The Dividend Cafe - The DC Today - Monday, August 7, 2023

Episode Date: August 7, 2023

Today's Post - https://bahnsen.co/3Yoorda Greetings from New York City (again). Lots of fun stuff today in my favorite DC Today of the week – the Monday edition (I love Mondays for so many reasons). 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 the Monday edition of DC Today, my favorite day for DC Today. We're actually, I'm just going to record here from my desk at my New York office rather than walk into the studio because we're already running late. So we're going to do this down and dirty, but there's a lot of information there today. And the written version at the dctoday.com will give you all the goodies. In terms of the markets, we'll get that out of the way first. The Dow was up over 400 points, about 1.1%. The futures were up last night about 50 points when I was on the plane coming into New York and had gotten up as much as about 75. Early, early this morning, they kind of were in that range, something between 50 and 100 points

pre-market. Then we opened up 200 and then it just sort of steadily went up throughout the day. So you just, you know, I think have positive earnings environment, a lot of Goldilocks type data that is in that sort of not too hot, not too cold camp. And market participants seem to be liking it. Although today was, even though communication services was the higher performing sector, the Dow substantially about doubled what the NASDAQ had done. So it wasn't just on the junkier side of markets. And financials did quite well today as well. Only sector was down was utilities and they were flat on the day. They were down two basis points. So big risk on.

I want to give you, let's see, the 10-year bond was up three basis points today. I think we're about 4.09%. Oil was up again and it's still sitting there right in between 82 and $83. There isn't anything particular about today's market activity I think is worth obsessing over. The kind of bigger deal issue I want to bring up is that the S&P 500, earlier in the year, it had a point at which it had dropped 8% from its high point to its low point.

The average, what we call drawdown at whatever uh peak level is to a trough level which are identified with the gift of hindsight um the the highest amount of a drawdown this year was eight percent the average level of a drawdown in a typical calendar year is over 12 percent and that includes the years, which is the bulk of years where the market is up. You know, the market is up more than it's down. And even in up years, you'll have 12%, 14% as a median level. Now, sometimes it can be 20%, 30% down. Other times, not so much.

I often tell the story of 2017 where the market'saked to trough all year was 2.9%, which was the lowest it had been since 1995, when it was also 2.9%. So those are almost non-existent downside volatility years. And that's captured in the average level. But on an average level, this has not really had much downside volatility at all. And that's with this massive Fed tightening and all the questions of recession, et cetera. Why is that? Well, first of all, markets got hammered last year. So a lot of those things were priced in coming in. There's obviously been a big kind of bubble up of optimism and valuations in a lot of the technology space and anything that puts the name artificial intelligence around their brand.

But you also just simply haven't seen corporate fundamentals deteriorate much. We're 84% of the way through earnings season right now. And revenues are going to be coming in somewhere around up 0.2% year over year. Profits are going to be down about 4.2%. That is substantially better year over year on trading 12 month basis. That is substantially better than what people were anticipating around a year ago at this time. The profits people worried could drop. There were some calling for them to drop 25 or 30 percent. Very routine, 10 to 20 percent. And here we are a year later with earnings down 4 percent. That's not the stuff that tanks markets, generally speaking. I talked in Dividend Cafe the last two weeks about credit and why we look to credit markets as such an

indicator of overall economic health. And I talked about, you know, the reality of many companies already creating through debt markets, both in bonds and loans, the amount of liquidity they may need for a little while at pretty favorable terms. I put a chart in the DC Today that the total size of the corporate bond market, both high yield and investment grade after financial crisis was right around $2 trillion. It got up over a year ago as high as $10 trillion. It's now down to about $9 trillion. And what that means is roughly a trillion dollars worth of bonds matured, were paid off, and were not reinvested in new debt issuance. But either way, we're sitting at about $9 trillion size bond market, 15 years after we had a $2 trillion bond market. Credit is very important.

The ability of companies to access borrowed money is very important. But you could argue, perhaps, a lot of companies have already borrowed the money they need to borrow, that there aren't enough creditworthy borrowers, that the creditworthy borrowers that tap the bond market are already adequately levered up, hence the $9 trillion. And that there just isn't a need right now for a lot of access to additional debt capital, at least on the corporate borrowing side. I realize commercial real estate can be very different. Moving into public policy, the only thing I wanted to comment on is that, and this just blew me away, 53% of proposed foreign investments that have to be approved by CFIUS, which is a division within the State Department that approves foreign ownership of domestic business, that regulator, that 53%

of those deals have been denied or blown up where people walked away in the last two years. That number averaged 25% in the four years before that. And that was with a State Department that was really intensifying their oversight of a lot of these foreign deals. So I just think it's worth watching the fact that a more hawkish economic nationalism doesn't appear to just be the sole property of President Trump or of the right or of these newfound economic populists that are so common right now in a lot of the political right. But even in the Biden administration, you see an awful lot of these deals not happening. And people can think it's a good thing or a bad thing. My comment is merely to comment on the fact that it is happening. Okay, so we know the jobs report

came out Friday. It was not a smoking hot number. It wasn't a disaster. The unemployment rate is still at 3.5%, but there were 179,000 jobs created. People have been expecting, excuse me, 187,000. People have been expecting about 200, so it's a tiny bit less than expected. There were another 50,000 of downward revisions from the past couple months. of downward revisions from the past couple months. The labor participation rate is still at 62.6%. That was unchanged. So you just sort of had, you know, not a great number, but not a terrible number, and a lot of questions about where we go from here. That's been the story most of this year, frankly. The Fed is not meeting again

until September. As you know, there's an 84% chance in the futures market right now that they will not raise rates. We have a CPI number coming on Thursday this week. And I expect that that inflation rate will tick up from where it was last month, just based on the very low base effect of what we had a year ago. And maybe that gets, I guarantee you'll get the media running around with their hair on fire. I don't know if the Fed will use it as cover or not. We'll see what happens in futures market pricing after the CPI comes out this week. But expect a little tick higher in that inflation year over year around base effects later this week. That's the biggest story for the week will be CPI coming on Thursday.

And then right now we're just watching oil prices because if you stick around 80, that can hold things in there. If you start getting up around 90, I think that starts to really push upper pressure on that component of headline inflation. So that's that with that. Okay, great. Against doomsdayism in the dctoday.com, which I'm going to make you read and ask David about how bond managers or bond investors ought to be thinking about duration, about what maturities you want to own when you have a two-year paying 4.8%. And I think my answer might surprise you. It's the

right answer, but for some, it may seem contrarian, but reading through the logic will make a lot of sense. So I will be on Varney tomorrow morning for those of you who watch Fox Business from 9 to 10 a.m. Pacific. And other than that, I think I just want your questions. I think we've covered all we're going to. A lot about the Fed, a lot about overall market happening right now. Breath definitely broadening out, making this market experience seem better for many, but still a lot of questions in the economy. That's what we're here to answer. That's what we're here to do.

And most certainly keep you focused on the right things. So thanks for listening. Thanks for watching. Thank you for reading the right things. So thanks for listening. Thanks for watching. Thank you for reading the DC today. 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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