The Dividend Cafe - The DC Today - Monday, January 30, 2023

Episode Date: January 30, 2023

Futures opened last night down -50 and were down -85 into the evening. This morning markets pointed to a down -265 open pre-market. Futures would improve in the next three hours before the opening. The market opened down just -80 points and then went positive before then steadily declining throughout the day. The Dow closed down -261 points (0.77%), with the S&P 500 down -1.30% and the Nasdaq down -1.96%. January looks to be the greatest month for bond market auctions in history, with every single auction printing below-market yields. More demand than supply across the yield curve; each auction of new treasury debt means one thing – these buyers don’t believe these yields will last. Only 29% of companies have reported Q4 results so far, so it is really too early, still, but thus far, we are tracking for year-over-year revenue growth of +4.2% and year-over-year earnings contraction of -2.9%. Full-year earnings estimates started the year at $225 on the S&P 500 and are now sitting at $220. The ten-year bond yield closed today at 3.54%, up two basis points on the day. Top-performing sector for the day: Consumer Staples (+0.07%) Bottom-performing sector for the day: Energy (-2.29%) Earnings in energy currently make up over 12% of the S&P’s earnings, but Energy is currently only 5% of the S&P 500 by weighting. That 7% differential between earnings contribution and weighting is the highest it has ever been. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3JqiqaH 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. I am back in Newport Beach and we have quite a few things to chat with you about. Let me get today's market action out of the way, and then I'll just sort of go through some of the other stuff that's in the long-form written Monday edition of DC Today. Markets ended up today down 261 points on the Dow. Futures last night were down about 50 when they first opened. Then we're down 80 or 85 when I went to bed. And they were down 265 pre-market, which is exactly where they closed down today.

But then those futures throughout the next three hours or so after I woke up before the market opened were improving. And then the market opened down just about 80 points, and then it reversed and it actually went up within the first hour or so. And then at some point it just sort of began a steady decline. So that's just on the Dow side. The S&P and the NASDAQ never really were above water, and the S&P closed today down 1.3 and the Nasdaq closed down almost 2 percent. So it was a little bit bigger of a hit to some of those things, which, you know,

is a familiar story from last year's down days. But it hasn't been the story here in January where there's been a pretty decent risk on for some of the lower quality indices. Let me just cover quickly the bond market. Today, the 10-year was basically flat. It was up two basis points on the day. The 10-year bond yield is sitting at 2.54%. Only one sector was positive in equities. That was consumer staples, and it was up a whopping seven basis points. Energy was down 2.29% and everything else was down in between those two. But January, I was just taken aback when I read this report over the weekend. January looks like it will be the greatest month for bond market auctions in history, where every single auction printed below market yields. So you know they

issue all kinds of new debt from treasury to primary dealers every week at all different maturities. And you could move the market when you're trying to get a certain amount of debt sold and it isn't selling at what the kind of current market rate is. And then the yield comes up or down or what have you and moves around in conjunction with market. But when every auction is getting filled at a yield lower than where the market level had been pre-auction, that's another way of saying that the prices went higher on each new issuance. So that's incredibly strong. And I've never seen it where every single auction at every maturity was doing that in a month. Now, of course, maybe something happens today, tomorrow, screws that up. I don't know.

As we go tomorrow, January 31, Tuesday will be the final day of the month of January. What else about bond markets? As far as earnings season goes, it's only 29% of companies that have reported their Q4 results so far. So I still think that's pretty early. This week we're going to get an absolute explosion of results. But we are tracking right now, expecting year-over-year revenue growth out of this quarter of 4.2% and a year-over-year earnings report, earnings contraction of 2.9. Revenue growing on the year a little over four, earnings dropping on the year a little bit less

than three. And we'll see where that goes. So the 2.9% drop in earnings over year is a little bit worse than had been expected. Full year earnings estimates on the S&P had started the year at about $225 a share out of the S&P 500. They're now sitting at about $220. So you've seen a $5 deterioration in expected full-year earnings. Speaking of which, earnings in energy currently make up over 12% of the S&P's earnings, but energy as a sector is only 5% of the S&P 500 by weighting. So the 7% differential between the earnings level of the energy sector in the S&P and the weighting level of energy within the S&P, that 7% differential is the highest it's ever been.

