The Dividend Cafe - The DC Today - Thursday, December 15, 2022

Episode Date: December 15, 2022

So the Dow gave back Monday’s gain today and a tad more, but with today’s -764 point day in the Dow, the market finds itself a couple of hundred points off where it was just last Friday. And the bond market rally continued again today as yields fell again. All of this is carefully dissected in today’s podcast and video … Dow: down -764 points (-2.25%) S&P: down -2.49% Nasdaq: down -3.23% 10-Year Treasury Yield: 3.45% (-5 basis points) Top-performing sector: Energy (-0.53%) Bottom-performing sector: Technology (-3.78%) and Communication Services (-3.84%) WTI Crude Oil: $76.20/barrel (-1.38%) Key Economic Points of the Day: Retail Sales fell -0.6% in November, and even ex-autos were down -0.2%. Much of this was related to the strong number of October, off of which this drop is based. Nominal GDP expectations for Q4 will come down if consumer activity is less than expected. Industrial Production fell -0.2% vs. expectations of a +0.1% increase. Initial jobless claims were down 20k to 211k. Continuing claims are at their highest level since February (at 1.67 million). 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. Well, hello and welcome to the DC Today, Thursday edition, final DC Today of the week. We will be back at you tomorrow with the Dividend Cafe. I've already begun writing what I think will be a kind of longer Dividend Cafe exploring the state of inflation and kind of where things are under the hood in light of this week's CPI number and what it just kind of means since this inflationary episode began, where we stand and where we believe we are going. So definitely check out Dividend Cafe this weekend. Markets got hit today in what's become a pretty recurring theme, where the moments after a Fed announcement are spent with a really mixed bag of hedges being unwound or speculative trades being unwound. And there being a real difficulty getting transparency in markets as to what a response may be.

And then in the next day, getting a bigger move. Now, you could say, well, look, the market went down today because the Fed hiked rates 50 basis points. But of course, that is ridiculous. The market is known for quite some time they were going to raise rates 50 basis points yesterday. And in fact, for a good portion of the last quarter, which is up thousands of points in the market, the expectation might have been that it was even going to be higher. And so what was actually new information yesterday? Well, you could say, well, their dot pots were higher.

And that's true. The expectations for where the Fed is forecasting the Fed's end run to be moved across the term spectrum, not 25 basis points, but I want to say more like 20 basis points. So you definitely got a little move higher there. But I do want to point out the futures market doesn't believe it. The futures market has not priced in that expectation of a higher terminal rate. More or less, the Fed funds futures are kind of still where they were. And so, look, let me just get this stuff out of the way. As Brian told you yesterday, the Fed hike rates up to 425. Brian told you yesterday the Fed hike rates up to 425.

And that was the 50 basis point hike from yesterday, getting the Fed funds rate to 4.25%. And they did make reference to not expecting cuts in 2024. I want to get back to that. of the kind of term structure movements where expectations are up and down different maturities of the treasury yield curve and of the Fed funds rate. Let's focus on the Fed funds rate first. They are now on their dot plots forecasting another 75 basis points of increase till they get to that terminal spot at which they pause and then eventually go lower. The Fed funds futures are looking at another 50 or so. And so I think that the disconnect is not necessarily what I'd look to to explain the equity market movement. Equity prices were down about 100 points in the aftermath of on the day yesterday. And then the futures had all night to digest it, didn't move a whole lot.

And when I got up this morning at 3.30 in the morning, they were only pointing down a little bit. But then what happened was the retail sales number came out. And the retail sales number was down 0.6% in the month of November. Ex-autos, it was down 0.2%, but still worse than expected. And I would point out that you could argue a lot of this was related to the very strong month in October. I mean, October was smoking. And so you did get a number that was lower off of a higher number. And yet nine of 13 sectors reported lower than expected retail sales numbers in November.

So there was a reasonable amount of breadth to the retail disappointment as well. And then the industrial production number was down 0.2%. We had been expecting about a 0.1% increase. And so then you start saying, okay, our nominal GDP expectations a bit too high. If nominal GDP expectations for Q4 come down, which they certainly would if less consumer activity was expected, then all of a sudden, the market ends up responding to something a little different than in the last couple of Fed days, where the focus was markets don't like that the Fed's still tightening. Economy's too hot. Gosh darn it. Too many jobs.

