The Dividend Cafe - The DC Today - Monday October 31, 2022

Episode Date: October 31, 2022

Futures opened basically dead flat last night and stayed there into the evening. Bright and early this morning futures pointed to a down -100 point open pre-market and it worsened from there. The market opened down -100 points or so and didn’t move much above or below that throughout the day. The Dow closed down -128 points (-0.39%) with the S&P 500 down -0.75% and the Nasdaq down -1.03%. The Dow hit 28,661 at one point October 13, it closed as low as 29,203 on October 10, and yet today sits at 32,732, up +14% from mid-month lows. We are a bit over half way through earnings season (263/500 companies reporting) and sales growth is +10.3% year-over-year (a bit ahead of expectations and earnings growth is +4.2% (a bit behind expectations). Excluding the energy sector, though, earnings growth in the S&P 500 is negative year-over-year. Right now consensus expectations are for $235 of earnings from the S&P 500 in calendar year 2023. The number was $250 in the summer, so it has come down, but really not very much. Operating margins have declined from about 17% plus change to 16% plus change. For the third time this year we have a spike of breadth where the % of companies advancing over a 10-day period is in the 99th percentile (it also happened in January and July). In those other two occasions the momentum was not sustained. As good as things have been the last few weeks, only 40% of companies are above their 200-day moving average. And in some sectors the breadth of companies seeing price improvement is really, really low. 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 Monday edition of the DC Today. I am now recording with the month of October in the books. now recording with the month of October in the books. We are done and it is Monday, October 31. And as a matter of fact, the month of October ended up being the biggest month up for the stock market since 1976 and the biggest October for the Dow ever. So you had a just nasty second and third quarter, and then you had a big rally back in October. Some of it was helped by coincidence of timing that things really rallied, excuse me, really accelerated to the downside in late September. But you know what? Actually, the number at which the Dow bottomed wasn't right away in October. On October 13th, intraday, the Dow was as low as 28,661.

Its closing low was the Friday before that, the 10th, which was 29,200. But we closed today at 32,732. So 32,700. We had been at 28,600. So you're talking about a 14% move higher from the middle of the month. Really quite significant rally in markets. I'm using the Dow here as bellwether. And I've talked about a lot in the past why that is those numbers would not be as good uh with the nasdaq not even close the s&p for the month of october was up about 7.9 percent or so really held down by the high cap weightings and some of the big tech stocks that got hit so sometimes though that construction that methodology criteria, sometimes it really helps, and other times it can hurt.

That's the way cap-weighted indexes work. But on the day-to-day, rather than just recap all of October, the futures last night were really quite flat and stayed there through the evening. I woke up this morning very early, as always. They were down about 100. And it kind of worsened a little from there, but then came back and just opened. When the market did open at 6.30 a.m. Pacific time, it opened down 100. We closed the day down 128.

And at one point, it was better than down 100. At another point, it was a little worse than a closing level. It stayed in a pretty tight range. There were some fluctuations along the way, but not a big move and certainly barely any move at all from open till close when you look at it from those two points. So look, 263 out of 500 S&P companies have reported earnings results so far. So we're a little over halfway done and we're looking at sales growth that is 10.3% year over year. That's rather impressive, but earnings that are only up 4.2% year over year.

And that's a little behind expectations. And what that mathematically tells you, of course, is that margins have come down quite a bit something in the range of 17 profit margins are now averaging about 16 that explains the revenue growth at 10 but the profit growth at four but one thing that does have to be said is and this is true of the earnings growth i don't know the exact numbers on revenue growth. This is going to be perhaps a little less true there. But the 4.2% earnings growth year over year, where we are now through halfway through this earnings cycle versus a year ago, it would be negative if it wasn't for the energy sector. So energy is over 100% of the earnings growth.

It is not over 100% of the revenue growth, but it's a significant portion of it. So it's something to keep in mind that even as this teeny tiny weighting in the S&P, energy is carrying that weight in terms of earnings growth. Right now, consensus expectations for next year for full year profits in the S&P 500 are down to $235 a share. And they were in May, June, roughly $250. So they've come down. I don't think it's come down a lot. I do think it will come down more.

I'm beginning to believe it will not get as low as some have feared. not get as low as some have feared. I know that there are analysts I follow who I believe are really, really good at this stuff. They think it will get all the way down to 200 earnings. And I have reasons I don't think it'll get that low. But either way, the trajectory of earnings expectations is lower. And thus far, consensus hasn't moved a ton. Just to give you a little context on the breadth of strength in this recent rally, over a 10-day period, the amount of companies that have moved higher, that have advanced over a 10-day period, is in the 99th percentile in the last 10 days. And that happened in July and that happened in January. And in both cases, it didn't hold. Usually it does. Usually it is an indication of some sort of momentum reversal, but not always.

