second quarter earnings season is basically completed.

In fact, it's 96% completed. So far, we've gotten about $108 of earnings about halfway through the year for Q1 and Q2. And if you kind of think about a little less than half of the year's earnings come in the first two quarters, there's some seasonality that pushes some of the earnings out into the latter quarters. But it puts us at about a 221 per share amount of earnings for the S&P 500 for the year 23, which is basically in line with market expectations. And I think markets have been feeling a little better because there was a worry that earnings were really going to fall out of bed.

And that, frankly, just hasn't been the case. Earnings have not fallen out of bed. They came in better than expected. They were still down on the quarter, just a couple percentage points, 3%, but all in all, better than expected and quite resilient, really. For next year, the estimate is 248. So that's assuming about an 11% growth from 2023. I think for the year of 23, we'll actually end up coming a little bit better than the 221 just because we already have some line of sight. This is August, so we can see into the next couple of months. But for next year, I don't know if an 11% growth rate is really that realistic, if rates are going to stay where they are.

And so just be prepared for that to disappoint a little bit. And if you think of the multiples for 2023, that puts us at like 20 times earnings. So 221 divided by today's S and P is around 20 X. And if you look at next year, if it were to 48, um, it would put us around a 17.8 multiple. So neither of those are cheap by any historical metric. And so, you know, we've got to keep some of this stuff in mind, especially when you have risk-free rates at 5%, you know, two years at 5.06% today. So those things feel a little out of whack to me, out of balance. You know, it's hard to have risk-free rate at five and then have, you know, a multiple at 20x.

Maybe something's got to give there. And of the two, I think it's a combination of rates coming down a little bit and markets being a little calmer. But I thought it was interesting. I was kind of looking through just basically bond land, looking at spreads, high yield, investment grade, looking at the enormous private credit market that has surfaced the last couple of years. It's over one and a half trillion dollars now. And I think it's interesting. We had spreads widen the most in 2022 or get to the highest point. And we haven't revisited those levels.

And I do think that there's something to be said about private credit playing a role in that. I think it's a good thing. I think it's a good role. But I think there's some absorption in what spreads would otherwise normally do, given where interest rates have gone. And given that some of the data, even the jobs numbers are starting to slow a little bit. You'd normally see spreads widen a little bit. You're not seeing that too much. I do think for next year year and actually the next two years, so for 24, so yeah, 24, 25, there's a maturity wall in corporate bond land of over a trillion dollars. So there's a lot of supply that's going to come to the market. I do think that will eventually

push yields a little bit. I'm sorry, spreads a little bit. But for right now, there's some absorption. The private credit market has about 400 billion left in dry powder. That's a lot. And I think it will absorb a little of the spread widening into next year, but not all of it. So we have that going on. The big news on the day, really, there wasn't a lot in the economic calendar. I mean, it was a follow through of Jackson Hole. And then over the weekend, China attempted to, you know, stimulate their economy. They've obviously had slowing numbers and they're dealing with that. And a couple of different things that they did, it actually had markets up in Beijing, five and a half percent at the start. So it was a huge, you know, run up in markets right away. They're going

to stimulate. And then I think after some digestion happened, they sort of realized why they're doing that. And also that it wasn't quite the bazooka, you know, that you've heard that that term, where they come out and do whatever it takes to basically make markets go up whether they want to or not. It wasn't that the reason is that they have to support their currency, too. So if you overstimulate and you create a whole lot more supply of yuan, you do get an outflow, a capital outflow. And then contrary to get a depreciated currency. And I feel like they're more worried about capital outflow than they are about GDP growth being a percentage or two points higher or lower. They need to protect that currency. So that limits what they can really do. There was a federal date set of March 24th for next year.

I'm sorry, March 4th of next year for the trial against Trump and accusation over election deal. We have that coming out. He was able to still raise money. Last week on Friday, I think he raised the most in a single day he ever has. So these indictments and these arraignments and these trials and these things that he's going through aren't slowing down his ability to raise money. He raised over $4 million in a day on Friday. I put a chart in there that shows the percentage of consumers' income that's going to service debt. And I think it's important, which is why I put it in there, to think about because we all know that interest rates are higher and that matters. And so but when you think about the amount of money people are spending to service debt, it's not historically high.

That can change. people are spending to service debt, it's not historically high. That can change. Those things can work themselves through the system and the debt service costs can go up or it has, or incomes can go down. There's a couple of different variables there. But generally speaking, and even through most of 90s, 2000s, we were 11%, 12% and we're at about 9.6% right now. My point to that is the consumer is very healthy. One of the reasons is that the great financial crisis, a lot of debt was just shifted over to the public side, the government, in other words. So when you look at the government, the same calculation, but for the US government, it's more like 14%. And I'll say historically, you know,

that is around a level which they start to kind of curtail spending a little bit. So on the fiscal side. So I don't know that that's necessarily a bad thing, although the economy is only made up of so many parts as far as what GDP goes into GDP. And so less there would either mean maybe a private side that would that would make up for it, which is what I think will happen, or, you know, a detraction a little bit on overall growth in the short term, at least in the long term. I think it won't be too big of a deal. Yeah, and speaking of rates, I mean, we had mortgage rates, you know, at basically 7.5%. So, you know, mortgage rates are higher. It hasn't affected housing as much. I said this last week. And one of the reasons is that the average mortgage rate is

not 7.5%. People have their existing mortgages and everybody refinanced when they could. They're most people. And so the average mortgage rate is more like 3.6%. So, you know, the effect of increasing interest rates on housing has been less than most would have feared, because people aren't realizing that mortgage rates, they're either not moving, or that potentially some home builders and new home builders are able to subsidize rates by offering a buy down for them. But regardless to say, it's just a little more resilient. So you have a pretty strong consumer, debt service cost is not a huge percentage of income. And then mortgage rates are somewhat unaffected because everyone still has their three and a half percent mortgage. Whereas if you look at, you know, on the government side,

the average maturity is not 30 years like a mortgage, it's, you know, something around six, five to six years as far as the outstanding debt of the US government. And so with rising rates, you have a quicker time in which those things start to make up and matter, which is why you're seeing the debt service costs go up faster there. We're upwards of 14% as a percentage of tax revenue. So how much money is coming in versus how much is being spent. So that was kind of a lot I threw out to you. I'll let you kind of read through. David was kind enough to put a couple sections in there too. You can read about on the Fed and his Ask David section. And then I'll be

back with you tomorrow on DCT, DC Today, with a recorded and a written. And we've got job opening numbers tomorrow, the JOLTS number, and some Case-Shiller housing data. I don't think that's going to be too market moving. And then really the number for the week is going to be the PCE read on Thursday. So that's going to be the anticipated number. But with that, I really appreciate you listening as always. Again, especially this week, please do reach out to me if you have any questions, and I shall talk to you soon. Thank you. again, especially this week.

Please do reach out to me if you have any questions and I shall talk to you soon. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC with Hightower Advisors LLC,

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