The Dividend Cafe - The DC Today - Monday November 7, 2022

Episode Date: November 7, 2022

Market Action Futures opened down nearly -200 points last night but got back nearly to the flat line by bedtime as Japan and Hong Kong markets were rallying. Then this morning, futures pointed to a +170-point open pre-market. The market opened +80 points and went steadily higher throughout the day. The Dow closed up +424 points (+1.31%), with the S&P 500 up +0.96% and the Nasdaq up +0.85%. It would be malpractice not to start with this chart. One thing I have said over and over is that I believe equity volatility does not stabilize until the ascendant dollar reverses. Friday’s drop in the DXY was the worst day for the dollar since 2015 and the second worst day since the financial crisis (h/t Jim Bianco). Now, the dollar was still UP on the week – we are hardly in a trend of dollar reversal. Volatility is still the story, not a weakening dollar. For now. We are up to 85% of companies reported for the quarter now (Q3 results), and revenue growth looks to be +11% year-over-year with earnings growth of +4.3%. And the earnings outlook for 2023 has only come down from $252/share for the S&P 500 to $233, meaning either this will end up being a very, very mild recession, or else there is more room to go for downward revisions of 2023 profits. The ten-year bond yield closed today at 4.22%, up six basis points on the day Top-performing sector for the day: Communication Services (+1.83%) and Energy (+1.73%) Bottom-performing sector for the day: Utilities (-1.94%) I am not sure that the ESG movement is proving to be much about ideology. It is apparently a lot more about performance, after all. As ESG-popular FAANG stocks have gotten hammered and ESG-hated energy stocks have thrived, new money into ESG products has evaporated. Links mentioned in this episode: 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 special edition Monday, DC Today, where we kind of go through the long form commentary that you're used to in the written form. And I want podcast listeners and video watchers to get all that same information. There's a lot today. For one thing, the market is up 3,640 points in the last four weeks. And so that feels surreal. It's because it sort of is. I don't know if anyone would say it feels that way, but that's just an absolutely monstrous move higher in the Dow in the last four weeks. And there's been some setbacks with that along the way. And then now we had a big rally in the market Friday and another big rally today, more than making up for the 550 point drop that took place on last Wednesday in the market. So

there's still a lot of volatility. There's still both up and downside risk in what the market might do on any given day. There are still people trying to time the market, getting their you-know-what's handed to them. But as far as the overall view we have of where we stand, I'm not sure much has changed. There's a lot of unknowns, a lot of day-to-day volatility, and a lot of intersection with both the unknown of monetary policy and the unknown of earnings outlook tied to recessionary risks. I will say this. The overnight action last night, Sunday, the market opened futures down 200 points. And then throughout the evening, it progressively got better. The Nikkei was up, I think, at one point 450 points. The Hong Kong index was up 2%.

So you had a lot pulling things higher on the Asian side overnight. And then this morning, the Dow futures were up 170 points. And so there's both volatility day to day in the overnight space. And then we opened up about 80 today and just went progressively higher from there. Eventually, the Dow closed up 424 points, which is 1.3% on the day. The S&P was down in the morning. It opened up, it closed up almost 1%. And even the NASDAQ, which was up quite a bit, excuse me, down quite a bit in the morning, closed up almost 1% at 0.85. One of the things I have to get into, and there's a chart in the dc2day.com today. I want to give a hat tip to Jim Bianco, who's a great macro economic research analyst.

