The Dividend Cafe - The DC Today - Thursday, October 13, 2022

Episode Date: October 13, 2022

Okay, so one of the largest intra-day market moves on record (from down -550 to up +950 – a 1,500 bottom-to-top move today). So there is market action AND inflation/economic action to unpack, and you have come to the right place: MARKET ACTION Dow: Up +828 points (+2.83%) – was down -550 points at the low S&P: +2.60% Nasdaq: 2.23% 10-Year Treasury Yield: 3.95% (+5 basis points) Top-performing sector: Financials (+4.14%) – I am not going to take the time to look it up, but I will safely guess that this is the best day in years for Financials; in fact, I bet HALF of this would be the best day of 2022 for financials … NOTE: Energy was right behind it at +4.08% Bottom-performing sector: Consumer Discretionary (+0.98%) WTI Crude Oil: $89.25/barrel (+2.27%) Key Economic Point of the Day: CPI (headline) increased +0.4% for the month where +0.3% had been expected. Headline inflation is up +8.2% on the year vs. a peak of +8.9% several months back. Core CPI (ex food and energy) was up +0.6% in September. Energy prices fell -2.1% but food prices increased +0.8%. It is all about food inflation in the aggregate data. Services is the source of increased inflation. Rents were up +0.8% on the month and primary residence impact is up +7.2% year-over-year. This is simply not true in the present tense but the lag effect is the driver here as we shall all see in a couple months’ time. The Fed has NO influence on this, but Health insurance prices were up a staggering 2.1% on the month and are up +28% on the year Airfare is up 43% on the year (base effect from limited travel a year ago) Goods prices were FLAT – slowest year-over-year increase since May 2021 (+6.6%) Used car prices down -1.1% on the month Clothing down -0.3% Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to a very exciting DC Today and what was an absolutely bizarre market day. You had futures up about 350 points this morning. And I'm guessing this was about 345 in the morning. And after the CPI report came a couple hours later, in one minute, they had dropped to negative 300. So you had a 650 point swing in futures. And then the market itself opened 6.30 a.m. Pacific time, 9.30 a.m. Eastern. The market opened down 550 points, kind of batted around there for a few minutes, but really proved to be the low of the day. And as I sit here, the Dow closed up 828 points. It was at one point up 950. So you had a 1500 point swing from the low point of the day to the high point of the day. And you closed pretty near the high of the day. Dow up 2.83% and the S&P up 2.6%.

And the NASDAQ up 2.23%. Interesting in a number of levels, by the way, that on very high beta days like this, meaning it's risk on and everything is rallying, the biggest rally generally is in the most aggressive, growthy, junky, high valuation type stuff. And today it was kind of a quality rally. The top performing sector was financials. It was up 4.14%.

And I didn't look this up. So I don't know if what I'm saying is true. But I would very much speculate that this is the best day in years for financials. I can't recall seeing the financial sector up that much in one day in quite a while. But I would guess it's double the best day we've had on financials for this calendar year. 2022, I don't think, has had very many days up 2%, 2.5% and up over 4% today. And energy was right behind it, was up 4.08. So you really just had a very odd day.

The treasury yield of the 10-year was up five basis points. So you're still up in the three nines range, started 390, ended 395 on the 10 year. So you didn't have a collapse of bond yields. Now you did have the British 30 year is back down to four and a half. It had been at 510. So it's given up 50, 60 basis points. There's clearly been a lot of de-levering and there's clearly been the threat of or actual intervention from the Bank of England to push that down. But if one's looking for a catalyst to explain why the market would start down 550 and close up over 800, I think you have to get to what caused that initial market swing, the CPI number, and unpack a few things around the inflation story.

So first and foremost, I just want to point out that the sentiment in the market has been so bad that you're going to get rally days like this. When people are at maximum bearishness and sentiment, those are prime opportunities for big rally days. You just do not want to be investing with the herd. Now, you really never want to be, but you certainly don't want to be in an environment like this. And I think that sentiment piling on one side makes you extraordinarily subject to reversal. Some of those reasons are just the laws of nature and the laws of the universe, that contrary reality of when everyone is on one side of the boat, the markets move the other way. But some of it is technical, that there's literally what's called a

short covering rally when there's enough people that have bet against something. The only way they make money on being right is to buy back what they shorted. And that creates sometimes a rally to the upside. So you have sentiment. You had the fact that there's probably some short covering, but there wasn't a particular news. There wasn't a press conference. There wasn't Jay Powell saying, haha, just kidding. There was nothing like that. So let's talk about what did happen with the CPI number and see if we can't make even more sense of this. I happen to think we can. So, okay, the CPI headline inflation was up 0.4% for the month, and that was more than expected.

