The Dividend Cafe - The DC Today - Thursday, October 12, 2023

Episode Date: October 12, 2023

Today's Post -https://bahnsen.co/3FkhgKh The headline and Core CPI figures today were largely in line with expectations as the market opened. However, we witnessed a reversal of early morning gains throughout the session, resulting in both stocks and bonds closing lower. Interestingly, Fed futures remained relatively unchanged after the release of these numbers, hovering at approximately two-thirds, suggesting that the Fed is unlikely to make any significant changes in the foreseeable future. Today marks the one-year anniversary of the market lows experienced last year. What’s intriguing, though, are the disparities within the markets that contributed to the S&P 500’s impressive 22% gain over the past year, following a significant downturn in the previous year. Currently, less than half of the market is trading above its 200-day moving averages, indicating that the market’s performance has been far from universally strong. Financials, in particular, have experienced a nearly 20% decline during this recovery, and it’s worth noting that this has been the weakest small-cap return following a market bottom in history. However, there is good news amidst this divergence. The contrast between interest rate-sensitive sectors, such as small caps and financials, and the lack of broad market participation presents numerous opportunities for value investors like ourselves to look forward to. Active management will be crucial in navigating this complex landscape. 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. Brian Seitel here with you and coming to you from our studio here in New York City in our office on 44th and Lexington and had a down day in markets although you know before markets opened we were up a little bit on futures about 140 points there was a CPI number released around 8 30 eastern that was basically in line really with expectations we had a headline number that was up 0.4 and 0.3 was expected, basically the same in a 3.7% year over year on headline CPI. Core, which strips out things like volatile food and energy out of that, was up 0.3% for the month and then 4.1% on the year. So maybe a 10th higher than expected, but basically in line. There was a 30-year treasury auction today that went a little worse than expected,

meaning that the rate was higher for it to close. And so interest rates kind of moved higher on the day. And I really think that was what drove stocks lower, at least. Bonds were lower, so yields were up. The 10-year was up 10 basis points on the day, closed at just over 470 on the 10-year. So we've got a little move in interest rates. Like I said, CPI inflation reading was basically in line. And I think it's notable, really, that inside of that number, and we've talked about this, but we still have an owner's equivalent rent figure in there that is a monthly average. So it's a pretty lagging number on inflation of housing. And it's at a 7.1% rate inside of that number, which is a third of the

calculation. So if you think about a third times 7.1, it's like a 2.5% figure added into the 4.1% year-over-year number. So if you strip the 7% owner's equivalent rent down to something normal, which the Zillow rent index right now is around three. So if you just chose something more real-time instead of an average going backwards, but what people are actually paying in lease payments now, say it's a 3% inflation rate, then you get a total CPI number of right around the Fed target, which is 2.2. So on the day stocks were down, but the futures, at least on Fed funds, really didn't move a whole lot. It's for the most part, about a 70% chance the Fed is done for the next, call it three, through the remainder of the year into the following, into 2024. So again, I still think that we're there on peak rates. I think the

amount of financial tightening that we've seen over the past couple of months has done the work for them as far as them needing to do another rate hike. And I think we're in a restrictive stance at this point to sort of bring down inflation. And that's what they're trying to get. We had a jobs number today that came out in line with a jobless claims number of 207. So still, labor market is very healthy. That's not a bad thing. That's a good thing. Inflation numbers coming lower. It's kind of sticky because, again, that sort of housing number that's inside of it there. On the market, on the stock market, today technically is the 12-month anniversary, I guess we can call it anniversary, of the low of last year.

So October 12th of 22, markets were at a low. And intraday the following day, it made it a little bit lower mark, but then sort of started moving higher from there. And we're technically up 22% from that period of time at 12 months ago in the S&P 500. And we've written about this, but it's driven by basically seven stocks. And those seven technology stocks that were down a ton in 2022 are now rebounded and are up in 2023. And they make up a third of the S&P. And so that's where you've got this sort of, technically, it's a bull market. It's a greater than 20% move from the low. But I think it's notable during that up period of time with what you've seen inside of the market, which is what

I just said. It's really driven by a couple of companies. The rest of the market has not participated. So if you look at the percentage of stocks that are above their 200-day moving average, for example, which would speak to momentum in markets, it's only about 44%. So most of the market hasn't experienced it. In fact, if you take out those seven big companies that, again, went down a lot last year and up this year, the remaining 493 on average are about flat on the year. The remaining 493 on average are about flat on the air. So small caps had the smallest bull run off of the market low ever.

They're only up about 5%, which would be really unusual. And things like a sector like financials is actually down 18% from a low. So you had a 20% move up in S&P or 22%, and then a down 18% financials. That's also never happened before. But I think there's an intuitive explanation for it, which is that we've never gone from zero to 5.5% in one year either. So there you go. Interest rate sensitive sectors in the market, like small cap stocks, which borrow more money and are more susceptible to interest rate shocks and things like financials with an inverted yield curve aren't making money. And I think that's reflected in the stock prices. And technically, let me back up. Financials are making money.

It's not that they aren't. I guess it's more of a more of a stock story with it. But an inverted yield curve is not good for the sector overall. So those are some of the intuitive reasons why. And I put a note in there, which is that the good news is, if you look forward now, and we kind of know that rates probably aren't going to go from five and a half to 11 over the next 12 months, so the same thing won't repeat, then I would suspect that you'll see sort of an opposite occur going forward, which is some of the lagging parts of the market. I'm using financials and small caps as an example,

but there are others, are likely to outperform. But either way, the point is that going forward, it's an active management story. And I think it'll be more important now more than ever. And I don't think it's normal that you have an entire market off of a market low driven by just a couple of companies like that. So with that, we're in New York this week, or I am this week and next week. We have our sort of annual portfolio money manager meetings lined up. There's more than a dozen, 15 probably, something like that, meetings next week, including some dinners with some great research folks that I'm really excited about. We have a symposium we're attending with Jay Powell, the Fed chair, which should be really

good. And so there'll be lots and lots of notes and lots and lots of discussions, but it's something that we've done for many, many years. And it just has a ton of value inside of the investment committee. So we're here rocking and rolling and doing that. And so stay tuned there. As always, reach out with questions. Had a lovely drive out to Connecticut to see some clients today. So I'm going to call it a day here in a little bit. But it's been great, as always, talking with you.

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