The Dividend Cafe - The DC Today - Thursday, September 21, 2023

Episode Date: September 21, 2023

Today's Post - https://bahnsen.co/48s8IyG The violence was most felt in the bond market as yields rallied dramatically at the long end of the curve. As yields did not move much (or at all) in the short end of the curve, you saw a fair amount of inversion eroded. It is all a rate story now – as stocks are following bonds, not vice versa. QT is tightening, and high rates are tightening (with the bond market doing more of it for them). Something has to break eventually. The Bank of England also left its interest rate alone, pausing after 14 consecutive increases. The House GOP was four votes short of having the votes needed to advance their compromise funding bill. Some tweaks are in motion to allow for a new vote next week. 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 the Thursday edition of the DC Today. A little sell-off in the markets today. The NASDAQ down another 1.8%. The S&P down 1.65%, and then the Dow itself was down about 1%, 370 points. So you really are looking right now at a stock market that is entirely following the bond market. And what's really interesting is that the yield curve, which has been very inverted, un-inverted quite a bit today. Now it's still inverted,

but what I mean is the severity of the inversion came in quite a bit as the short end of the curve basically didn't move. You know, 90 day bonds, one year, you know, short term, those yields didn't move. And the longer end yields went up about 15 basis points. You got to near four and a half percent on the 10 year treasury. So really, you're getting tightening in financial conditions in terms of liquidity, cost of capital from the bond market, even where the Fed has chosen to pause. At least you're getting that from the long end of the curve. I am starting to wonder. I need to do more analysis about it. I may end up deciding to turn this into my dividend cafe talk tomorrow.

My dividend cafe writing. If quantitative tightening, which has been largely ignored throughout this tightening process, which has largely been assumed to be benign, but has been running as a two-headed monster with the Fed's 525 basis point hiking of the Fed funds rate, if perhaps what we're starting to see now is really the impact of quantitative tightening. You had the Swiss National Bank pause their rate hikes a couple months ago when the Fed first paused. You have had the Bank of England kind of surprisingly announce a rate pause themselves. I think that that comes after 14 consecutive rate hikes. And yet all of these bond markets have seen the long-runner curve go higher. And so I do think that quantitative tightening is becoming a bigger play.

Now, you are looking at a NASDAQ that is from its pretty recent. How recent are we talking here? Ancient history of July. So going into August, you're talking about less than two months and it is down about 1100 points so to put that in perspective for you i'll give you a percentage um it it's a severe it's a it's a big deal to have uh you know a seven and a half to eight percent drop in in less than two months in about seven weeks. And yet that really is because, and we saw this in 22, the bond market impacts the high PE elements much more. Now, look, today was a bloodbath in markets

and healthcare was the best performing sector and it was still down 0.9%. But again, you see real estate, which is much more rate sensitive, was down three and a half. And then in terms of the higher beta stuff I'm talking about, I'll tell you the numbers real time here. Your consumer discretionary, which is very levered, was down almost 3%. Technology and communication services, which are kind of cousins, were both down 1.5%. So that's really the story. That's where the NASDAQ came in itself. And I think that that's what you have to expect right now until it changes is as bond

yields go, so goes the market. If bond yields were to go lower, I think it would bring the stock prices up. In other words, there's an inverted relationship between bond yields on the longer end of the curve and stock prices. There are some in the news that have reported it. The House coming up four votes short today may have impacted it. That's one of the dumbest takes you'll hear today. So, yes, there are a few votes short of a House compromise that itself is going nowhere. They're going to end up probably getting a House compromise of a bill that just becomes even more unpassable in the Senate, let alone the White House. But the idea that that is what the markets are spying to today with the 10-year up 15 basis points, it'd be hard to imagine something more wrong.

I'm being nice. Initial jobless claims fell by almost 10% on the week and the pattern is continued. That's part of a trend. Both existing jobless, excuse me, continuing claims and initial claims are basically at lows on the year now. Existing home sales, by the way, were down about 0.7% in August or down over 15% year over year. So that is the third month in a row of declining sales volume month over month in residential real estate. Um, and I do have a section in the dctoday.com today, reiterating why PE ratios are important, answering a reader's question and how this kind of applies to the way we think about valuations. It may be worth checking out as a refresher.

So oil stayed flat today. That's more or less the scoop here. I'm going to leave it there and I'll know by 4 a.m. what I'm writing Dividend Cafe on tomorrow. Thanks for listening, reading and watching the DC Today. 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.

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