The Dividend Cafe - The DC Today - Monday, December 5, 2022

Episode Date: December 5, 2022

Futures opened last night down -40 points and stayed around there into the evening. This morning they pointed to a down -100 open pre-market and worsened a bit from there. The market opened down -175 points and worsened throughout the day, though it came a hundred points off the low late in the trading day The Dow closed down -483 points (-1.4%), with the S&P 500 down -1.79% and Nasdaq down -1.93% Markets on Friday gave us the full gamut of today’s idiocy, as futures quickly dropped over -400 points upon the God-awful news that more jobs were created than expected last month and that lower-income people were making a little more than they had the year before. Then, hours later, markets finished to the upside after a day of volatile trading. Right now, consensus expectations are for $232/share of earnings for the S&P 500 next year, about 7-8% lower than what their peak expectations were but +5% higher than the $221 level of this calendar year. The best thing I can say is that if we had a recession in 2023, and earnings were up +5% on the year, that would be a rarity. The ten-year bond yield closed today at 3.58%, up eight basis points on the day. Top-performing sector for the day: Utilities (-0.60%) Bottom-performing sector for the day: Consumer Discretionary (-2.95%) Most cyclical sectors were down the most today; the most defensive sectors were down the least (but all were down) 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 extended day DC Today. Monday is where I go back to our old school style and there's quite a bit in the written DC Today and the normal categories we're going to cover. I'll walk through it for you who have gotten accustomed to listening to the podcast, watching the video. But the long and short of it is that it was a definite risk-off day in markets. The Dow ended up on the day down 483 points, 1.4%. The S&P, though, was down 1.8 and the Nasdaq down over 1.9. Pretty substantial give up. You know, you could say, well, I guess that unemployment report on Friday was too good.

And then the market was panicking about the Fed tightening more. But, of course, that came out at 530 in the morning on Friday. And the market did drop 400 points in the futures market Friday morning. It's funny. I was taping an interview for Maria Bartiromo's Wall Street Week on Friday morning before the market had opened. And then it's not going to air until Friday night, and we had just gotten the unemployment number, and the futures are down 400 or 500 points,

and she's interviewing me, and the tone of the questions is this thing where when you're doing rare, not live TV, you have to talk as if there's an update, but then not box yourself in because of what could change by the time it airs. I think this is the only show I've ever done that isn't live. My guys may correct me on that. But I mean, I do this show, you know, four or five times a year and we tape it Friday morning and airs Friday night. I'm used to doing it. It's a great show, by the way.

But anyways, it's weird when you're talking about something, knowing it's in the air differently. Well, sure enough, the market closed up 40 points on Friday. And then, let's see, is that right? I believe it was 40, close enough. Yeah, that's right. And so my point being, I watch it Friday night and all of a sudden the way in which it's edited, the knobs are turned. You know, they do a very good job because the questions I was answering were the context of being down 400, but they kind of got to rework the way it sounded as if that wasn't where they were going. And that's because of such a big shift. Why do I bring this up and what's after today? My point is that I don't think the markets waited, you know, two whole trading days to respond to good employment numbers. The markets initially responded with all of that trading arbitrage that had to be sorted through around expectations on the jobs number.

It did drop a bunch. It then kind of recalibrated, actually rallied. On the Dow side, it went positive, S&P negative, NASDAQ slightly negative. And then now today, futures last night were only down 30 points or so. And then this morning when I woke up, they were down about 100. And then the market opened down about 175. And then we did get down at one point almost 600, 580-ish, and we closed down 480-ish. So the markets were 100 points off their low. So it stands to reason that you get one of those days where I wouldn't be attempting to canonize the explanation of market action today. One of

the least plausible explanations would be a late reaction to a good jobs number. But you could say that was in tandem with other economic data that was strong or other whispers that the Fed is chilling on their expectations for slowing rate growth. I don't know what you want to do with that. I think an equally plausible explanation is that this time of year seasonally that annual tax loss selling is now a factor. So there's any number of things that could play in. When you go out longer term, though, I want to get these numbers right. I'm looking at consensus expectations of $232 a share for the S&P for next year. And that's 7% to 8% lower than had been expected at the peak. It was at one point priced in about $250 in consensus expectations.

But, you know, in 2022, the S&P is going to do about $221. So that means a 232. The market's expectations, these are consensus expectations, are 5% higher than they were for this year. So, you know, do people believe a recession is coming? Obviously, the yield curve does. Do most people you talk to believe one's coming or has already come or is going to be here or is here now? And it could be minor. It could be not minor. Yeah. Yeah, I think so.

But do earnings go up 5% in a recession? Not very often. So perhaps the belief is that the recession has already come and gone. Perhaps the belief is that we will have one. It'll be very minor. And perhaps the belief is we'll have one and it can do a lot of damage, but it just isn't going to chip into corporate profits. But, you know, I hear that more and more of like, no, no, we're in a recession and it's going to come worse, but it's not going to hit jobs much. And I'm trying to figure out what a recession is that doesn't hit jobs or profits. I don't know what that is.

So perhaps there's a whole lot of vocabulary stuff going on. God knows we're living through a time where a lot of words don't mean what they used to mean. All right, so rest of the day today, every sector was down. The best performing sectors were defensive in nature, utilities, health care, consumer staples all did the best, but they were still all nevertheless down. And then the worst was consumer discretionary. But right up there were other cyclical sectors like energy, industrials, financials. So a bad day for cyclicals, slightly less bad day for defensives. The 10-year bond yield moved up about eight basis points to 3.58%, still really, really off of that high of a month and a half ago.

