The Dividend Cafe - The DC Today - Monday, October 17, 2022

Episode Date: October 17, 2022

Greetings from the world’s greatest city where we kicked off money manager meeting week with significant discussions with the CIO, the taxable fixed income team, and the levered loan group at Voya, and this afternoon met with the real estate team, private equity group, and head real estate folks at Blackstone.  It won’t be this many meetings every day this week (it better not be), but it was a great way to start off the week.  My summary of the whole week will be prepared at the end of the week for public consumption. Futures opened last night up +100 points and stayed positive throughout the night even as Japanese markets struggled.  By bedtime, we were about +150 in overnight futures and at the crack of dawn this morning (now on eastern time zone), futures were pointing to a +300-point open. The market opened up +500 points and got as high as +675 points, and stayed very level throughout the day. The Dow closed up +550 points (+1.86%) with the S&P 500 up +2.65% and the Nasdaq up a massive +3.43%. UK bonds rallied violently this morning as yields collapsed, no doubt the key correlative event to the U.S. stock market rally overnight.  The 30-year and 20-year dropped by a stunning 40 basis points, and each point on the yield curve from three years up to ten years was down by almost the same.  Anyone who bought British bonds last week made about two years’ worth of return in about 24 hours. The ten-year bond yield closed today at 4.01%, up less than a basis point on the day I am not sure what to think about the measurement of bond returns in 1721 when churning butter was the most profound technological advancement of the decade, but I do know this: 2022 is going in the history books for global sovereign bond returns Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Monday DC Today. I am running between meetings here in New York City. between meetings here in New York City. And luckily, I got most of the DC Today written, because you know, Monday, we do the long form legacy style written edition. And that commentary, I was able to get a lot of stuff written over the weekend and did a lot this morning, before the meetings began, wrapped up what I need to have the closing data that I'm going to go through with you here in a moment in our written version. And now we're leaving one meeting and have a dinner event tonight. And so you won't get to hear from me or you won't have to hear from me for the next three days because the meeting schedule

is so intense here in the city, Tuesday, Wednesday, Thursday, that I'm not even going to try. I'll end up doing you guys a big disservice with the daily podcast. So I've asked my partner, Trevor Cummings, who some of you may know from Thoughts on Money, his weekly writing and podcasting video. And he is the director of our private wealth advisor group and a partner at the firm. And he'll be handling the podcast and video for Tuesday, Wednesday, and Thursday. And I will have the normal written dividend cafe for you on Friday. So just quickly, it was a big rally here in the markets. This up and down volatility is continuing some big up days last week and some big down days. And now another big update here today. I do think the market was substantially oversold on a technical basis. And I don't have a better explanation for why the market was up so much today. It opened up 500 points and basically

just kind of stayed there all day. At one point, it got up to like 650, closed up 550. So you had a pretty significant rally at the open that was evidenced in the future markets this morning, and then just kind of stayed there throughout six and a half hours of trading. The S&P was up 2.65% and the NASDAQ was up 3.4%. A big part of the story is UK bond yields. And I mean, this is something else. A violent rally in the UK bond market, the yields collapsing in UK, they were more or less down 40, anywhere from 30 to 40 basis points overnight, basically, you know, it's complicated because it's a Friday to a Monday. But you got if you had bought the 30 year bond, the 10 year bond on Friday, you got like two or three years worth of bond market returns in 24 hours as the yields across the whole term structure came way down. And so I'm sure that's the key correlative event to the US equity rally today. But I think that that is just part and parcel of the oversold nature of where we've been. And we'll see where some of those things go from there.

Our own 10-year bond, by the way, the yields were down five or six basis points when my meeting started today. And they closed up like less than one basis point, basically call it flat. So the 10-year is still sticking there around 4%. I'm going to have a lot more perspective where I think these things are going. Today, I'm reporting for you on where they went over six hours, but my more substantive commentary will come when I tell you where I think they're going over the next six months and longer. A replay of a chart in DC today from Dividend Cafe on Friday showing the return in government sovereign investment grade debt around the world this year over the last couple of decades and in fact centuries. And I just want to draw your attention to that chart

if you have a chance. Consumer discretionary, highly levered sector was the best performer today, up over 4%. Consumer staples, very non-levered sector, very defensive, was the worst performing and it was up over 1%. You know my rule of thumb, when the worst performing sector is up over 1%, you know you had a heck of a day. Really week one of earnings season, and we're not quite even a whole week yet. It started Wednesday. And even with today, it's been mostly financials that are released so far, a couple others. But the financial sector results have been pretty good and better than expected. sector results have been pretty good and better than expected. Some banks underperformed a little bit, some overperformed, but in aggregate better than would have been expected so far. I do kind of tangentially have some charts on dividend growth in the DC today. And I just want

to hit this point home while I'm sitting here talking to you. I do not believe that dividend growers take a lower volatility and lower risk, but then give up return. I think they gain return and over time even end up obviously in a higher defensive apparatus. There's less of all and a higher return. And so we show in DC Today the decades of return, breaking out those who cut dividends versus those who sustain them versus those who grow them. The data speaks for itself. But more importantly is the percentage of the total return the market gets from dividends decade by decade. And when you look into a period where you have some of the problems that have existed in periods like, let's say, the 2000s, you end up with dividends being over 100% of return in more troubled market decades. I don't know if the 2020s are going to be more troubled or not.

