The Dividend Cafe - The DC Today - Monday, February 27, 2023

Episode Date: February 27, 2023

Well, I am back from my family’s little jaunt through the Bahamian Seas and am grateful to Brian Szytel for filling in with the DC Today for a few days last week. I hope you will find today’s old-school long-form DC Today informative. I will bring you the DC Today from New York on Wednesday and Thursday this week, as well as Dividend Cafe on Friday. Trevor will handle DC Today duties tomorrow as I fly after the market close to the world’s greatest city. Blog post here: https://bahnsen.co/3ksS6me 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 Monday edition of DC Today. I have missed being with you. I was out for a few days last week with my family. I was out for a few days last week with my family. And I know that Brian Saitel capably filled in covering the DC today, even as the market was experiencing the most downside volatility it had seen all year. And hopefully you got a lot out of the Dividend Cafe on Friday. I enjoyed going through a lot of those different subjects, questions that had come in. And so if you didn't get a chance to see Dividend Cafe, either reading it at DividendCafe.com or checking out the video, I would encourage you to do that. But now we're back in the thick of it. We have one more day in the calendar month of February to get through. I'm actually going to have Trevor Cummings fill

in tomorrow on DC Today because I will be flying to New York City after the market closes tomorrow and landing late tomorrow night. And then we'll be there on until near the end of the following week. And then we'll be doing the normal DC Todays and dividend cafes and weekly portfolio reports and all that good stuff from New York. Quite a few meetings coming up and different things of importance happening out there. But in the meantime, I just want to summarize what kind of happened in the market today, walk through a few things and then get you on your way. It was a odd day in markets in that futures were totally flat last night when they opened. They were flat still at the time I went to bed.

And then this morning, they were up about 200 points, about 100 points when I woke up, about 200 right before the market opened. So the market opens up, let's call it 200-ish, and then got up as much as about 380 early in the day. And then pretty much gave all that up, was still up throughout most of the day, about 100-ish, got all the way down to the flat level of the day. So it had given up a 380 point return with a few minutes to go in trading, and then it rallied up 70 something points in the final minutes of trading. So you ended up today with a Dow up 0.2%, an S&P up 0.3%, and a NASDAQ up 0.6%. So you got a little bit of upside today, but nothing to write home about. The breadth of the market, by the way, right now is not great, but it isn't atrocious. It's

kind of in this in-between spot that I don't think tells you a whole lot, but you have 45% of companies in the S&P that are above their 50-day moving average. So for it to be a really high momentum market, you want to have probably over 80% of companies doing so. And then if you're down around 10% to 20%, that's when you can say breadth has totally come out of the market, but we're in this kind of no man's land in between right now. And I think a lot of that is expected just around the fact that you had a really strong first five, six weeks of the year. And then you've had a couple of struggle here the last couple

of weeks and that stocks and bonds are just totally correlated right now. That as bond yields were dropping, stocks were rallying. And then as bond yields have come higher across the term spectrum from the very short term, you've out roughly 30, 40 basis points has been added to bond yields, and that has brought equities down with it. So both bonds and stocks have dropped in the last couple of weeks of February. Wrapping up on today, though, consumer discretionary was the top performing sector, up over 1%. Utilities were the worst performing, down 0.7%. Nothing real extreme either way, but just a fair amount of intraday volatility

that goes with the general theme of the market. To summarize kind of where we are on earnings season, by the way, we're not fully done, but 96% of companies have reported. It looks like we're going to end up with earnings down year over year 3.2%. The projection at the beginning of the quarter was 1.6% contraction. So earnings are down year over year by about double what they had been expected to be, but it's still not that bad, but it is something down three. I will point out that if you strip away energy, which there's no reason to do, energy is part of the market, but X energy earnings are down over 7% year over year, something a bit more material. Now, the part that is most interesting is that revenues

appear to have grown over five and a half percent year over year. And they were projected just a month ago to be up 4%. So you have positive revenue growth, better than expected positive revenue growth. You have earnings contraction, worse than expected earnings contraction. And obviously, the only mathematical explanation that fits in the middle of these two factoids is that margins have compressed. You had an operating earnings margin, operating profit margin of 17.7% a year ago with the S&P, and it's at 16.1% now. That's how you get less earnings for more revenue is by margins compressing. And that, of course, is a tautology for those of you that like that fancy word as much as I do. On the public policy front, I think that one of the bigger themes right now is not so much

domestic legislation, all the thrilling things that can come out of some of the House investigations. It really is more global. And that is, I think, where China is going to come in on their support or lack thereof with Russia and the Ukraine war. The rhetoric has already been far cozier than the Biden administration would like to see. The actual actions have been a bit less so. But there is both all at once an opportunity for a tremendous destabilization if China is to put actions to words in support of Russia's imperialism. And there is the possibility of a significant upside rally if China were to play a role in some form of de-escalation, which is entirely within their incentive structure to do so. On the economic side, my partner Brian covered what happened

last week in the PCE as far as inflation data. I just want to quickly read for you the goods price inflation year over year over the last six months. In August, it had been 8.6%. 8.6%. In September, 8. October, 7.3. November, 6.3. December, 5.1. January, 4.7. So it's almost been cut in half in six months. This significant disinflation in year over year goods prices. And that came with a couple of months in there of out and out deflation to get that sort of disinflated grade of growth in goods prices. Energy is a whole different story because it's taking away two points one month, but like in December, and it was adding two points last month. And that's why core and headline inflation are different readings because of the expected volatility, in particular, something like energy prices, food prices can be such as well, although they've been more straight up on the inflation

reading versus up and down like energy. But really the part that I think, and I'm not going to bore you again with the narrative about how shelter prices are so distorted and we're waiting on this lag, in fact, to take two to three points off of the inflation number as inevitably the more concurrent rent rolls get priced in in the months ahead. It's services X housing that I think is most significant. I'm talking about things like utilities, transportation, recreation, insurance. Healthcare fits in there as well. That seems to be a kind of stickier ingredient right now. And it's very much worth continuing to watch to get a feel for where the overall core inflation

number will go. I am going to leave it there. There's a few other factoids. Durable goods orders were down 4.5% in January, and that was worse than had been expected. However, when you strip out defense and aircraft, it was actually positive. Personal income was up in January 0.6%. That was less than expected. So there's all kinds of just different economic points floating around. I covered a few things there, including an update on Fed rate projections in the written

DC today. But I have to jump now. So I am going to leave it there. I invite you to send any questions you would like to questions at thebondsgroup.com anytime. And look, there is a continued narrative here of uncertainty around economic data, Fed expectations, and so forth. I think that the first quarter is gone pretty much how anyone could have predicted, up, down, up, down volatility, with still no clear direction in the markets either way. Thanks for listening to, watching, and of course, reading the DC Today. We'll be back at you tomorrow with Trevor, and I'll see you again from New York on Wednesday.

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