The Dividend Cafe - The DC Today - Thursday, July 6, 2023

Episode Date: July 6, 2023

Today's Post - https://bahnsen.co/3NJs88A One of my least favorite things I see analysts do on Wall Street is take various historical incidents and attempt to extract likely future market behavior from it. “7 out of the last 9 times a team from California won the World Series, the market was up over the next 120 days” (or something like that – I made that one up to make a point; actually, that example there would be significantly more logical than some of the nonsense I routinely see). This morning I read a report that said “nine of the last nine times the real Fed Funds rate was rising, the S&P 500 was up.” Okay, fair enough. Not super helpful predictively, though, since one only knows what the period of time the real Fed Funds rate is rising in hindsight (from a start to an end), and periods within it can be quite negative (see: 2022). But then this report went on to say: “in the 12 months following a period of a rising fed funds rate the market was up double digits four of the nine times and down in the remaining five.” Crystal clear. Now who won the World Series last year? The ADP jobs number came out showing explosive June private sector job creation (+497k, double expectations). Leisure and Hospitality was nearly half of that, so it does seem a bit lumpy. Of course, we also know weekly initial jobless claims have been rising, so there is a bit of a mixed bag in the labor data with the skew still being to the positive side. We shall see what the BLS report generates for June tomorrow. Bond yields went up and stock futures went down after the ADP report. 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 the DC Today. It feels like I've been away from DC Today for a while just because of Brian doing it yesterday and the 4th of July stuff before that. And now here we are. I'm in the New York studio. We have a really special Dividend Cafe tomorrow going through all the questions we've been behind on, different questions you guys have sent in. It's not too late tonight. I'll still finish more of that up tomorrow morning. So if there's stuff you want addressed in this week's Dividend Cafe, feel free to send us questions to questions at thebondsongroup.com. In the meantime, the market today was down 366 points on the Dow.

It's basically about 1%. S&P was down on a percentage basis, close to the same. I think the S&P was 82 basis points or 80 basis points. The NASDAQ was 82. So right around the same level. The Dow had been down over 500 and closed down 366. So off of its lows on the day. So you say, okay, well, what made the markets drop a little bit? Bonds are down as well. The 10-year yield was up 8.8 basis points. So you saw the yield curve. Yields all move higher, bringing bond prices down. What could have caused it? And the answer is that we got the horrible news of 497,000 jobs created in the private sector via the ADP payroll report that came out bright and early

this morning. And then, you're really not going to believe this one, the ISM services number jumped back up to 53.9. It had been at 50.6 last month, barely in expansion territory. 50 is the breakeven level. A number below 50 shows contraction. A number above 50 shows expansion. Not only stayed into expansion territory, but did so quite robustly with 15 out of 18 sectors showing net positive numbers and new orders in particular driving a lot of the increase. So why would these anecdotes of good news be received by the market as bad news? It's the traders saying, oh my gosh, the Fed now is more likely to raise rates again. So we're in bizarro land still. We've been there for a very long time. This isn't really that much of a news. You have to remember the market is up a couple thousand points from the March numbers. The fact that the Fed is staying higher for longer and all those things have been baked in for quite some time.

Markets mostly shrugged it off. Today, you did get every sector down. Technology is the best performing sector, and it was down 16 basis points. Energy got hit pretty hard, which was down 2.45. But it wasn't from oil prices. These were flat on the day, and they had been up in past days. WTI is back up near 72 a barrel, well off of those numbers in the high 60s. It keeps going to and then bouncing off of.

So we'll see how some of that plays out. It's interesting right now, the thing I kind of talk about more than just what happened in the market today and the DC Today, the written version at the dctoday.com, is there's this constant analysis. There's a constant temptation in data that I receive from all sorts of different analysts, all sorts of research providers and macro perspective that is always seeking to look at different data points and say, well, look, last time such and such happened, this is where things shook out in the market and whatnot. And some of them are at a level of non-correlation or arbitrariness or kind of just randomness that you wouldn't believe me.

And I joke about, you know, saying like, well, seven of the last nine times a team from California won the World Series, the markets did this in the next 120 days. And you would think it's so obviously disconnected and not very helpful. And is seven out of nine even really that many? And what's 120 days or whatever? But I made all those things up to make the point of that's about the level of intelligence that goes into some of these things. And this morning, I saw a report that nine of the last nine times the real Fed funds rate was rising, the S&P 500 was up. And of course, the real Fed funds rate rising, a period from when it begins to rise to when it ends rising, is not known what that period is until it ends. And that the S&P would be up in that period. Why is the Fed funds rate rising? Presumably because of economic growth and expansion,

and therefore it wouldn't be counterintuitive at all that the S&P might be up in that period. And now what would make the Fed fund, why do we say real Fed funds? Because could the Fed funds rate be going higher without the real rate going higher? In other words, if the Fed funds rate is going higher at a slower pace than inflation is going up, then in fact, the nominal Fed funds rate becomes less

important and the real Fed funds rate could be going lower if inflation is going up quicker than the Fed funds rate is going up. You follow me? So the real Fed funds rate is the operable thing here. But then this next data point is you go, okay, well, nine out of nine times, something that we don't know happened until it's done happening, the market was up. But then in the year after that, a year after an era of real Fed funds rate rising, the market was up four out of nine times and down five out of nine times. And I just think to myself, who in the world could consider this to be an actionable data point? Now, maybe that's the intent of the data is to say it's not actionable. It's just too random. But the whole point is, when do you start your 12 months? You start your 12 months when the real Fed funds rate has

stopped going higher. So it's by definition only measurable in hindsight. So it isn't actionable even if the number was nine out of nine times. And by the way, the real number means you have some measurement of inflation and the Fed funds rate means you know what the Fed itself has done. And so that's why I say even trying to project what will happen, you're projecting more than one data point. I bring all this up to say that attempts to try to find a correlation to what someone should do, people want to know these things.

Why? How did the market do when this happened? Because they believe there's some predictive benefit. And I think some of the more absurd examples that most people listening right now would be like, OK, obviously there's nothing predictive in what he said. Help to color in the argument I'm making, which is it's never predictable. Never. And if it were, it would then stop being so.

Never. And if it were, it would then stop being so. Because it would all get priced in and that little data point that was a giveaway to something predictable would get arbitraged away in the pricing. This is the stuff we live with every day. People believing that they found a way to game something they can't game. So yeah, the ADP number was good today. We'll see if that carries through to the BLS number tomorrow. The monthly jobs number, Bureau of Labor Statistics for the month of June coming out tomorrow morning, bright and early. Leisure and hospitality were about half of the jobs in the ADP number. So it was a little lumpy and that may have kind of

So it was a little lumpy and that may have kind of neutered a little bit of that enthusiasm. The initial jobless claims have been rising lately. They've kind of petered out, but they had gone up weekly. So the kind of trailing monthly average had picked up. Maybe that is a counter to where this ADP number is. We'll see. But again, bond yield stock numbers up today. And that's the reason why. Go to the dctoday.com. We have a link to my appearance on Charles Payne's Fox Business Show today. We cover a lot of ground that you might enjoy that interview. And I also

would say there was a good question somebody had asked about whether or not there was a concern of bankruptcies picking up in the aftermath of the student loan issues and the Supreme Court throwing out that decision or that attempted action from the Biden administration. You may benefit from that answer there. In the meantime, Div in a Cafe tomorrow, really unpacking questions, multi-topic. It's a lot of fun. Look forward to Div Cafe tomorrow and a big full week next week thanks for listening thanks for watching and thank you for reading the dc today the bonson group is a group of investment professionals registered with hightower

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