And so I don't lean. That's why most of the field of technical analysis I find reasonably worthless. Most of the field of technical analysis I find reasonably worthless. Whether or not momentum is sustained is not known by looking at the past. By definition, it requires some understanding of the future that knowledge of the past does not give you. But all that to say, the breadth that we're experiencing now is quite significant. It's in the 99th percentile of number of companies have advanced. I do think it's quite interesting when you look at the 200-day moving average that we have gotten up to, up to about 40% of companies in the market

that are above their 200-day moving average. And when you look into each sector, only 10% of companies in real estate, 10% utilities. But more surprising for those who usually believe high beta, high risk, high cyclicality, high valuation, high momentum drives these things. Only 27% of technology companies are above their 200-day moving average and only 21% of communication services companies. So if you split the baby on those two sectors, it's about 24% of the sort of traditional understanding of technology that's above its 200-day moving average. So you still have a whole market that is at low momentum relative to the grand scheme of 200-day and certain sectors that are doing much worse than

that. 10-year bond yield today closed at 4.05%. That was up four basis points on the day. The 2-10 curve, which is the 10-year minus the 2-year, it's been inverted for a long time. We talked about this inverted yield curve 100 times this year, but the three-month treasury bill to the 10-year has not changed at all. And as a matter of fact, I have a typo in DC Today that my production people will fix because it says the three-month relative to the two-year, but no, I'm referring to the three-month to the 10-year. And that three-month Treasury bill this morning was 4.1%, and the 10-year was 4.01%. So we finally have gotten a little inversion on the three-month to the 10-year. And hopefully you'll see that correctly when you get the written DC today. Energy was the only positive performing sector today.

It was up 60 basis points. The worst was communication services, which was down 1.67. It's just had a violent month. Speaking of communication services, Elon Musk of Tesla electric car fame is now the owner of Twitter. There was a massive tragedy in South Korea over the weekend. Over 150 people died in a Halloween event. The far left candidate in Brazil's presidential election seems to have very narrowly but nevertheless beaten the far right incumbent candidate. And so those are kind of the major news stories I'm going into. Many of the other stories and so forth you've heard about extensively. Midterms are eight days away.

And I would say right now the momentum's clearly turned into the advantage of the Republicans. And yet, you know, some of the Senate seats are still going to be very tight, very close. And we'll see next Wednesday morning. And we'll see if we even see next Wednesday morning. next Wednesday morning and we'll see if we even see next Wednesday morning. There is a chart about labor productivity in the economic section of today's DC Today that I hope you'll look at because that declining output, labor productivity is such a pivotal story. And I think this graphic illustration of how far down labor productivity is and the role that has in suppressing the production

of new goods and services, which puts upward pricing pressure. It's a major story. The National November Rent Report came out, apartment list. It was the second month in a row nationally that apartment rents on average were down. In October, down 0.7%. Also had been down in September. Fed funds, that's the story coming for the week. The Fed starts their meetings tomorrow. They'll release the FOMC announcement on Wednesday. And the market is pricing in about 90% chance of a three-quarter rate hike. So it's not technically 100%, but it's very close.

And then you're split down the middle, 50-50 in the futures market as to whether or not next month you'll get a half a point or a three-quarter point. So that seems to be the question in markets right now. I'm going to leave it there. Actually, energy real quickly, I'll tell you. Oil closed at $86.09, was down 2% of the day. Biden administration released another 15 million barrels from the Strategic Petroleum Reserve. In fairness, that was part of the 180 million that they had said they were going to release. And that now completes the 180 million. We'll see if they decide they're going to release more. And that now completes the 180 million.

We'll see if they decide they're going to release more. But 180 million barrels of oil have been released from America's emergency reserves since spring. And we're still sitting here in the high 80s on oil prices. Against doomsdayism, I think you'll find it quite fascinating what has improved over the last 100 years in the way we get bread. And then the Ask David deals with my outlook for diesel fuel. I'll leave you in suspense. You have to look at the DCToday.com to get that. Thanks for listening to the podcast. Thanks for watching the video. Thank you for being a part of DC Today from Grand Rapids, Michigan, where I fly tomorrow for a symposium on poverty that I am participating in on Wednesday. But from Grand Rapids, I will be recording the DC Today both

Tuesday and Wednesday before returning to Orange County early on Thursday morning. Thanks so much for listening and reach out with any questions anytime. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free 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

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