The Dividend Cafe - The DC Today - Thursday, November 2, 2023

Episode Date: November 2, 2023

Today's Post - Big rally day, with markets posting a very nice fourth day of gains, closing up 564 points and putting us now up almost 5% on the week. While I would love to say it’s off to the races, under the hood, the relative underperformance of the higher beta components of the market just feels less convincing. Another bond market rally day as well, with 10’s coming down another nine bps to now 4.67%, along with continued yield curve volatility. Following a slightly lighter-than-expected Treasury issuance report that was more front-end loaded on the curve and QT, which has removed the largest buyer of the front end, we’ve gone from 18bps inverted yesterday morning to now 30bps. For those citing the historical track record of an inverted curve un-inverting just before a recession starts (looking at you ‘bond king’), the last two days have us in the opposite direction. 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. Today is November the 2nd, and nice rally day on the market today. We were up 564 points on the Dow. So pretty broad based across the board in markets. It puts us up about 5% on the week so far if we were to close here.

But it's not Friday. So we still have tomorrow and we'll see where that kind of gets us. But if it did close here, it would basically be the best week of the year so far, going back about 12 months to November of last year. So a nice little move to the upside. A lot of it has to do with some perceived certainty. I guess there really isn't ever total certainty, but on interest rates, yesterday the Fed kind of left rates unchanged. They've done that for the second time, second meeting that they've left them the same. And since then, most of the yield curve has moved lower. So meaning the bonds have rallied. The long end of the curve has rallied much more. So the yield curve technically,

which was, it's been inverted for a long time, a year almost, has started to un-invert a little bit, meaning that it was negative 100 plus basis points at one point. And as of yesterday morning, was down to about 16 to 18 basis points inverted. And so now we're kind of going the other way, which is that the short end of the curve is selling off in price and then rallying in yields. So long short-term rates have gone up a little bit. When I say a little bit today, twos were up like two basis points. So not, not much of a move, but the long end has gone north of 515 on tens or 510 at least to now 457. So you've had rates kind of come down a long end and then on the, on the short end, they've stayed high. And so we've got more inversion. We're inverted now by about 30 basis points. So I put a note in there, but for all of those saying that

the inverted yield curve un-inverts right before a recession. I mean, history can, depending on what statistic you look at and what chart, I think you can paint a lot of different pictures. That's technically true, but it doesn't necessarily mean that that's true this time. So, you know, we'll have to see. But it's a kind of a common thing that people are talking about. It kind of makes sense to me, too, on why that's happening. You basically have an issuance report from Treasury yesterday that had, it was actually a little bit lighter than expected, which was surprising to markets and appreciated. But you had more of a focus on the short end, which is what they basically always do. But it was even more of a focus than they usually do, meaning that they're going to issue

more short term debt. So with more supply in the same demand, you would think that rates would go up a little bit on that. And then the other thing is that with the Fed letting their balance sheet roll off, they've let roll off about $800 billion so far in the last 15 months. And what that means is just they're not reinvesting interest into new bonds. As bonds mature, they're not reinvesting the interest and then they're not reinvesting the proceeds from principal that they receive back into new bonds. So just by definition, the stuff that's maturing is on the short end as well. So the biggest buyer of the short end isn't there. And then you have a little more issuance.

And I think that's what's causing this steepening, unsteepening of the yield curve, inverted, more of an inversion. You have, you know, so Fed's on hold. I mean, globally, we're seeing obviously a slowdown in China. We're seeing now a slight contraction technically in Europe by a one-tenth of a percent. We'll see if that lasts. But my point is just most central banks around the world are on hold. And if you're asking me two things, one, which direction do I think interest rates will ultimately go in the near future? And also, which central bank will sort of blink first? I mean, if everybody's on hold, the next direction is either up or down or the same. And if it's going to be one of those two things, I would bet, if I were a betting man,

that it would be lower. And if you had to bet which area it would be, it seems to me with a 4.9% GDP reprint in the US and a slow Europe, flat to negative slightly, that the ECB would be the one to do it. All these central banks are looking at inflation. And so that's the deal. And the question of whether unemployment needs to go from 3.8 upwards for inflation to go down, aka the Phillips curve, is to be seen. And I'd say that it doesn't. And I think so long as you get definitive prints of normalized inflation, the central banks are going to be pretty quick to pull back on where they have taken rates so far, so fast. So what's the trade in all that? I mean, arguably, most of the yield curve is in the bond

market in that. But it's a tough call to get right. And so, you know, our positioning that, you know, isn't trying to time necessarily that that occurring, but it's more around what's more probable to happen. And that's the way I see it. You know, right now we're sitting at a budget deficit of seven percent of GDP. Historically, that's that's that's high. It's quite high. 7% of GDP. Historically, that's high. It's quite high. We've had it in wartime and different periods of time. It's been there before, but we're not in wartime. There are some things going on in the world that we're supporting, so don't take that the wrong way, but we aren't in a world war at this point or anything like that where a massive amount of expenditure needs to go into defense. We're at 7% of GDP, and that's during a time of full employment. We're at 3.8% unemployment. So we're sitting at a fiscal budget right now of about 24.2% of GDP. That's high. One of the biggest components of what's increasing in this thing right now

is interest expense. A lot of treasuries and debt in the country is short term. And so as it matures, it gets rolled over at much higher interest rates. And so interest expense is now about 14.8% of tax receipts. So almost 15% of tax receipts is just going to pay the interest. And that deficit that I mentioned of 7% of GDP, the biggest, or not the biggest, defense spending is going up as well. But as far as the rate of change, the fastest thing changing is interest expense. You also have potentially a looming government shutdown. And then you also have an election year coming up. And you also have inflation pulling back. And while GDP was 4.9% on the quarter,

on third quarter, it's estimated now for fourth quarter, we're looking at more like a 1% trend. So you have a slowing economy. You have inflation that's moving lower. And then you have these things like deficits and interest expense and elections and some political turmoil. So it's just, there's a lot of recipe to kind of vote for rates, you know, ultimately moving lower here sometime in 2024. Fed futures is saying that as well, but we'll see how this all kind of plays out. The other thing I'll say is this is not necessarily predictive and markets could definitely do, you know, opposite things that then what is intuitive. But if you think that the U US economy may be sort of the

cleaner dirty shirt in the pile of laundry around the world between Europe, China, Japan, and maybe our Fed has some more staying power with where they're going to keep interest rates, and maybe Europe, for example, lowers rates first. If you think about what that does to a relative value of currency, say the dollar would appreciate. And I think that that likely is going to be the case if that plays out and probably will stay that way until there's a crack in US growth. Again, I'm talking relative versus something like the euro. So is parity on the horizon? will tell but again I would take the over on that you know that's a lot to chew

through there again I'm happy to see a great day in the market you know this year and frankly the last two years have not been that friendly so we're getting a little reprieve on the week it's obviously a short period of time but we will take it.

With that, I'm going to let you go for the night. Wish everyone a good night. And please reach out with your questions. I'll answer them just as soon as I possibly can, as I always do. And I hope you have a good evening. We'll talk to you soon. Thanks. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. 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. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable.

Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. Thank you. 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.