The Dividend Cafe - The DC Today - Monday, January 23, 2023

Episode Date: January 23, 2023

Futures opened last night pretty close to flat (down -20 points) and stayed right there into the evening. This morning futures pointed to a dead flat open pre-market when I first woke up. The market opened flat but moved up from there and stayed up with a few zigs and zags along the way (see chart below) The Dow closed up +254 points (+0.76%), with the S&P 500 up +1.19% and the Nasdaq up +2% The worst performers of 2022 are so far the best performers into 2023, partially as tax loss selling leads to re-buying post-wash sale rules. The “dividend payers” outperformed the “non-payers” in the S&P 500 by 23% last year. Dividends paid in the S&P 500 last year were $563 billion, the highest amount in history. Dividends were 26% of the return of the market in the 2010s and the 1990s but 100% of the return in the 2000s (when the market had a negative price return). Prior to that, dividends had averaged between 40% and 70% of the market return every decade for fifty years. The current dividend payout ratio of the S&P 500 is 33%; it has averaged 48% for nearly a hundred years but has not gotten back to that average since the financial crisis. Selectivity is crucial. The ten-year bond yield closed today at 3.52%, up 3.7 basis points on the day. Top-performing sector for the day: Technology (+2.28%) Bottom-performing sector for the day: Energy (-0.20%) TIP spreads show implied inflation for ten years at 2.1% now, down from over 3% less than a year ago. Shorter term inflation expectations (5-year) evidenced in the TIPS market (treasury inflation-protected securities) has gone from 3.6% at the high to 2.1% now. Whether 10-year or 5-year, the bond market has seen a collapse in inflation expectations in recent months. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3QZ6Y7w 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 the DC Today, our special longer version. And there's quite a bit to chew on at the dctoday.com. I'm going to walk you through some of the highlights now. For those of you listening on podcast or watching on video, am I right? I think this is the first Monday DC Today of the year. There may have been one other because the Monday version we had to do on Tuesday, at least twice because of New Year's Day and MLK Day. I can't remember what the week in between. So anyways, I am in the New York

office studio and we'll be here in New York all week. And there will be a number of different TV appearances and interviews. There's also just a lot of client meetings and portfolio things and speaking engagements going on. It's a pretty, pretty massively busy week. In fact, I'm going to have Trevor Cummings do the DC today. I actually, I think it's Brian Saitel doing it tomorrow, Tuesday, Trevor Cummings doing it on Thursday. I'll be with you on Wednesday. And then we're going to have the normal Dividend Cafe that I'll record from here in New York on Friday. Speaking normal Dividend Cafe that I'll record from here in New York on Friday. Speaking of the Dividend Cafe, if you missed it from the Friday before, particularly

the video for those of you like watching video, we did add all of the charts as I was talking to the different things I was going through and I'd encourage you to check that out if the subject of housing is important to you. So let's talk about the market today and then we'll kind of cover a few more evergreen things that may be on your mind. And actually, even apart from evergreen, there are some things in the news cycle and with the Fed I'm going to go through. The one thing I'd like to just give you a quick kind of bullet point on, and maybe this will keep you tuned in, is I just thought it'd be helpful to give my kind of sequence of events and the really underlying political calculus in this debt ceiling debate. A lot of asked, and we answered last week, I think in two different Q&As or Ask David section about how we're approaching the risk of a debt default and this and that.

And hopefully those answers made sense. And I even last week told listeners my opinion on the whole matter, just laying out kind of what I thought were some of the political and even ideological takes that were relevant to it. But today I want to give you just kind of a breakdown as to how I see this thing shaking out. I think it'll be worth your time. So in terms of the market today, the Dow ended up being up 254 points. It was off of its highs. It did actually at one point get up over 300. But, you know, the futures were kind of flattish last night.

And they were up a bit this morning, but then moved higher after the market opened and then kind of zigged and zagged through the last three quarters of the day. But stayed up. And that's just the Dow, which was up three quarters of a percentage point. The S&P was up over 1%, the NASDAQ up 2%. So you had a strong day in technology and again, strong upside in markets. The worst performers of 2022 are more or less so far the best performers of 23. But the breadth has been pretty impressive. I mean, really, most things are up. I do think some of this is expected in January, where you might have had some tax loss selling

in December that gets unwound in January. In other words, there's a watch sale rule that forces you to not buy back what you sold for a tax loss for 30 days. And a lot of those 30 day periods are expiring or have been expiring, which may theoretically be creating some upside buying for some of the losers of last year. But we'll continue watching the general themes within market activity. It's a little too early and a little too sporadic so far to speak with a lot more conviction. But as far as a longer term period that wasn't very sporadic, the dividend payers in the S&P 500, That's different than the dividend growers that we might be buying. But of course, if you are going to be a dividend grower, you have to be a dividend payer.

