The Dividend Cafe - The DC Today -Thursday April 20, 2023

Episode Date: April 20, 2023

Today's Post - https://bahnsen.co/3mP5Ad0 The talk is warming up for the debt ceiling debate to become a major market story for a time. As I was writing months ago, there is no leverage for the Republican House if they don’t first pass their own debt ceiling bill (essentially, a bill they actually pass with 218 or more votes that does raise the debt ceiling but gives House Republicans what they want by way of spending cuts). It is what John Boehner first did in 2011 that then forced the Obama administration to have to take a stance against it, and then ultimately pushed that stand-off to the point of the “sequester” where hundreds of billions of dollars came out of the deficit. In this case, I (a) Do not know if Speaker McCarthy will get his 218 votes, (b) Do know that the Biden administration will oppose whatever that is, and (c) Do not know what the twists and turns will be when they find themselves at their version of a “Boehner-Obama” stand-off. I only know this: Without “A” – there is no “B” or “C.” So we shall see if the House GOP can pass a bill and then take it from there. A debt ceiling lift that comes with the spending cuts they want does force the White House into a tougher political play (they can’t see the Republicans are forcing the government to default if the House has actually passed a bill to not do so). But these things have a way of moving and shaking quite a bit before we get to the end, and I can promise you media coverage of it all is going to be … unhelpful. Links mentioned in this episode: TheDCToday.com 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. Hello and welcome to DC Today. My name is Brian Seitel. Today is Thursday, April 20th. And down day in markets. Futures were down last night a little bit too, but not anything real significant. But we opened down about 150 points on the day. We kind of traded back up, not quite to fair value, but close to it and then sold off before the close, then down something like 109 points on the day. The rates today, interest rates were down a little bit across the curve. The curve actually steepened a tiny bit, but the 10-year closed down six basis points on the day at something like 3.54%. So a little rally in bonds, a little sell-off in stocks.

We talked about this a little bit, but the kind of collapse of equity volume has been pretty significant. About a month ago in March, we had a VIX at something like 35. And actually, I take it back. That was going back to October. October, I would say the VIX was close to 35, something like that. We kind of came down about 10 points. We were 25 about a month ago. And then today, while it was up, volatility was up today because of sort of a down market. We're down to 17, 16, 17, something like that. So you're just sort of seeing this kind of erosion in volatility. And I'll talk about this a little more, but I think the reason is just the feeling of certainty around a terminal Fed funds rate, call it five, five and a quarter, something close to where we are now.

And so I think equities are feeling a little bit better in that regard. I wouldn't go so far as to say this is sort of off to the races. We're still in a very range bound market for the past 12 months. I don't know that that is going to change dramatically. We're still expecting earnings to come in a little bit. And so at a valuation of call it 18 on the S&P, I wouldn't call it off to the races by any stretch of the imagination. We're just getting kind of a mixed bag of economic data. There was data out today that I'll talk through, but it isn't real bad. It isn't really good. It's in the middle of those

two things. And that's not necessarily bad for stock prices. But you are seeing that volatility come down across the board. Bond market volatility is still very, very high. To my knowledge, at least in my career, to call it 21 years, it's pretty much the highest bond market volatility that we've ever seen. The two-year treasury is down 100 basis points in about 40 days, to put it in perspective. It's a big move. So you went from something like 5.1 to 4.1 in a month. And the reason for some of that is that if you had Fed funds right now, call it 5%, it's a range, but let's say it was 5%. And a two-year treasury, meaning two years out from now, it's at a 4% yield. That obviously speaks to Fed funds coming in and inflation being

a little lower over the next couple of years. All that to say, we have jobless claims out today down 245,000. We were expecting, or at 245,000, we were expecting something more closer to 248. It's basically in line with expectations, but it is showing sort of a continual easing path in the labor market, which is what the Fed wants to see. They're starting to get what they want. They've raised rates all the way up in one year, 500 basis points. And now we're starting to see it in the employment picture, and we're certainly starting to see it in the inflation picture. So for those that are looking for an end to QT or

a Fed pause or a pivot, these are the things that we kind of want to see. They're just not quite robust enough. There's nothing really broken other than the SVPB collapse in the banking sector for the Fed to just automatically cut rates. But I do suspect they'll probably hike in May and then pause for a period of time and see how these things work through, which is what the market is expecting. We had a fairly Fed index for manufacturing today, pretty much collapsed. It was down 31, printed a negative 31. We were expecting a negative 20. So we were expecting a negative number, but far more than we expected.