And I was reading him over the weekend. The US dollar, the DXY index, you recall recall I talked about this in Dividend Cafe about two months ago. It had its biggest drop on Friday that the market, that the DXY market has had. The dollar, its value relative to a weighted basket of other developed currencies, it had its biggest drop in a single day since 2015. And it was the second worst day since the financial crisis. So I've been talking about this over and over again, that a reversal of dollar strength was going to be necessary to sustain an equity rally. And that excessively strong dollar and more particularly excessively weak other developed

foreign currencies were creating a very difficult backdrop for equities to kind of find their footing. Well, look, the dollar had this massive drop on Friday, but it was still up on the week last week. So I don't know that you can interpret this as, okay, a reversal is here. Right now, it just looks, feels, smells, acts like volatility. There's volatility in equities, there's volatility in currencies. But if a trend is to form in the dollar to the downside, I think you'd see equities find a more stable footing. In the meantime, we're going to continue to call it volatility. So 85% of companies have now reported their results for the third quarter. And revenue growth looks like it'll be about 11% year over year. Earnings growth

is about 4.3% year over year. And I think that the fact that earnings outlook, which about four or five months ago were for $252 a share next year in the S&P, it's only come down to $233. So it's come down a bit. That's not very much. But that really represents a big unknown is to if the market's earnings next year are going to come down to $220 to $230. You could argue a lot of this is already priced. If the market's earnings are going to drop to $200, then I suspect it probably has not. The 10-year bond yield closed at 4.22%. That was up six basis points on the day. The top performance today, I'm used to such a reverse correlation between these two things, but communication services was up 1.83%. It's been getting walloped lately, as you know. And then energy, which has been rallying like crazy lately, it was right behind it at plus 1.73.

So you had an in-favor and out-of-favor sector. Both have a good day. Utilities, which have been more out-of-favor than in-favor lately, they were down 1.94%. A lot of volatility in utilities at the moment. I have a chart of the DC today. I really want to make this point about the ESG movement. What you see in the chart is just a massive inflow of new monies in 2020 and 2021 into ESG branded, ESG-branded, ESG-themed mutual funds and ETFs, not even counting some of the separate managed account and certain managed money programs, but just fund to product.

And energy was down a lot in 20, and big tech was up a lot in 20. And then now in 2022, the flows have just completely dried up, and you see a lack of new money going in. So for those who wonder if there's a sort of compensation premium around ESG, I think that the anecdotal evidence at this point in time is that it was really a marketing-driven phenomena that had a strong performance backdrop rooted to connected to other things and as the performance premium goes away like so many things then apparently the attraction does a little more conventional financial services product

than ideological innovation it would appear. So the elections are tomorrow. My final prediction, just so everyone can hate me, get mad at me or whatnot, is I do believe Republicans will undertake to get back the Senate, and I do believe that 52-48 is entirely possible. If I wanted to be safer, I'd say 51-49. Just what I mean by that is safety of my prediction. to be safer at, say, 51-49. Just what I mean by that is safety of my prediction. But there's some odd things that are prevalent in some of the other polls. Now, you'll recall,

I was thinking it would go the other way three, four months ago. And I think that a couple of the GOP's more concerning candidates ended up righting the wrongs that were taking place in their campaign. Some people may still not like the candidates, but that's not at all my comment here. I would just say that, you know, look, most people are guilty of predicting along the lines of what they want. And I don't believe I'm guilty of that. I work very hard to maintain an objectivity. I'm guilty of that. I work very hard to maintain an objectivity. I think that the way that the Republicans get to 52 and possibly 53 could end up surprising people. But look, there is a scenario which this is wrong and all these tight races break the other way. There's a scenario in which it's wrong and that it's even more robust that maybe New Hampshire and Arizona and Pennsylvania and Georgia all go

Republicans way. But I suspect that there will be a net pickup in Georgia and Nevada and that the Republicans will hold Wisconsin and Ohio. And then, you know, I'm a little more unclear on both Pennsylvania and on Arizona. So that's where you could end up seeing a little more, a little less. on Arizona. So that's where you could end up seeing it go a little more, a little less. And I'm not bold enough to go call New Hampshire on the other way, but there's no question those polls tightened hugely in the last couple of weeks. And that's a surprise to a lot of people. But I'm writing on Wednesday morning more about what happened, doing a bit of, you'll get it in the middle of the morning on Wednesday. I won't wait till after the market closes. Just whatever analysis I think is worthwhile and what trends we do see, there may be some races too close to call. For one thing, if neither candidate gets to 50%

