The Dividend Cafe - The DC Today - Thursday November 3, 2022

Episode Date: November 3, 2022

MARKET ACTION Dow: -146 points (-0.46%) S&P: -1.06% Nasdaq: -1.73% 10-Year Treasury Yield: 4.15% (+9 basis points) Top-performing sector: Energy (+2.04 xxx%) Bottom-performing sector: Technology (-3.00%) and Communication Services -2.83% WTI Crude Oil: $87.95/barrel (-2.29%) Key Economic Point of the Day: 1.485 million continuing claims (up 47k, most since March) ISM Services came in at 54.4 – still expansionary but a point lower than expected, and with New Orders dropping 4 points ASK DAVID “I enjoy listening to your podcasts – thank you for the insights! I am sitting on cash – about 75% of my investable assets. What would be a good philosophy of when to get back into the market and how? I am a believer in dividend based investing.” ~ Adrian One first has to start with the basic principles – not getting invested in a dividend equity portfolio with cash is a riskier than getting invested in one. The reason not to invest immediately is either (a) A belief about market timing that is not grounded in reality, or (b) A desire to not invest all at once at an inopportune time (that being revealed to you in hindsight, not in advance). I reject reason A and am sympathetic to reason B, as long as one does the needed self-assessment to see that reason B is psychological and emotional, not financial or rational. So then if the desire to mitigate timing risk is psychologically helpful, I advise deploying no less than 50% at once, and then the rest either over a period of time periodically (say, 1/10th of the remainder each month for ten months), or tactically (each “bad” down day in markets deploying more). I have no statistical or empirical argument for one over the other as it pertains to how to deploy the second 50%, but feel strongly about getting 50% of uninvested cash at once. Links mentioned in this episode: 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 DC Today. You have no idea how quickly I have arrived from the airport. I flew very early out of Grand Rapids, Michigan this morning through Denver, came back to Newport Beach right as the market was closing. And now I'm sitting in the studio of our Newport office recording today's DC Today. It was an interesting

day in the markets. Of course, because my day starts so early and I was on East Coast, I was really early into the futures and I would have bet that you were going to have a real significant sell-off today as the futures were piling on the late day sell-off from yesterday. And it ended up being a very bizarre day. Not only did the Dow open down a couple of points and then worsened, but then it came all the way back up and actually went positive. And then in the final 15 minutes or so, we're back to this charade again.

It dropped off. But the Dow closed down only 146 points. Now, the S&P was down over 1%, a little bit over 1%. And the NASDAQ was down 1.73%. You combine that to what the NASDAQ sell-off was yesterday. Now you're starting to talk about a real sell-off, but very little, very benign, especially over a three, four, five-day period in the Dow, in value, in old line companies, in blue chips. But yeah, this is a pretty significant drawdown now in the last few days on the tech side.

Tech was the worst performing sector today. It was down 3%. Communication services, its sister, cousin sector was down 2.8%. So basically, both of the sort of techie sectors were down 3%. Energy was the best performing sector. It was up over 2%. And it was a bit more mixed of a day than some of the market averages indicate. I know on my screen, just a tiny bit less than half of our stocks were up today and a little more than half were down. So that's

generally an indication of kind of a mixed bag across sectors and certain names. And the energy stuff helped as well. The 10-year treasury was up nine basis points. It's yield to 415. And so I'm trying to think where it started yesterday. That's a meaningful move. Not like last time. And it hasn't come up and retested the prior highs. It may do so, but it hasn't yet. But again, you're still dealing with quite an inversion in the curve between the short end and the long end. Yesterday's sell-off, by the way, the breadth, which is sort of the amount of advancers to decliners or vice versa, advancers to decliners or vice versa to give you an indication of kind of, again, the word breadth across what level of market participation and either an up move or down move. And you did have an eight to one decliner to advancer ratio yesterday. And so we've had plenty of those

this year, but I mean, that was pretty solid breadth. I've seen much worse this year, but it wasn't anything good. But the thing I want to point out is Apple as a big tech company is one of the few that had rallied after its earnings this season, where Facebook, Google, Microsoft got hammered. Amazon got hammered. Apple had rallied. And then with the Fed's announcement, yesterday's sell-off and now today was down another, I think, three or four percent. Apple gave all of that rally back and then some in just minutes. Yesterday, it was about 20 minutes to get rid of about five days of return. And so I don't bring that up with any indication or any thought or any comment about an outlook for those particular companies. I bring it

up to say that the market is punishing the top of the cap stack. The larger capitalizations are getting hit, the larger PEs and particularly those sectors. And that's kind of inside our vein of a long duration stock situation that are most vulnerable and shorter duration stocks that are much more defensive in this environment. An interesting tidbit I'll share, the last time the Fed funds rate was at 4% and the Fed was still in the tightening mode, the S&P multiple, this is back to 2005, by the way. The S&P's multiple is about 15 times earnings. It's currently getting down near 16 times. But it's so fascinating because this is all pre-GFC stuff.