But just because you're a dividend payer doesn't make you a dividend grower, right? Our portfolio has at any given time 30 to 35 stocks. The S&P is obviously 500 stocks. 30 to 35 stocks. The S&P is obviously 500 stocks, but the dividend payers in the S&P outperformed the dividend non-payers by 23% last year, pretty staggering number. Dividends paid in the S&P last year though were $563 billion. It's the highest amount of dividend payments in history. I want to remind people that in the 2010s, the decade we just came out of, dividends were only 26% of the return of the market. And in the 1990s, it was a very low number like that as well. But in the 2000s, so the decade in between, dividends were over 100% of the total return because the price appreciation was negative. And if you just go back from the 40s, 50s, 60s, 70s, 80s, 50 years, more normal decades, no negative decades in there. Dividends on the low end were about 40% of the market return

on the high end, about 75% and averaging somewhere in there, roughly, you know, half of market return. That was a 50 year average before these last couple of decades. That historical context I provide just because I don't ever want to get away from it. And I think there's a lot of relevance there around our dividend orientation. The current payout ratio of the S&P 500 is only 33%, meaning of total S&P profits, only 33% are being paid out in the form of dividends. It has averaged about 48% for 100 years. And that peak level we have not gotten back to since the financial crisis. So finding companies that are paying at their historical payout rate or above it, that have not settled into a far reduced level of dividend payout, that obviously requires selectivity right now, you're not getting it from the index. Switching gears to bonds and inflation right now, I want to point out that the break even implied for inflation in the TIPS market, the Treasury Inflation Protected Securities, it was over 3% annualized in April of last year.

And it's currently down to right about 2%, technically 2.1. So those tip spreads have come in quite a bit, implying much lower break-even assumption for inflation. The 10-year bond yield today, by the way, closed at 3.52%. The top performing sector for the day today was technology at plus 2.28. The bottom performing was energy, which was negative 0.2. It was the only sector down. It was barely down. By the way, the five-year break even had been at 3.6%, and it's now down to 2.1. So you've just had a dramatic reduction in implied inflation levels embodied in the tip spreads that we look to quite heavily. that Jeff Zients is set to be named the replacement. He's got extensive resumes, covered a lot of ground,

more recently worked in the White House in COVID policy implementation. So that aforementioned debt ceiling drama, I think you are at about six months out until anything is potentially resolved, maybe longer. August, September, no earlier than July is very much the likely scenario. So along the way, just expect a lot of dumb things to be said and to be done. Look, President Biden's opinion right now from a political calculus standpoint is that he can wait till the very last minute and then it will be much more pressure on the Republicans at that point. And I don't disagree that that's probably the lay of the land politically. the debt ceiling, because if they do that, where they go get some of the changes that they want in a budgetary sense, but still allow for a debt increase, then it changes the narrative.

It sort of implies it's the other side now not raising the debt limit. And I'm not sure if the Republicans can or will do that. It was done by Speaker Boehner in 2011, and it changed the leverage in that debate. But I don't know if the Republicans can or will. And then if they do, I don't obviously know exactly what the Democrats would do about it. I can't even imagine that the Senate would approve any budget that the House Republicans approve. And yet, there's a lot that will shake out between now and then. What else do we want to go through? I think eventually whatever deal happens,

that they'll end up getting a cap on future discretionary spending increases and that will be some form of a political victory and perhaps at a small level a substantive victory, but I don't think it's the real essence of what's happening on the budget side, which is much more driven by entitlement spending. Speaking of which, I do actually think that'll happen too, that they'll get a commission on entitlement spending embedded into the eventual budget bill. That's one of the demands that many in the Republican House have. In terms of economic news, the National Association of Business Economics released its 2023 business conditions survey this morning.

There are more companies expecting net layoffs in the survey than that are expecting net hiring. That's not good. But there's definitely been a significant improvement in sentiment about inflation with almost every company surveyed, not quite all, but nearly all, indicating that material costs have declined for them. I would point out separately, just from a Bloomberg chart update, that weekly bankruptcies have picked up. bankruptcies have picked up. Now they're not high, they're higher, but they're still not quite where they have averaged for the last 15 years or so when you exclude recessions, but they're getting pretty close. Okay. So again, you had the big housing dividend cafe on Friday.

The only kind of anecdotal news I'll share since then is that existing home sales declined one and a half percent in December. So that brought total sales down year over year, transaction volume down 34%. And that was with an elevated amount of sales in January, February, March. So that trend of declining volume, we're now down to the lowest level of activity we've seen in over a decade. The Fed is definitely telegraphing quite heavily, quarter point rate hike at the next meeting, and perhaps a quarter point rate hike behind that. The vice chair of the Fed, L. Brainerd, made a speech at the University of Chicago over the weekend indicating this. So that is my expectation.

The other piece I want to point out is that the Treasury Department may be doing things right now to sort of hold on and deploy cash, which enables them to kind of make some of their debt allowances last longer with this current debt ceiling hiccup. And I think that does play in to the Fed's plans of quantitative tightening. It handcuffs their ability to accelerate removing cash from the system. Oil was up a dollar since the Thursday close, kind of flat today. A takeaway from Davos was that Saudi Arabia is definitely making noise about more openness to denominating oil sales outside of U.S. dollar. And China in particular continues to express a desire for Yuan-based purchase of Saudi oil. You must read the Against Doomsdayism section in the DC Today.

And certainly the question I thought was worthwhile and asked David. I'm going to leave it there. Brian will bring you DC Today tomorrow. We're looking for the PCE index this week, the personal consumption indicators and other inflation price measurement. This one that the Fed looks at heavily. That's on store for the week. Earnings season is now in full effect. We'll get a lot more information about earnings in the week to come. And that is what we have for you today in the DC Today. Thank you for listening, watching, and reading. And reach out with any questions anytime, questions at thebonsongroup.com. Thanks for listening to DC Today.

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