The Dividend Cafe - The DC Today - Thursday September 22, 2022

Episode Date: September 22, 2022

The market really doesn’t want to close strong these days, going from +100 to -100 in the last ten minutes of trading today. MARKET ACTION Dow: -107 points (-0.35%) S&P: -0.84% Nasdaq: -1.37% 10-Year Treasury Yield: 3.71% (+20 basis points!) Top-performing sector: Health Care (+0.51%) Bottom-performing sector: Consumer Discretionary (-2.16%); now down -27% on the year, just 1% away from the down -28% of Technology but not nearly as bad as -36% Communication Services WTI Crude Oil: $83.45/barrel (+0.60%) Key Economic Points of the Day: The Bank of Japan left their policy rate unchanged (as expected) Initial jobless claims came in again at just 213,000, and last week, it was revised down to 208,000. The four-week average is now the lowest since early June. 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. Hello and welcome to the DC Today, Thursday, I think it's September 22nd. And we will have basically a week to go in the third quarter starting tomorrow. It'll bring us through until next Friday, which will then be the end of the quarter. And we'll see where things go. First half of this quarter, though, was just a violent move to to be a testing of those June lows as markets have just gone in the opposite direction these last several weeks. The Dow ended up being down 107 points today, which was 0.35% to the downside. But that was all in the last 10 minutes. But that was all in the last 10 minutes. The NASDAQ down well over one and a quarter,

down 1.37. You could look at it and go, okay, well, another down day. And we had that big down drop yesterday. But I got to say, if you had told me that the 10-year treasury yield was going to be at 20 basis points today, just pummeling the long end of bonds, I would have guessed equities would have been in for a much worse track. In fact, not even every sector was negative territory. Healthcare was up, a sector that we have quite a bit of exposure to. Healthcare was up over half of a percentage point today. And the worst performing sector was consumer discretionary. So what you are seeing right now is a bit of the winners hanging in there and the losers losing even more. That momentum is at play. And the consumer discretionary sector has been a very tough place for the whole year.

It was down 2.1% today, but it's now down 27% in the year. And that's just a whisker away from technology, which is down 28%. So those very high beta sectors, consumer discretionary technology down 27, 28. And then, of course, communication services, which is a sort of offshoot of tech, that's the worst performing on the year. It's down over 36%. And so the sector attribution still in that place of higher beta, higher valuation places doing the worst. We're talking about whether or not the markets are going to retest and even go broach through their June lows. Look, the communication sector and the

real estate sector already have. They're already lower than their June lows, have made new lows on the year. Several big cap tech names like Microsoft and Google, just as examples, they're through their June lows. So it's going to be interesting to see how some of this plays out. The fact that the markets are not responding even worse to this most recent surge higher in bond yields is interesting. We'll have to see how it plays out. I offer no predictions here whatsoever. We'll have to see how it plays out. I offer no predictions here whatsoever. WTI crude at 83.45 a barrel was up about 0.6% today. So in the aftermath of yesterday's Fed announcement, where again, as everyone knew, they raised rates 75 basis points, there was no changes announced or any color of note on quantitative easing. Goldman raised their terminal rate projection, which has been behind Fed dot plots, to 4.5%. Goldman previously was around a 4% level that they thought the Fed would get up to at the most and then level out at before starting to drop the Fed funds rate, they've raised that target to four and a half. My own view on this

is that the terminal rate will be easier to know when the Fed breaks something, because I do believe that there's a point at which the Fed will stop hiking rates. And I believe that point to be lower than what they are saying and what they are predicting. And yet they have predicted higher than they previously were. So it stands to reason that our own expectations of a Fed funds terminal rate are higher than they previously would have been and yet still lower than consensus. But when I say the catalyst to stopping will be the Fed breaking something, it's very hard to know when that would be and when the Fed would start to care about it. I think that the Fed may very well have already broken residential credit and commercial credit to some degree. I don't think