I do know that if one wants to play defense, you're going to want a higher percentage of your return coming from dividends, that the total return of the market begs during a period where you're not getting big multiple expansion for a higher percentage or higher contribution to total return from dividends. And I put the charts and the data in there to make that case. Selectivity is important right now. Almost 100% of the S&P, meaning the market value, paid a dividend in 1980. Only 77% do now. So meaning if you take all the companies in their market cap, there are some companies that didn't pay a dividend. But if you look at the market cap of all the companies that paid a dividend in the S&P, what is the year we're talking about here? 1980. So I was in kindergarten. 98% of that market cap in the S&P paid a dividend. Barely 75% does now. So that's a significant difference of accessibility to dividends, let alone dividend growth,

So that's a significant difference of accessibility to dividends, let alone dividend growth, especially relative to market capitalization, makes the point for greater selectivity. And also making that same point is only 9% of the S&P now has a dividend yield that's higher than a two-year treasury bond. And so there's a real premium available to those that can sustainably offer a premium yield relative to what one can get in bonds. All right. So public policy. There's a great chart in D.C. today speaking to the average stock market return in the first two years of the first term president going into midterm elections. And you see stocks were up 38% when President Obama faced midterms, but he got schlacked, to use his words, in the midterms as I think it was 63 Democrats lost their seat. And Trump had a 22% return on the market going into his midterms. And I think he lost 40 seats in the Republican Party.

Bush Jr., it was down 37%, but of course, 2001, 2002, we're in the middle of that bear market. And yet he was quite popular at the time. All favorability ratings, both for Biden now, Trump, of course, and Obama then then after the passage of Obamacare were very low. And Bush was down, the stock market was down 37% his first two years in office. And yet he did very well in those midterms. But that was, again, the aftermath of 9-11. So the reason I put the chart in is to say, first of all, the stock market's down as we go into the

midterms. And you could believe that's either going to weigh or not weigh on voter sentiment relative to investor sentiment. But you also have to recognize historically, there could be other idiosyncratic events that make a bigger difference. And I think you've seen that out of the last four presidents. But I happen to think it will be a factor in the midterms along with other issues that will affect where these midterms go. There was a couple of new polls that came out, CNN and New York Times, not exactly right-wing type polls, that are a pretty dramatic move with independent women towards the Republican side of the ballot and a complete flip-flop of the generic congressional ballot. Now, nobody gets to run on a generic ballot.

That's not the way it works. We don't elect generic Republican or generic Democrat to Congress. Every race has a real candidate in both parties, and you're picking one. But on a general trend, top-down level, those numbers have seemed to steer a little bit away from that Democrat momentum in the summer, and Republicans potentially catching a little tailwind of momentum. But I don't know. We'll see. I don't know what to say. Retail sales for September were unchanged in the month. They're up 8.2% versus a year ago. Consumer sentiment was up a little bit from last month and a little higher in expectations, nothing huge, but nothing shocking in the economic data. basically in a current month capturing what the owner's equivalent rent would have been four months earlier.

And why I believe it's been pulling that as you go forward, this contribution to CPI will pull headline inflation down, not up. And there's a chart looking at the rent levels in real time as judged by Realtor and Zillow and Redfin and some of those types of metrics relative to the CPI methodology, you'll get a chance to see what I'm talking about. I think this is about enough. What else? There's more on the Fed. I really do think that when we're talking about the quantitative tightening the Fed has to do, I've talked about this a bit, but I'm reading more and more about it. I just don't understand how they're going to be able to get much off their balance sheet when so much of the bank deposit money has left the banking system. Maybe they were getting a 1% yield on their cash and they've gone to money markets yielding 3%. And so as those bank reserves come down, that means less capacity for lending. And it effectively does some of the

tightening for the Fed and leaves them with less available reserves. I don't know what the Fed is going to be able to do about the quantitative tightening given that environment. And I don't know that that environment can change. I don't see the bank deposit rates coming much higher. That spread is desperately needed, especially in a low lending environment for these banks who still need cash flows and earnings and net income. And you have an inverted yield curve. So net interest margin isn't necessarily working to your favor. Even the rates have gone higher. I just don't believe that there's an easy solution on this quantitative tightening, and it's a big thing to be watching with the Fed right now. Okay.

I have a great, I think, great contribution to the against doomsdayism section in DC Today and all the good stuff. So that's the kind of scoop here. Thanks for listening to today's podcast, watching the video. Trevor Cummings has you covered the next few days. We'll have our normal DC Today every day. I'll be back with a Divinity Cafe Friday and a long form DC Today next Monday. And we'll continue to answer your questions as you send them to us, questions at thebonsongroup.com. Thank you for listening to and watching. The DC Today is

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