Gosh darn it. Too much price increase around robust demand. Therefore, we think the Fed is going to be really tight. Therefore, we think the market should sell off. And bond yields would go higher. And therefore, bond prices lower as well. This is a bit different because not only was there all sorts of delays and other causative relationships that I think make more sense about this market sell off, but the yield curve went down on treasury bonds. So bond market prices went higher, stock market prices went lower.

And today, in fact, the 10-year bond yield was down another five basis points, down to 3.45%. So you've got a NASDAQ down 3.23% today. That's pretty bad. With the technology sector down 3.78% and communication services, its cousin sector down 3.84%. Virtually both of them right there at down 3.8%. And then the best performing sector was still negative, but that was energy at only down 0.53. So more or less, you had a really interesting high beta sell-off. And you had bond yields going lower, bond prices going higher. And I think that this is a different reason for the markets to sell off than we've seen on past Fed days,

where now the concern, the heightened volatility would be a byproduct of, wait a second, instead of this market or excuse me, this economy being too hot, do we now need to respond to potential recessionary fears? Do we now need to respond to potential recessionary fears? The initial jobless claims were actually down 20,000, but it was continuing claims were at their highest level again since February at 1.67 million. Not a super high number by any means, but continuing claims have moved higher and kind of stayed there a little bit, just marginally. So as a narrative goes, it makes plenty of sense. Whether or not it plays out that way, we'll see. But the notion that the market has moved past the concern that the Fed is tightening still and inflationary pressures are worsening still, and now just simply dealing with some of the potential hangover of Fed tightening,

I think that makes a lot of sense. Very odd things in the yield curve when you see the two-year and 10-year really heavily inverted, and then other spots of the yield curve not inverted at all. But nevertheless, a day like today was quite odd, the retail sales numbers. But nevertheless, a day like today was quite odd. The retail sales numbers, by the way, the market was at one point down, not quite, but near a thousand points. 970, I think, at the low point and it closed down 760. So there's about a 200 point rally from the intraday low.

And then, like I said, the S&P down two and a half. The Nasdaq was two and a quarter and then the Dow down two and a half, the NASDAQ was two and a quarter, and then the, excuse me, the Dow down two and a quarter and the NASDAQ down three and a quarter. When all said and done, you got to remember the Dow was up 500 points earlier in the week. And so, you know, you're basically kind of back a couple hundred points lower than Friday's level. In just a few days for all this up and down volatility, you're not quite flat. You're a little lower than flat, but not by much at all. And so this is the higher volatility, higher uncertainty and higher ongoing gamesmanship about trying to predict where economic response is going from Fed response.

A lot of expectations needed to get different responses to get a market actionable thesis, for one, trying to play that game. So I'm going to talk more about inflation tomorrow in Dividend Cafe. I am looking forward to the D.C. today on Monday because there's a lot of other news and things I want to unpack. Overall, I've already stated where I think we are through the middle point in December. You know, the fourth quarter has been monstrous in terms of rally. Certainly bond investors are going to be happy. Valley. Certainly bond investors are going to be happy. But the ongoing question as to what the actual recessionary impact will be and then therefore how risk assets are to respond, I think that's the bigger question out there. But if you ask me, do I think the market was a one point down nearly a thousand points today because of fears of the Fed tightening, I do not.

I think the market knows that the Fed is slowing its rate of tightening. I think the market has known about the tightening they are doing for some time. And I think that it's entirely possible, as the Fed funds futures market is saying, that even into the future, things are not going to go the way the Fed may be forecasting, which would be the historical norm, not the exception to the rule. The dot plot, so to speak, that shows what Fed governors are predicting they will be at in certain future periods of time has been an almost perfectly unreliable indicator of what actually happens. So we shall see where we are. The FOMC will not meet again. The Federal Open Market Committee that sets rate policy will not have another announcement until February 1. So we still have the remainder of December and

a long January to get through. And by then, you're going to have a whole lot of extra equipment from me about 2023. Our white paper and forecast for the year will be out by then. I'll go ahead and leave it there. Please reach out with any questions at the dctoday.com today. Someone asked a wonderful question about our thoughts on day trading and what not only the investment ramifications may be, but what we thought of the general practice morally and sensibly speaking. And I gave that my best shot. Feel free to check that out. And I'll look forward to your more questions. I'll look forward to Dividend Cafe tomorrow. Thank you for listening to and watching the DC today. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable.

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