So all of the news headlines you're going to see about, wow, inflation was worse than had been anticipated. It was anticipated to be 0.3% in the month, and it came in at 0.4%. And so, yes, the headline inflation, which includes energy and food, was a very tiny bit worse than expected. Headline inflation was up 8.2% on the year, meaning year over year where it was last year. Prices were 8.2% higher. The number had been 8.9% a few months back, just shy of 9%. So you have a very high overall inflation rate that on the

month was a tiny bit higher than expected. And it has come down versus a year ago in terms of what it's a year over year increases. But let's unpack a few more details. You tell me what you think. That's why I'm going to keep the readers on until I get through this part. Core CPI. So core inflation is headline inflation minus food and energy. Why did they create something called core CPI to take out food and energy when people do eat and people do drive? Because those numbers can be extra volatile. And so it just gives a secondary measurement to the price level. Both core inflation or a core price level and a headline price level are a myth, but they do the best they can. Core CPI was up 0.6% in September,

and that was with energy prices falling 2.1%. So core was up because food prices increased 0.8 and overall headline inflation was still up. The key issue here right now for the aggregated data is the food inflation. Energy has come down two months in a row. It certainly seems so stabilized. Perhaps it comes back up a bit more or lower. But the point being, it's well off of where it was several months ago. And yet these numbers have still gone higher. And as we're about to see in a moment, there's a lot of mixed bags within goods and within services. And yet

inflation going higher in a way that becomes politically problematic and driving some of these narratives. It really is about food. and driving some of these narratives, it really is about food. Services is the source of increased inflation in the sense that overall goods inflation was totally flat. Goods prices were flat. You had the slowest year-over-year increase in goods since we've had, let's see, it's May of 21, so almost a year and a half. Year-over-year goods inflation is all the way down to 6.6.

It's come down almost 2%. That's something I talked about a lot earlier in the year. In the month in which I said goods inflation had peaked, it absolutely, I think that was March. It may have been April, but it absolutely proved to be the peak month. So you have things like used car prices are down 1.1%. Clothing, apparel is down 0.3% within goods. But you have airfare up 43% on the year. Now that's a little distorted because the base effect of a year ago, airfare costs were much, much lower. And then there's things

like health insurance prices that were up 2.1% on the month and up 28% on the year. And I would love for someone to tell me what they think the Fed can do with interest rates about health insurance. And that is completely outside of the Fed's purview. And that's a significant part of inflation. It's certainly a part of what people are experiencing in their wallets. The number one thing that matters in understanding the measurement is the way in which rents and owner equivalent cost of housing is measured. Rents were up 0.8% in the month. up 0.8% on the month. And that impact of how residential cost is factored in is 7.2% year over year. And it just simply isn't true in the present tense. But the methodology that they've consistently used and applied, I'm not suggesting they change the methodology, but my point is that it's really

measuring the way rent prices were moving three or four months ago. And in the present environment where there is a bit more anecdotal support of what people see at street level now, I'm going to put a chart, by the way, in DC Today on this on Monday, rents are dropping nationwide and quite significantly. And there, I don't mean the level of rent increase went from seven to six. I mean, the level of rent increase went negative. The rent prices are dropping. This is the mathematical or English vocabulary difference between disinflation and deflation. But again, that's not being measured in the services component yet. That's a lag effect. It kicks in in a couple of months.

So these things just have to be understood that they're lingering out there. So at the end of the day, what do I have here? Four quick takeaways. We'll wrap up. Food inflation is the real challenge in the price level right now. Rent and housing is the challenge in the data, but not in real life, meaning anyone looking to buy or rent right now knows it's a very different environment than it was three or four months ago.

I anticipate that being a bit different in the data in December. And then number three, goods inflation peaked a while back. And number four, it's laughable, laughable that the Fed would be able to do anything about food inflation or health insurance prices. But this is where we find ourselves. So you might think that beyond the sentiment reality and contrarian facts that play into the market reversal today, you might think that maybe the CPI number as a headline and as a trigger to algorithmic activity that could see futures drop 600 points in one minute, that could see futures drop 600 points in one minute, that maybe some of those things, once more properly understood and digested,

are being viewed as, okay, it is the peak level, that we will start seeing it go differently. The Fed isn't going to be rushing to slash rates anytime soon, but the market is starting to price some of these things in ahead of time. That could change. I could be wrong. I'm not betting anybody's investment portfolio or positioning on it, but do I think it's the most plausible scenario that there are going to be a series of events that indicate a kind of beginning of the end that then represents the market factoring in and discounting a long time in advance of the actual action, some of these things. I do. I do think that. So that's where we find ourselves. I have no reason to believe that there will not be more

days where the markets drop a lot. Other days it reverses because I think volatility is this normal environment right now. And it could be parts from earnings season. It could be more inflation data, more Fed activity, certainly geopolitical type catalyst. bound, when you have these kind of very idiosyncratic things happening in government bond yields, like we've seen in the UK that I talked about yesterday, I think you have to count on more volatility and just expect intraday volatility, not 1500 points intraday. I mean, that's something else. That's a big deal. We've had bigger intradays when the market drops 3,000 points like it did in March of 2020 or two different days it dropped 2,000 points and some days it was up 2,000 points. Obviously, the intraday volatility is higher on days like that.

But this was interesting because the intraday volatility was almost double the actual price movement up. And yet we closed near a high, meaning we went from really down a lot to really up a lot. So we'll see what Friday holds. We'll see what Monday holds.

You know, the beat goes on. Earnings season accelerates a bit more next week. We'll talk more about earnings and so forth then. I wish I could tell you what I'm going to write Dividend Cafe about tomorrow, but I don't know. I have two different topics that I'm debating between. And if I say what they are, then I think I'm going to get like 600 or 700 emails with your vote.

And I kind of want to avoid that in my inbox. So I'm just going to figure it out myself. I'll be writing Dividend Cafe very, very early Friday morning. And I will look forward to seeing you all at Dividend Cafe tomorrow, Friday. And I do hope you'll reach out with any questions you have here in the DC today. Questions at thebonsongroup.com. Thanks for listening to and watching DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities

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