The Dividend Cafe - The DC Today -Thursday April 27, 2023

Episode Date: April 27, 2023

Today's Post - https://bahnsen.co/3oR1amD Rally day and then some as earnings continue to outperform expectations. Add that to a weaker-than-expected economy (because everyone knows bad news is really good news in Fed-bizarro land), and voila – the Dow goes up over +500 points. 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 the Thursday edition of DC Today. What a difference 24 hours makes. We had a substantial rally in the markets today. And I'm going to talk to you about four different reasons and four different, not so much reasons, but stories behind market activity today. The Dow was up 524 points, which is over 1.5%. S&P was up about 2%. The NASDAQ was up about 2.4%. So you got that staggered risk on total return on the day. Let's start with, by far, the biggest mover of markets is earnings. Even after hours today, some of the results that were coming out were very positive and you're seeing some pre-market boosts.

Some other results came out were not as positive. You saw some drops pre-market, but as earnings go, so goes the market. That's always true through time. But those are expecting this to be a period in which tighter margins and downward pressure on revenue growth kicked into a tougher earnings environment. We're getting far enough along to start saying, okay, it looks like that day of reckoning has been delayed yet again. Earnings results coming in better than expected. And particularly the largest social media company in the world was up huge,

which brought the whole communication services sector up behind improved earnings results. Communication services wasn't the whole story, though. All 11 sectors in the market were up today. The last place sector today was energy, which was up half a percent. Communication, I told you, was number one. Consumer discretionary was still up over 2%, and real estate was up over 2% even as bond yields were higher on the day. So you had a big rally and a lot of optimism around where the earnings environment, generally speaking, is. Secondly, things didn't worsen today. No shoe dropped in this ongoing

escapade about the banking system and particularly the very large regional bank, $230 billion of assets. That is, First Republic has left roughly $50 billion of uninsured deposits, $30 billion of which was put in by various Wall Street banks just a little over a month ago. And then, of course, there's a lot of loans that are underwater in real life because of moving interest rates and questions about where that capital hole gets filled and how they go about living to fight another day. Various attempts are being made to try to find larger Wall Street firms to buy some of the assets, which are loans, you know, assets to the bank, loans, debt to the people paying them back.

And yet, not a lot of appetite to see that happen, even with a kind of equity component out there as people sort of realize that there's a capital hole that someone has to figure out what they're going to do on those unrealized losses. I'm more and more wondering if they're going to just let it continue and not go to any particular resolution, which they think could be the best systemic solution, even if not great for equity holders of this particular financial institution. What we call a zombie bank can stay on for a long time. I joke in the written DC Today, and it kind of sets the table for what I want to talk about in Dividend Cafe tomorrow. But I mean, whole countries have been built off of zombie banks for quite some

time. And so we'll see. There could be a shoe that drops or a catalyst that forces something that happens sooner, but it didn't worsen today. And that was the reason why some of the sell-off for the last couple of days was able to stop. Number three, and this would have been the lead story and perhaps the only story of the day if it weren't for these other things going on with our banking system and our earnings environment. But the House did indeed pass their increase of the debt ceiling. And you say, well, why would markets? That must surely be the reason markets were up. I mean, it's huge news.

news. But the issue is it's big political news because there is no way that the Republicans would have had any leverage apart from doing this. But it isn't the end of the economic news because the White House is still, this particular bill isn't going anywhere. The Senate's not going to vote for it. The key issue though, is that now they likely do have the leverage to force the White House to negotiate that at this point, the blame is not going to be put 100% on one party if the debt ceiling is not raised. And so it really probably does force some deal to take place, but that deal is not going to happen anytime soon. Estimates are that you don't run up against the debt ceiling limit till July. It could even be a little longer. And that gives plenty of time for more gamesmanship and various skullduggery, if you will, as they try to

negotiate and grandstand in the public. Both sides will end up, I think, coming to a deal in the end, but that isn't done yet. But nevertheless, Speaker McCarthy did get a deal by the skin of his chinny-chin-chin, and we will see what happens in the broader political apparatus around this. And then number four was GDP for Q1. The initial result that came out this morning had quarter one annualized GDP growth at 1.1%. The estimate had been 1.9. So it did come in below estimates. And you say, why would markets rally on that? The economy growing less than expected. We already know the reason because we're living in a backwards bizarro world. estimates. You say, why would markets rally on that? The economy growing less than expected.

We already know the reason because we're living in a backwards bizarro world, courtesy of the Federal Reserve. And there is some thought there, okay, well, if things are slowing down sooner than expected, that hastens the day of reckoning by which they capitulate and rates stop going higher and start going lower and blah, blah, blah. Under the hood, the GDP number wasn't all that bad. A good part of why the growth was not quite up to expectation was inventories dropping, which is never really necessarily a forward-looking growth indicator. But then non-residential fixed investment, which is what we call business investment, capital expenditures, that was still far below what I want to see it at. And so it was a pretty muted, unimpressive, non-octane GDP number. But the futures, look, the bond yields were up today.

The futures market is now pricing 88% chance of that other rate hike. So I don't really know what to tell you other than I think people expect the economy slowing and at some point the Fed is going to reverse. And the futures markets say both things, that they're going to raise next week and that they're going to be cutting quite rapidly starting at the end of the year. The futures is pricing in a Fed funds rate a year from now, about a year and a half from now at 3.2%. It's 5.2 now. It's going to drop 200 basis points. So that's what the futures market, real market actors are pricing. And they could be right twice. There's a lot of questions about how the central bank would deal with economic reality. So those are the four considerations

I want to bring your attention. I think I've covered all I had for you today. There is an Ask David today about artificial intelligence and where I think this chat GBT and this different stuff bodes for our education system and our future as a society in terms of the capacity for educating high school age, college age kids with what they will need to flourish as human beings. And I addressed that in the written the DC today dot com. I'll be back at you tomorrow with Dividend Cafe. Thank you for listening.

Thank you for watching. Thank you for reading the DC today. 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. Thank you. information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information.

Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.