And again, with the mixed bag comment, the New York Empire Index just four days ago, or when was it, Tuesday, was a big expansion. So you're just seeing different numbers kind of work their way through the system. In aggregate, it's still expansionary. So, so far, I guess so good in that respect with how this will shake out. We had existing 2%, 2.4% month over month and are now down 22% year over year. So continued weakness in housing, it's no surprise to anybody. Mortgage rates have gone up so high and just sort of a real tight real estate market. That said, and I think this is sort of interesting, the homebuilder index, so if you

looked at just the index of all the homebuilders, you probably know a couple of them off the top of your head, is at 52-week highs. So what does that tell us? Again, with my mixed bag comment here on economic soup, why would the homebuilders be at all-time highs if real estate and housing is going lower. And I think that the reason is that commodity input prices, call it lumber and labor and cement and all the things that go into copper, go into building a house, have come off their peaks. So they're still higher than they were a year ago, but they're far lower than they were just recently. And I think that gives a little bit of margin back to some of the home builders. And I also think just structurally, we've underbuilt in this country for decades and decades. And so you're seeing that. The question I would ask is, have we ever had a recession

with home builders making all-time highs type of a thing? And I would say that probably not. And so that's a countersign to those in the recession camp along with technically expanding economic data because that's what we're seeing. It'd be unusual for that to be the case if we were contracting in aggregate. Also in the real estate side, the difference now is that there's just more equity. You end up with

defaulting loans and people walking away from homes and all that sort of thing when there isn't equity. People would be silly to do it if there's equity. And it's a big deal. The consumer in this country, to give you perspective, the consumer in this country has something like literally 50% less liability to net wealth ratio from 2008. So if you think about where we were before the financial crisis, as a consumer in the country, we literally had twice as much liability as a percentage of net wealth as we do today. So consumer is pretty darn healthy. And I think we spoke about this the other day on the DCT, but those things matter. Equity in homes matter, health of consumer balance sheet matter, and it makes things more resilient. And so when they

keep talking about a shallow recession, if everybody's talking about a shallow recession, there probably won't be a shallow recession. There probably won't be one. And I think the statistics on consumer health and the real estate market health, even though it's come down in a healthy way, those things do matter as far as what we can expect in the economy. David actually was able to get in and write the Ask David section today. There was, and David actually was able to get in and write the Ask David section today. And the question was something like, when will the yield curve go from being inverted to upward sloping? And the comment was, when the Fed is able to bring down short-term rates. And I would second that and just say that that's all the Fed can control. They don't have control over long-term rates.

So they don't set a 10-year rate. They don't set a 30-year rate. And those rates have already come down. So a 10-year north of five down to three and a half is a meaningful contraction, decrease in rate. You still have a three-month bill at something like 5.1%, which is where Fed funds probably will be in three months is my take on it. And so how can those two numbers sort of correct themselves? I don't think it's the 10-year going to seven to make an upward sloping curve. I think it is going to be that the Fed needs to lower interest rates. Historically speaking, going into recessions, yield curves are usually inverted preceding a recession. That's no news. They usually become less inverted as we get closer to recession. And technically, the twos tens have gone from something like 100 basis points inverted

to now 65 basis points as of today, 66 basis points, so less inverted. So does that mean that we're, you know, that's the hallmark of when we enter the recession? You know, time will tell. But again, the economic numbers are not speaking to that as of right now. So it's hard to have a recession. You have 156 million people employed. It's the most we've ever had employed, and it's more than we had last year. So it's hard to argue, unless there's a big change in consumer spending, how the economy would go lower with more people having jobs. And that's kind of where we're at. The Fed knows that. And that's why they're likely going to raise on May 3rd. 25 bps is priced into the market. They'd be silly not to take advantage of it. They should raise.

If I were them, they should raise. Do I think they need to raise? I don't because we're already at 5%. So it's another quarter point, not going to do much, but I still think that they'll take advantage of it for some of those reasons. You know, I'll kind of wrap it up here a little bit from there. I want to keep this to the point and succinct. There was a decent amount written in DC today that you can check out. Tomorrow we have a flash read on services and manufacturing PMI data. Not a lot else other than that. We'll have Dividend Cafe for you tomorrow in your inbox on Friday, which is tomorrow. If I don't speak to you, and I hope I do, but if I don't, have a great weekend, and I will be back with you soon. Thank you. 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

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