The Dividend Cafe - The DC Today - Monday October 24, 2022

Episode Date: October 24, 2022

I think we have a meaty one today, so here we go with this Monday edition of DC Today … Off we go … 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 DC today. I feel like I haven't been with you for a little while, even though I got to record Dividend Cafe on Friday from the studio in New York. Obviously, Trevor Cummings filled in admirably last Tuesday, Wednesday, Thursday on the DC Today as I was out and about at these meetings in New York City. Those meetings are now actually going to be the subject of Dividend Cafe on Friday. I'm going to

just convert the kind of major takeaways from the various meetings we had last week. And a lot of things we're kind of thinking about and adjusting within client portfolios. As a result of those meetings, we're going to make those major takeaways both on macroeconomic and even kind of bottom-up investing points into the Dividend Cafe. As far as the sort of special Monday long-form DC Today goes today, obviously I'm not in either of the office studios today. I just arrived in Palm Beach a short while ago, and I'll be speaking at a family office event tomorrow, Tuesday, and then traveling back to California Wednesday.

So for that reason, you'll have Brian Seitel bringing you the DC Today tomorrow, Tuesday, and then traveling back to California Wednesday. So for that reason, you'll have Brian Seitel bringing you the DC Today tomorrow, as I'll be speaking after the market closes. And then Trevor Cummings will again be with you Wednesday, because I'll be traveling home when the market closes on Wednesday. But then I'll be back with you Thursday. And of course, I've already mentioned Dividend Cafe Friday. So that's the expectation for the week. Last night, futures opened up 240 points and then kind of moderated into the evening.

The Nikkei in Japan was up 350 and closed up just 80. When I woke up this morning at 4 a.m. Eastern time, so a long time before the market opened, futures were now down 130 points. And about 90 minutes before the market opened, futures reversed course to the upside. The market opened up 350 points and then it moved higher throughout the day. There was a few turns and pivots and so forth along the way. It wasn't a totally non-volatile day. But the market did close up 417 points, 1.3% on the Dow. This follows off of a huge market rally on Friday as well. The Dow is all the way back to 31,500. So for whatever it's worth, a similar thing happened last quarter. Near the end of the second quarter, the markets really tanked and found a new low.

And then into the first month plus change of the third quarter, markets rallied huge, up a few thousand points. And then as we know, at the end of the third quarter, markets fell off again. And now here we are in the fourth quarter in kind of a recovery territory, a particularly impressive recovery in certain things like energy and healthcare. The price volatility in the market, so when I talk about like month by month and quarter by quarter, that's not generally how we measure volatility. It's sort of how we should measure it. I guess that's more meaningful than what I'm about to say. But intraday volatility and day by day volatility,

we have not seen it like this since the financial crisis. 50% of market days this year have been up or down more than 1% on the day at the closing level. But here's another factor that speaks to kind of intraday volatility. 88% of market days have seen an intraday move where the low and the high of the day, wherever those were, even if it didn't represent a closing spot, were up or down more than 1% in that range, 88% of days. So this is what I talked about a long time ago regarding my expectation in a period of Fed policy that you were not talking about a straight down, a straight up, but you would, if nothing else, be dealing with a new era of volatility. And I think that's where we are. And right now, the 10-year bond yield closed at 4.24%. That was up about three basis points on the day.

Bond volatility has been another underappreciated story on the year, not just downward pressure on prices. So you've certainly had that, both from rising rates and from rising credit spreads. But you've also just had a dramatically enhanced volatility in the bond market. And we think ultimately it will be when spreads stop widening that volatility stops enhancing. The best performing sector in the market today was healthcare. It was up almost 2% on the day. And even though it was a broadly up day in the market, there were a couple sectors that weren't up. And so the most violent of up days and the same thing can be said in down days are when you even have a really impressive performance in the worst performing sector. Today, you had materials down 0.6%, not a big deal. And then real estate was actually barely

down as well. Chinese stocks can't say anything about being barely down. They were brutalized today, especially in the tech sector. I assume investors are taking President Xi's consolidation of power, his sort of movement of the chess pieces on the board in terms of the Communist Chinese Party's Politburo to his advantage. I think investors are taking that to assume even greater crackdowns are coming. So in the news, that was, I suppose, the biggest geopolitical story of the weekend. We know that President Xi has an unprecedented third term. The United States government is reportedly looking at whether or not they want to have the Committee of Foreign Investment look at Elon Musk's purchase of Twitter. And then Rishi Sunak has been installed or will be installed as the new prime minister of UK.