the Fed cares if they break residential credit until it slows down housing so much that it affects GDP and jobs. A price correction in housing is not going to bother the Fed, and it's frankly not going to bother me. But a commercial slowdown of credit that is more macroeconomically sensitive, that's the type of a thing I'm referring to that I think will generate some reversal. And if it is, in fact, playing out, as many of us that are inside financial markets and are seeing things believe is more evident. I don't think the Fed sees it yet. On the residential side, everyone knows mortgage rates are way higher. Everyone knows volume has dropped a ton. Credit is slowed. But

until they see prices really reverse and then job loss from construction and other aspects of how housing contributes to GDP. I'm not sure that's really in the league of what we're referring to. Other central banks, by the way, the Bank of England today raised rates 50 basis points, I was expected. The Swiss National Bank raised their rate by 75 basis points, which is only noteworthy because it actually brought their target rate above 0% for the first time in over eight years. The Swiss National Bank has been running a target lending rate that below 0%. And so this 75 basis point rate hike brought them back above zero. Quite a bit of noise this morning out of Japan when the Bank of Japan intervened to support the yen. They really haven't done that since 1998, back during the Asian crisis. And they've intervened in currency markets. I think the last time was 2011, but that was to weaken. This intervention was to strengthen.

And I could elaborate, if you're interested, on what that means for a central bank to intervene to try to weaken or strengthen their currency. But the point is, the yen caught quite a bit this morning around that. The other piece I want to refer to, and I don't really need to check my notes on this, it's something I was studying for about an hour today, the details of Center Mansion's roughly 90-page plan for streamlining energy was released. Chuck Schumer has said he is going to attach it to a continuing resolution next week to fund government, which largely handcuffs some of the progressives that have been threatening to block this Manchin promise to bill. Because if it's attached to funding government, it's one thing to say you want to block this bill. It's

another thing to say in doing so I'm going to refuse to fund government. That's been politically problematic for other side of the aisle and they've done it over the years. is to allow 25 projects on federal land to get identified for priority review for federal approval every six months and to really limit the ability of states to decline approvals based on bogus water claims, concerns about water safety that go against what federal standards have said. And you go, why in the world is this minutiae in DC today or even in Manchin's plan? This is kind of a game that has been played for some time that Manchin's trying to eliminate where project approvals are either delayed or denied based on manufactured concerns. And they're trying to streamline that gamesmanship. He does want to appoint another agency that would be kind of a coordinator taking lead on some of these approvals and so forth. Most prominently, the bill calls for the immediate approval,

even court jurisdiction change to get the Mountain Valley Pipeline approved, which runs through West Virginia. And we suspect, of course, Senator Manchin has a vested interest in that project for his own state. So we'll see where some of those things go. Other policy issues I want to bring up real quick is that President Biden nominated two Republicans to the board of the FDIC on Tuesday, the Federal Deposit Insurance Commission. And sure enough, Sherrod Brown, a progressive Democrat in Ohio, is saying he will not put those people up for vote until a Democrat is appointed to be the head of the FDIC.

And you could argue, frankly, I would, that generally speaking, FDIC, a kind of banking regulator bureaucracy would probably in a better world be a more nonpartisan thing. Who cares what the Democrat or Republican partisan affiliation is of this agency? but it looks like there's going to be a partisan fight. So we'll see what happens there. The median rental price, the average price paid for rent nationwide in August dropped. That's the first time we've seen a month over month decline in average rents in quite some time. dropped. That's the first time we've seen a month over month decline in average rents in quite some time. So there's a lot of things stewing in housing, mortgage, rental, real estate, residential finance that I think is clearly slowing down and perhaps brewing up bigger storms. That's the scoop on the market. That's the scoop in public policy, central banks, economic data.

I hope you're liking getting this via the podcast. I know the vast majority of you have communicated how much you appreciate the new format. And we're going to continue bringing this to you by podcast and video, along with a condensed written version. It transcribes this podcast. And then, of course, the legacy long form on Mondays. Thanks so much for listening to the DC Today. And of course, the legacy long form on Mondays. Thanks so much for listening to the DC Today.

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