Financials were the largest sector. Keep in mind, 2005 was only five years after the tech blow up and tech had not come back yet. And people forget that because it had such a monstrous decade, last decade. But it wasn't like the NASDAQ imploded in 2000 and two years later, tech was back or three years later. In 2005, financials were the largest sector within the index but by largest they made up about 20 percent of the S&P now tech is the largest and that's with them carving out communication services which used to be considered part of tech by the way and tech right now is 26 percent of the market and it at the beginning of the year, it was over 30.

And so that's a byproduct of other sectors coming up so much and tech coming down so much. But another factor I'll share, and this could be a bullish indicator if you think historical comparisons matter. I don't think they do. But I share it for a reference point. Investment grade spreads were 100. They're 150 now, meaning investment grade corporate bonds averaged 100 basis points wide. So they were much richer.

And now they're 150 wide, meaning they're much cheaper. High yield was at 350. much cheaper. High yield was at 350. So 3.5% higher yield for junk bonds than treasury bonds in 2005. Now it's up to 450. So you don't have recession-like spreads in high yield, but you're a lot richer than you were in 20055, excuse me, cheaper than you were in 05. And the market multiple is not all that far apart. So interesting. It is still a little bit more expensive though, but I just wanted to provide some historical comparison. In the news, I don't have much to say. Bibi Netanyahu is back in Israel. I think he's now done like 32 terms or something. I don't know. But it's a pretty amazing political story. And so our congratulations to Netanyahu and his campaign.

Okay, Fed stuff. The Bank of England raised 75 basis points today, as our Fed did in America yesterday. We were expecting that. One noteworthy thing, it's a little tiny but different. But they said they actually called out financial market expectations and said financial markets are anticipating a rate potentially higher than what we might do if conditions call for us to tighten at a slower pace. So they basically said something similar to what Powell said yesterday. Like, look, if conditions warrant, we may slow down how quickly we're tightening. But then the Bank of England added, and the financial markets might be overestimating

how tight we're going to be. And I haven't seen that from a central bank. And so we'll see if that's somewhat indicating of other rhetoric that may be forthcoming from other central banks. I will point out most of this, by the way, you're still thousands of points higher than you were a few weeks ago, but most of what's happened in the last day or two, particularly long duration stocks, is that the terminal rate of Fed funds across the term structure, so not just in January, of Fed funds across the term structure. So not just in January, not just in June, but across the entire maturity spectrum rate went up about 20 basis points. So the market had whatever they were expecting in Fed funds. I won't get into all that detail month by month over about, I think I looked out about nine months. All nine months, it was raised proportionately,

about 20 basis points. So that's kind of the story here. Economically, 1.485 million continuing job claims. So that's up 47,000. The weekly initial jobless claims were 217, 218. They were right, I think, within 1,000 of expectation. It's higher than it had gone a few weeks ago, but it's nothing to write home about. But this is the most since March that the continuing jobless claims have hit. And I've said it before, we have to allow a few weeks of a cycle to see, particularly with continuing, because they only report every other week, the weekly or weekly. So I want to get more of a run rate before I interpret that data. ISM services came in at 54.4. So it's still plenty expansionary, but it was expected to be 55.4. So it was a full point lower than expected. But what stuck out to me was that new orders

dropped four points. So it continues to be certain indications of economic slowness, other indications of economic strength or resilience. I've said it a million times. I can't stop saying it because the data points keep indicating it. There's a lot of back and forth interpretation in various differing economic data points. The BLS jobs data will come out at 5.30 a.m. Pacific time tomorrow, Friday, and expect to hear a lot of really, really dumb things said about that. I'm looking forward to the Dividend Cafe tomorrow. It's going to be all about dividends and a particular angle on dividend investing I want you to consider. And what else?

Monday will be our normal long form DC Today. Tuesday, we'll do our regular video podcast like we're doing right now with a commentary and synopsis of the market. But then Wednesday, I will be doing in the morning, written commentary on the midterm elections from the night before. But then after the market, Wednesday, Thursday, there won't be a DC Today. We have all 50 of the employees of the Bonson Group on planes headed to our Nashville office, where we will be for our offsite team retreat at a undisclosed location in downtown Nashville for starting Wednesday night through the weekend, into the weekend. So there will be a Dividend Cafe Friday.

There will not be a DC Today next Thursday. There will not be a DC Today next Wednesday, but there will be a midterm election commentary that we'll write and get out Wednesday morning. And I just wanted to prep you for those things for next week. That's all I got. Reach out with any questions, questions at thebonsongroup.com. And thank you for listening to this Thursday edition of the DC Today. Thank you. 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. The Bonser Group and Hightower shall not in any way be liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. contained in or omissions from the obtained data and information referenced herein.

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