Technically, I believe King Charles still has to approve it. But my understanding is that's a total formality and that this is a done deal as the other likely challengers have all one by one backed out. So quite a bit of movement on the political front in the UK. On the policy front, a federal appeals court over the weekend has temporarily blocked President Biden's student loan forgiveness plan. Now, that's just for time for the court to consider a request for injunction from several of the litigant states. And so that could come off at any time. But for the time being, it is on hold. We'll see where this court battle ends up going. My own prediction is that there will end up needing to be a stay long enough for a real adjudication and that ultimately that adjudication is a coin flip. There's at least

a 50% chance it gets thrown out on the merits. 50% chance it does not, maybe because someone isn't looking at the merits. Okay, a Republican lead and the general ballot polls has come screaming back. I wouldn't dare to offer a recommendation as to how these, excuse me, a prediction as to how these things are going to play out. As I've talked about time and time again, the Senate races, you know, to predict what's going to happen in aggregate in the Senate, you have to have a sum of parts. And if you say, well, I think the Republicans are going to take the Senate, it helps to have a feel for which states are going to be the path to do so. Or if you say the Democrats are going to keep the Senate or expand to their lead, all that is is a sum of parts of particular

races. And I think Nevada, Pennsylvania, and Georgia are all too close to call. Pennsylvania is a state the Republicans are trying to hold in the retirement of Pat Toomey. And Georgia and Nevada are races the Republicans are looking to pick up. Likewise, Democrats are trying to pick up in Wisconsin, and technically Republicans are also looking at a possibility of trying to pick up in Arizona. But my guess is that Nevada, Pennsylvania, and Georgia are going to be ground zero here for where this could go. Economically, China's economy grew almost 4% annualized in the third quarter. That was quite a big increase. Over last quarter, 0.4%. Of course, their second quarter is when they were effectively locked down the whole time, particularly Shanghai,

in the aftermath of the absurd, preposterous, ridiculous, laughable, preposterous, ridiculous, laughable, zero COVID lockdown policies that they continue to play with. Normalization of their economy is nowhere near 100%. Remember, even Q1, I think, grew 4.8%. But again, to get back to the nearly 4% range now is a demonstration of where they're headed and what that could mean to supply chain efficacy globally when China's fully reopened. But their export growth is definitely still slow, and that has an impact to the rest of the world supply chain as well. What is not slowing down activity is the United States. Flight travel has re-reached pre-COVID levels of 2019 and early 2020. Restaurant reservations are well above 2019 COVID levels. The only thing I'm seeing, there's about 25 data points I look at every week. The only two that I see not back to pre-COVID

levels and aren't going back anytime soon are total MTA travelers, those using public transportation in the New York metro area, and national office key card use. Now, look, I'm sure San Francisco use of public transportation would be even a fraction of what New York's is, but that's not on my weekly metrics I'm checking. So there's other pockets where things are nowhere near normal. Certainly San Francisco, Portland, Seattle are by far the worst of economic metrics. But I'm just referring to the kind of national indicators that are relevant. And I think the data is pretty clear. I'm going to spend a few times in housing real quick. You have to look at the dctoday.com today

for a couple of charts. The NAHB Home Builder Index last week was down to its lowest levels in 10 and a half years. This is 10 straight months of decline for optimism from home builders. Both prospective buyers traffic and future outlook were dismal. Home price appreciation nationally, whatever that's worth, remains up on the year, meaning how you look at price levels now one of my institutional manager meetings last week about the level of buying of single family residences from institutional buyers.