On the news front, the market was expected, I think, to respond a little more positively, but there's no question China is starting to slowly capitulate a bit on some of these COVID restrictions. More specifically, they had still had a mandatory COVID negative test required to use public transportation and a mandatory COVID negative test to go to a public park. And they got rid of that. So that's an impressive level of status depression that they got people to stay out of the parks and the public transport system this long without all that. I don't keep a close eye on what exactly they'd been doing, but even I didn't know it was that bad still. So they got rid of that. Democratic Party is moving the first primary of

the 2024 election out of Iowa, which it's been in, you know, as long as I can remember, the caucus there is going to go to South Carolina first. And, you know, I'm going to move forward here. I think the two big public policy things I want to bring on first, the easy one, the Supreme Court agreed to take the case on President Biden's student loan erasure program. There was a lower court who kicked it out. It went up then to a federal court who then now it's been appealed to the Supreme Court and they did prove standing. And so if they're going to rule on it in February of 23, or excuse me, here are the case in February 23, we expect June of 23 when you get a hearing. And I don't want to give my own legal commentary,

let alone my own political commentary, which I think you all know what it is. But it's very hard to believe the Supreme Court will rule it to be constitutional based on the fact they were willing to take the case and based on what we know of the makeup of the court and the trickiness of some of the argument around it. So I'm saying most people that I'm reading who do favor the policy, and I do not favor it, but most people

I know who do favor it are forecasting that the Supreme Court will not uphold it. And so if I say that, it may sound like I'm putting my finger on the scale of what I want and what I think, but that's not what I'm doing here. Congress is, I don't know, I think it's looking a little better in 50-50 that they will have a spending plan in place in the lame duck session, not have to go into the new Congress. There is a little debate between both parties on the amount that would be in defense mandatory spending versus non-defense spending. Knobs still have to be turned to agreed to, but it does seem as if they're working towards an agreement on a spending plan going into 2023. And that takes away some of

the risk about the funding of government next year. On the economic front, the jobs report Friday was the big news. 263,000 jobs. They're predicting 200,000. Wage growth was year over year 5.1%. And the leading sectors for that 263,000 new jobs created last month was leisure and hospitality at about, I think, 88,000 jobs, where retail was negative on the month. So you continue to see this really lived out and evident in the jobs data reality of services versus goods. It's a mixed bag on the report. People that are so worried about it being a good report because

of this paradoxical belief that what is good is bad when it comes to the Fed. Look, the labor participation force ticked up a couple tenths of a point. The household survey was significantly negative. Again, 138,000 jobs, and that's including small business numbers that the BLS data does not include. So it was a positive report for sure, but it wasn't quite as heated when you factor in all the nuances, as some may say. So what kind of did heat things up a bit. I think today's ISM services, seeing 56.5 in the ISM services index, it had been 54.5 last month. So you not only are way above 50, indicating expansion, but you even got higher rate of expansion this month than last month. But you got that with lower breadth. Last

month, I think we had 15 out of 18 industries in the expansion side. And this month was only 13 of 18. There's a chart under housing and mortgage that I think says it all about where price inflation is and the way in which it's being measured. So the 75% odds right now of a 50 basis point rate hike next week with the Fed. So that number has gone higher. I don't see a lot of daylight where the Fed could surprise and raise three quarters of a point, but I wouldn't bet my life on it. But I think that's a pretty fair guess.

And then the terminal rate, where they end up peaking and when they end up peaking, the Fed funds futures are now looking at a little bit better odds at 4.75% versus 5%, but it's pretty close. And then when you factor in all of it, that's around the range of where on the term structure people believe the Fed peaks and then starts to head down. And as I've said, I think the bigger issue that the data can't show now is how long they will end up staying at that level. So I wrote about the Fed in Dividend Cafe Friday. I hope you'll check that out if you haven't. Oil was up 3% this morning.

It closed down 3%. You had OPEC Plus say they weren't changing supply levels. You had the European Union announce they're banning shipments of Russian crude oil. I would point out there's a chart in DC Today today that I think I shared this factoid last week, but I want you to see it visually. 84% of the time in the last 22 years that the dollar was negative in a month, oil was positive. But both having the dollar and oil negative as they were in November is very rare. So anyways, I'm going to leave it there. The against doomsdayism and the question of the day, you could read at the dctoday.com. But there's a lot of

action in the market today and energy we have the Georgia Senate runoff tomorrow I think most people are expecting for a number of kind of mathematical realities and electoral sensibilities around what happened in the runoff and the general election with a Republican winning the governor by a wide margin, and yet this Republican senator candidate still losing the race. Most people expect that the Democrats will firm up and finalize a 51-49 majority in the Senate after tomorrow night's special election. That's all I got for you today. Please reach out, though. We love your questions. special election. That's all I got for you today. Please reach out, though. We love your questions. There's a good one answered today in the DC Today about the yield curve and recessionary predictions. And someone has already sent in one I'm tackling in tomorrow's DC Today.

But send them to us and we'll try to get you published. And in the meantime, thanks for listening to and watching and reading the DC Today. Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute

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