The Dividend Cafe - The DC Today - Thursday, March 23, 2023

Episode Date: March 23, 2023

Today's Post - https://bahnsen.co/3TGllyM That the market gave up -500 points in fifteen minutes at the end of the day yesterday but then rebounded +500 points this morning is, to me, validation of my theory regarding yesterday: that it was a closing speculative trade. Fundamentally, the facts on the table (where they are known) are not really subject to much debate. So an interesting thing happened on the way home from processing the Fed’s announcement yesterday … Math. The Fed is now projecting a +0.4% real GDP growth rate this year, yet a +3.2% growth rate is currently showing in the Atlanta Fed model for Q1 (others have it at +2% and others at +2.5%). Regardless of whether or not Q1 comes in at +2% or +3% (and this always refers to an annualized quarterly number), you can’t get from there to +0.4% on the year without … wait for it … a recession. But the Fed is also showing a projection of no rate cuts this year. And Powell is talking about a credit crunch coming and the financial markets doing their tightening for them. And the first two years of the yield curve are entirely inverted. And the futures market expectation for the 3-month t-bill rate (currently 4.75%) is that in 18 months, it will be below 3.5%. So what should we make of this? 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 Thursday DC Today. We're getting ready to come to the end of the week. to the end of the week. Excited for the dividend cafe tomorrow. We're going to talk at great length about Credit Suisse and kind of things happening on Sundays in the financial markets these days. But for today, I want to kind of pick up where I left off yesterday, because the market went down 500 points in the last 15 minutes yesterday. and I said it was not in response to what the Fed said and didn't say because the Fed said it two hours before that. And so the market went higher after the Fed made their announcement, and then it kind of stayed up there, even as Jay Powell was doing his press conference. And that the best theory to me, if you believe as I do in Occam's razor,

the simplest explanation is almost always the right one. And the simplest one here was that there were traders who had a long position on the idea of uber dovishness and that they let it ride. And then at whatever point they realized we weren't getting any more juice out of this, they cut loose. You had a lot of selling pressure that brought markets down suddenly and quickly at the end of the day. And then we were up nearly 500 points. I don't think it ever got quite to 500, but I saw it above 450. So it kind of made all of that 15-minute dump back this morning. And again, there could be another explanation, but I think the simplest is usually the best.

And I think it sort of validates what I was saying, that normalizing for kind of where things were. Now, then several hours later today, the market did give that 500 up. It even went negative for a little bit. Then it kind of came back at the end of the day and closed up 75 points. So on the week now, I think I'm remembering correctly that the Dow was up 375, up 375, down 500, and now up 75. And so still net up on the week, but with pretty significant intraday volatility. And this is the world that we're in now. I want to point something out on the math of what the Fed said yesterday. The Fed is right now projecting two different things, one about interest rates, one about economic growth. And I just want you to decide if you

think both of these things can and will prove true. Right now, the Atlanta Fed tracker has GDP growth annualized for Q1 at 3.2 percent. And that's a kind of real time model that could be capturing some data that ends up being antiquated. It's not a perfect track record, but I think that there are various sources that are projecting 2 percent and some 2.5%. And like I said, the Atlanta Fed tracker right now indicating 3.2% as an annualized growth rate for Q1. But the Fed has us closing the year at 0.4% for 2023, year-over-year annualized growth. year-over-year annualized growth. So if you're getting 2% or 3% in Q1 and you end up at 0.4%, you had a recession.

You did not get there without a contraction and a rather significant one of that. Maybe the Fed's wrong about that. I don't have any opinion either way. But when you see that that's the projection of what they're talking about in terms of economic growth, and then you see them saying that they are not anticipating any rate cuts this year, even at the end of the year, I don't believe both things. So one of them could be wrong and not the other, and you're looking to pick which. But I don't think both make sense. The other thing I would do, I put in the DCToday.com the written exact verbatim quote from Jay Powell one year ago,

but essentially talked about, and I think he's right about this, by the way, the inversion of the yield curve primarily mattering in the first kind of 18 months of the term structure. Right now, from the one year all the way to the 10 year, everywhere in between, every point on the yield curve has a lower yield than the current Fed funds rate. And what Jay Powell said a year ago is that if that happens in the first kind of 18 months, then you've inverted your yield curve and you're going to have to cut rates. And you've probably created a recession and you're going to have to cut rates. And so by Powell's own messaging, and not from some obscure paper he wrote 18 years ago. I'm saying something he said one year ago. As chairman of the Fed, they are in a position where they're going to have to cut now

to deal with what they've done. And yet yesterday they raised rates of a quarter point. So why does the market believe that they're going to have to cut by the end of the year? Because they think it's going to have to take back what they just got done doing. We closed today at I believe it's 56 percent excuse me I'm sorry 66 percent odds of no rate hike at the next meeting 34 percent of another quarter point that had been 50-ish 50-ish before and it's kind of moved that direction but when you're talking about what Powell said a year ago and the reality of the yield curve already being below where the current Fed funds rate is, when you're talking about them projecting an economic activity that would be the

prime stuff that rate cuts are made for, I think they're done. I think cuts are coming by the end of the year, and I think that they're done. And I think that the data says it, and I think that the qualitative evidence suggests the same. In the meantime, the 10-year today hit 3.42%. 3.42%. I'll remind you we were above 4.2% a short while ago. The only sectors that really were up today

are communication services and technology, communications being at the top. Energy was the worst, but it wasn't down huge. But there was definitely not great breadth in the market today. So they're digesting this reality about the Fed, digesting what the Fed means, not what they say. And still First Republic's out lingering. And I don't know that all the tensions about the banking system are resolved yet.

This is the state of markets. Expect ongoing volatility. We're higher than we were, even with up and down, up and down movements. That's our story. That's the story at the DC Today. Thanks for listening. Thanks for watching. Thanks for reading. And I'll see you in the Dividend Cafe tomorrow. 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.

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