in Georgia on Tuesday night, then, or, you know, by the time these votes are done being counted on in Georgia, if they don't get to 50%, we have to do another runoff as took place in 2020. And so that could keep the whole thing going even longer. On the House side, I think everybody is well expecting the Republicans take the majority. And there's a debate as to whether or not it can be as low as only 15 seats or as much as 30 plus or something. So again, I'm just kind of taking that safe spot in the middle there and pointing out that there was such an odd amount of net pickups for Republicans in 2020

that some of the normal midterm minority party success might have already happened two years in advance because of how well things went in House races for the Republicans two years ago. because of how well things went in House races for the Republicans two years ago. The thing I would say about the market, and it's funny, I'm looking at my DC Today today, I notice I have a typo where I'm referring to the execution branch instead of the executive branch. branch instead of the executive branch. And hopefully my team will correct that because I don't want to refer to the executive branch of government as the execution branch and be accused of Freudian slip or people believing I'm hinting at something crazy. I really don't do crazy when I do politics and I wish more people could say the same.

Yeah, the markets have known all year the House was likely moving Republican. The Senate, it could go one way or the other. I don't think markets rally one way or the other on it just simply because you're still going to end up with divided government and you were going to have divided government anyways just by taking one of the two chambers. government and you were going to have divided government anyways just by taking one of the two chambers. So more or less, I've advocated this all year that it wasn't an upside surprise, but it does stabilize things. It does take some risks and possibilities off the table. But yeah, for the most part, I think the markets have known this is coming and we'll see exactly what it ends up being here in the next, call it, 36 hours.

We know by now the jobs report on Friday, 261,000 jobs were added, more than expected. But the household survey saw a big loss of 328,000. And part of me is of the opinion that the markets are now responding to that mixed data, not only going to the BLS data. Until they see confirmation from two sort of conflicting surveys, it's hard to get a set theme as to what will happen and then what they therefore expect the Fed to do around it. Keep in mind that the China closing around COVID-related matters and so-called iPhone City, that Apple itself is warning of big production halts. And so we wonder what that impact could be overall for trade as we continue to go through

the just utter silliness of China's locking down. There is a chart at DC Today that I think is really important to this theme of an explosion of factory construction in the United States for electronics and for computer parts, components. Again, it seems to me to reinforce a really big on-shoring trend that we're in early innings of. And that's a story we want to keep watching. Pending home sales were down in September 31% year over year. And by the way, that's the fourth month in a row. First time home buyers are only 26% of home purchases this year. That's the lowest in 40 years, and that's clearly related to affordability. And energy, you can see the sector returns since Election Day over two years

since we last had a midterm election. Energy up 237 percent, and most everything else, either, you know, like communication services is down 19, consumer discretionary is down two. This is after the huge up year of 21 and the big down year of 22. And then every other sector up somewhere between 10 and 20 percent, but energy up 237 percent. All right. Against doomsdayism, let's just put it this way. You had 20 million people dying of famines 150 years ago. You have seen the number reduced by 90, almost 98%. And if that doesn't argue against doomsdayism, then I don't know what does. Someone asked me a question about central bank balance sheet,

and I gave a multi-paragraph answer. I won't rehash now. So again, I'll be writing from Nashville, Tennessee on Wednesday morning, a day after election summit. We will not do a DC Today podcast or video Wednesday afternoon or Thursday afternoon as the entire team is flying out to Nashville on Wednesday and we'll be in our team off-site meetings Thursday and Friday. We will have a Dividend Cafe Friday, but just be prepared for that minor adjustment to the schedule. So a normal DC today, tomorrow, Tuesday, election commentary coming written to your inbox Wednesday morning. And other than that, have a wonderful evening and reach out with any questions you may have anytime.

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