The Dividend Cafe - The DC Today - Thursday September 29, 2022

Episode Date: September 29, 2022

We reversed much, although not all, of yesterday’s broad-based rally in today’s market sell-off – what one day giveth another taketh away. I unpack it all in a deep capital markets dive for you in today’s video and podcast links below that you’ll not want to miss. Dow: -458 points (-1.54%) S&P: -2.11% Nasdaq: -2.84% 10-Year Treasury Yield: 3.77% (down 6 basis points) Top-performing sector: Energy (- .13%) Bottom-performing sector: Utilities (-4.07%) WTI Crude Oil: $81.47/barrel (- .83%) Links mentioned in this episode: TheDCToday.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. Welcome to today's DC Today. It is September 29th, and we've got a lot to kind of unpack today. Obviously, I'm not David, I'm Brian Seitel and write these occasionally, but first time I get to come to you here on the podcast. So hopefully you're able to see this and hear this. Kind of go through yesterday a little bit. I know David did. It was an interesting day. Yesterday was a very big, broad market rally across the board. Stocks rallied, bonds rallied, very broad based.

And it was large part to do with the Bank of England coming out and buying longer dated bonds, which is quantitative easing. So they were on the same path that we were on to raise interest rates, to fight inflation, to start to reduce their central bank balance sheet, the Bank of England's balance sheet. And we're on paths to do the same and sort of reversed course. And we've kind of referred to that as they were the first large central bank to blink as far as taking some of the weight of the foot off of the gas pedal of monetary tightening. The reason they did that, I mean, there's a new administration there. There's a new prime minister, Truss. There was a very large, most in 50 years large,

tax cut package that she put through. And subsequently, the debt of England really sold off hard, as did the currency. Those two things tend to go hand in hand. So you had five-year gilts, which is the equivalent to our treasury, go from something like a 3% yield, actually a little below a 3% yield two weeks ago to over a 4.5% yield, meaning the prices were in freefall. And of course, the pound sterling is now, or almost was to parity with the dollar. And so they, I don't know if I'd call it a little panic button, but it's a decent reverse course to go ahead and start buying bonds again. And so the market kind of looked at that as, okay, first central blink to blink. I think that myself and my team and most market participants have an idea of there being a

point at which central bank policy does shift. And that's what we've called the pivot to something that is trying to raise rates and reduce balance sheet and slow the economy down to something that maybe becomes a little bit more benign. And so if this was the first central bank to do that, markets like that. I was pleased to see it. It's been a tough market in 2022. So I'll take a nice day like that. It certainly helped some of my client conversations that day. But the reality is it was a little bit of a sugar high. And so now what happened today? So the exact opposite happened. So we had a big rally yesterday, and then we had a big sell-off. The futures today were down 250 points coming into the open.

So it wasn't like it was a surprise. I knew markets were going to be lower, and we all did. But within about 30 to 40 minutes, markets were down over 500 points. In fact, they got as low as about 680 points on the day. So basically completely reversing all of the up from yesterday in the course of a couple hours from today. And the question is why? There is some data today that I'll kind of go through on the US side. But if you look at the bond market today, you had stock sell off first to give back almost all of the gain. They actually did recover

towards the end. The bulls got back in there. Markets rallied about 230 points before the close. We closed down about 458 on the Dow. So nice to see a little bit of a positive market action in the last 20, 30 minutes in markets, which we haven't seen in a little while. So I'll take that too. But what was interesting to me today was that stocks did what they did. But really, if you look at the bond market yields yesterday, the two year went from 4.3 to 4.15. So 15% decline yesterday, meaning that the prices went up and yields came down by that much. Today, with stocks down, rates go back up, but not back to where they were at 4.3. They only went up a couple of basis points. Same thing on the 10 year. You had a 4% yesterday morning on the 10 year, come all the way down to 380. In fact, a little lower than that intraday. It was about 375. It closed around 380 on the day. Today, we actually went down on the 10-year. So what is this stuff telling us? So you had stocks

sell off. It almost gave back what they made, but then you had bonds sell off, but not get anywhere near what they had made from yesterday. So when I look at that, specifically when you have a short end of the curve that moves much more or moves up a little, and the long end of the curve move down, you get a flattening of the yield curve that's speaking to kind of lower economic expectations going forward. And the way that I read that was yesterday was sort of sugar high, you know, first central bank to blink, maybe things are going to get a little easier. And these central banks will start slowing down, tightening monetary conditions until today. And I think the market was more digesting of why was there a central bank blinking so fast like