And we were about 15% or so of sales volume in 2021 was from institutional buyers. That's not super high. It's always been somewhere in between 11 and 13. It was a little higher than normal, but it by no means explains the big boost in home price appreciation. I think that was clearly a byproduct of overly accommodative monetary policy. But what I thought was fascinating is that 28% of residential sales in Texas were from institutional buyers. And any states that were above their average, I circled on the map, but it basically just goes from Nevada and Arizona all the way out to North Carolina and Florida and everything in between from the Sunbelt through Texas through the Southeast. And yet there wasn't any movement of institutional

buying on the far west, the top of the country, or the Northeast. And I will let you decide why that may be. Fed-wise, 75 basis point rate hike is right now priced into futures as a 100% chance. That's next week on November the 2nd. The question now is whether or not they go 50 or 75 basis points in December. There was a 76% chance in the futures market for another three-quarter point rate hike in December last week. That's come down now to only 48% chance. You're kind of evenly split between 50 or 75. 48% chance. You're kind of evenly split between 50 or 75. So I think at this point, we're debating if we go anywhere from 100 to 150 from here by end of the year, brings the Fed funds rate somewhere in the mid fours, and most are expecting them to pause at that point. That gets them to a higher

point than I would have previously predicted, but it does get to what I definitely predicted for some time, which was a stopping point in a terminal rate in the fours in December, meaning even if that terminal rate's higher than I would have thought, I think three and a half was the range I thought a few months ago. Even if that number is now higher, I do expect them to enter 2023 without a posture of hiking to try to evaluate where things are going. Fed Governor Charles Evans gave a speech where he talked about the risk of overshooting a monetary tightening. And you're just hearing more of these types of speeches of the Fed, very modestly trying to talk down expectations of ongoing hawkishness. By the way, foreign investors apparently see a better bargain when they see it. $174 billion on the month of purchase of U.S. treasuries from foreign investors,

and that's largely not China and Japan. That is with the Fed not there as a buyer and yields continuing to go up. It's not enough to moderate yields yet, obviously, but foreign appetites certainly come back. One of my big themes this week in Dividend Cafe and the aftermath of meetings from last week is my firmer conviction that I do not expect to see quantitative tightening continue. And I want to point out South Korea, who had begun a big program of quantitative tightening, announced they are now aggressively buying corporate bonds on their own central bank balance sheet. That is what you call quantitative easing again. A few charts on the energy sector continue. It's been the best performing sector in the S&P for the last three days,

five days, 10 days, 20, 40, 120, 250, 360, 500. So energy has really established a certain leadership role right now. We'll see where that goes. Against doomsdayism, my favorite part of the weekly DC Today on Mondays, I talk about people's pessimism not always just merely being predictive, but even backward looking. Even the way they interpret already known facts or forecast or assume or analyze current conditions always tends to lean more into the negative. 99% of people polled getting wrong the amount of people that had been polled out of extreme poverty, meaning 1% guessed the range when given an option of ranges, and 99% assumed it was something worse than it was. Very similar to during COVID, when there was less than, and it was actually well less than 1% of people who contracted COVID who passed from it. And yet time and time again, polls were showing

people who believed that it was 40% or 50% who were dying from it. They weren't wrong. They were just stratospherically wrong. And it speaks to the pathology of pessimism that I think not only wreaks havoc on one's perspective, but even their own ability to see facts. Ask David deals with a question someone asked about why CPI did have a lag effect in it from housing. And I encourage you to check that out. And that's that. So a lot there in DC today. Today, I'm going to leave it there. And you'll get a great recap tomorrow from Brian and a great recap Wednesday from Trevor. And I'll see you on Thursday. Questions at thebonsongroup.com. Reach out anytime. Thanks so much for watching, listening to DC today. not an offer to buy or sell securities. No investment process is free of risk. There's no guarantee that the investment process or investment opportunities referenced herein

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