So with that said, weakest sectors in the market for January, one of which is consumer staples, which was the only positive sector today, and then utilities. So you can definitely see, so far starting this year, a little more strength in some of the less defensive areas and then more weakness and more of a struggle in the more defensive sectors of the market. All right, now I want to get into the fun stuff. I just want to make sure I covered all the market things for you. I think I did.

The public policy front, I put a chart in that I really just think you have to look at, seeing as believing that you can see the domestic migration from April of 2020, which is, of course, when COVID began that, you know, right in March of 2020. And it goes through 2022 and you can see a negative net migration, more people leaving than coming in to Washington, D.C., New York, California, Illinois, Hawaii and so forth. And then you just see a massive amount of net migration in, more people coming in than leaving in Idaho, Montana, South Carolina, Florida, Arizona, Tennessee, North Carolina, Texas, Utah. So I won't add a lot of commentary to that because I think it speaks for itself where the aspect of public policy ties into geographical desirability.

But the one thing this chart does, it also highlights in red a couple of the states that are proposed adding, and that's all it is, is a proposal, wealth tax, annual tax on the level of one's own wealth. And interestingly, I know one's California because I live here, but it's New York, California, Illinois, Hawaii, and then the state of Maryland, it would appear. Those are the only states that reposed it, all of those being amongst the leaders in net negative migration. So it doesn't seem like a great idea. Okay, I'll leave it there. Economic front GDP, 1% for full year 2022.

Net of inflation, real GDP growth. That comes after an annualized number of 2.9% in the fourth quarter. We started last year with two negative quarters, largely off of trade and inventory. But both Q3 and Q4 were positive. Then we know from Friday's inflation read, the PCE, the personal consumption and expenditures, they rose 0.1% in December. They had risen a whole 1% in both March and June of last year. And so you've just seen significant disinflation in pretty much all measures.

The year-over-year rate dropped to 5% for full year 2022, where the year-over-year rate had been sitting at 7% in June. And then for the core PCE, which excludes food and energy, the year-over-year closed had been sitting at 7% in June. And then for the core PCE, which excludes food and energy, the year-over-year closed the year at just 4.4%. So a dramatic drop. And then other economic news, personal income rose 0.2% in December. On the Fed front, so the FOMC meeting starts tomorrow. That's Tuesday the 31st. And on Wednesday the 1st, they'll announce the rate decision.

And we do have right now in the Fed funds futures market a 100% chance of a 25 basis point, a quarter point rate hike. And that's pretty conclusive in the futures market as to what is expected from the Fed. I want to read this line to you from the Fed governor of the Bank of Canada that came with their rate hike last week where he said, and I quote, we are trying to balance the risks of under and over tightening. If we do too little, the decline in inflation will stall before we get back to target. But if we do too much, we will make the adjustment unnecessarily painful and undershoot the inflation target. I think that thinking that is inviting a little tampering of what has been pretty consistently hawkish central bank rhetoric is becoming more common amongst the central banks of the world.

I don't expect, by the way, Chairman Powell on Wednesday to be talking victory lap language or pause language or reversal language. And yet I believe victory lap, pause, reversal are all coming. But I don't think they're going to be telegraphing it. They may be telegraphing the telegraphing of it, but I expect that they're still going to talk the right game. I think that they are far past the point of believing that they're the primary counter to inflationary pressures. I think that at this point it's far more posturing and wanting to not take their foot off too early. So I expect some rhetoric to match that on Wednesday. All right. Crude oil closed just below $78. Very interesting report I got from Corbu

over the weekend that China has dramatically, and all the data is there, the reporting, but a significant increase in their level of oil imports from Iran. So we're sitting here looking like crazy for China to be importing oil from Russia. And it appears they may have gone from one bad actor on the world stage to another bad actor. The Against Doomsdayism and the Ask David in the DC Today today are there for your reading at the dctoday.com, and I can only say they are well worth it. So Fed announced the big story of the week. I'll be with you myself here from California each day this week doing the dctoday.com.

We know the clients get their weekly report Wednesday, and I'm really excited for what's going to be a big dividend cafe on Friday about the subject of deflation. In the meantime, reach out, questions at thebonsongroup.com. Go to our YouTube channel and subscribe. Rate us forward around. You'll love the way it's structured if you just want to see our library of archived video content and if you're listening on our podcast make sure you subscribe in your podcast player as it helps us to serve you better thank you for listening to watching and reading the dc today the bonson group is a group of investment professionals registered with Thank you. 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.

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