that. And I think what the bond market is telling you is that the Fed is getting what it wants, which is the economy slowing. The flattening yield curve bonds starting to catch a bid, meaning that yields are actually starting to go a little lower, especially on the long end. The 10-year yield was down today and the 30-year yield was down today, which does speak to a little bit of a slowdown. And as they say, don't fight the Fed. I think they are starting to get what they want, for better or for worse. Well, today's market action was negative. And I said this to someone yesterday. It's negative. It's not disorderly, though. So when I look at credit spreads, when I look at just the underpinnings of the market, how things are functioning, yeah, it's tough, but it isn't broken. In COVID, you had a broken

period of time. In financial crisis, you had a broken period of time where things just weren't functioning. That's not what we're seeing here. We're seeing still strong demand in the US, although that's starting to kind of ebb a little. Still seeing sort of the sticky inflation figures. And that's really what the next quarter is going to be about. It's going to be about, will inflation start to show what we think it will, which is it'll start to kind of calm down a little bit. And from that point, I do think you'll see Fed be able to do what I imagine they ultimately want to do, which is to take the foot off of the gas pedal a little bit. I don't think they intentionally want to cause a deep recession here. They're trying to do the right thing.

And I think they're actually doing the right thing. But that doesn't make it easy. The one thing I'll say, too, when I say orderly, I'm not making light of a down market. It's tough. It's a tough year. And it's broad-based negative, meaning bonds are down, stocks are down, kind of nowhere to hide type of thing. But the volatility, when I look at the VIX, especially today and yesterday, I mean, it got over 34 yesterday morning. Even with today's decline, it's lower today. It was around 32 for most of the day, closed at under 32.

To me, that doesn't speak to mass hysteria. It doesn't speak to mass fear, for better or for worse. I'll take an orderly down market versus a disorderly down market, I suppose, in a year. That doesn't make them necessarily any easier. But some top news stories. We noted yesterday that Apple was down in a very up market, which was unusual. They had some slower iPhone numbers. Today, it was down again because Bank of America downgraded the company. And you get that is adding a little bit. Apple was down something like 5%. So that doesn't help a down market as far as the Dow goes as part of it. It's a Dow constituent.

The big news today on the economic front was something we didn't really want to see. It was initial jobless claims coming in lower than expected. What does that mean? It means that people filing for unemployment, there were fewer of them than we would have liked to see. I know that sounds counterintuitive, but the Fed is trying to tighten monetary conditions in order to ease the overly tight labor market to try to ease inflation. And these are not the numbers that we necessarily wanted to see, but initial claims came down 22,000 less than we thought at 193 and continuing claims, meaning ongoing people on unemployment were also lower by about 40,000 than estimated. So that's not a great number to see. It's probably not what the Fed wanted to see. You know, I don't know that I'd put a lot of weight behind it, but technically it's a five

month low in initial unemployment claims. The other thing that a tight labor market does, you know, it hurts corporate profits, it hurts margins. You know, it's harder to get people, and I can attest to this, it's harder to get good people out there basically end up having to pay more to get them. And so it's a tight market and they're trying to ease that up. And that's not the number that we saw today. There was a revision to second quarter GDP. And I was kind of curious about it. These revisions go on and on and on. Second quarter so far in the past now. But first quarter was negative 1.6. Second quarter was revised unchanged today, which I'll take. It was still negative 0.6. But there's always a little fear that they're going to start to revise

things a lot lower and cause a little bit more market turmoil. But so we had sort of an unchanged figure there. Real estate kind of shifting gears. Mortgage rates today were closed around 682 on the 30-year mortgage compared to where we were a year ago. Obviously, mortgage rates are dramatically higher. It is making a difference. It does show month over month numbers are negative now, six months in a row as far as home sales go. At a 6.8% mortgage rate, it's something like we haven't seen since 15 years. So these things matter. There was a Fed comment out, actually, speaking of rates in the Fed, from Fed President Mester. And she said, basically, in a comment this morning, that the Fed doesn't even

feel that it's in really restrictive policy yet, meaning that they don't have the Fed funds rate at three and a quarter high enough to really be restricting economic activity. I wouldn't disagree. I mean, they've telegraphed that pretty well where they're trying to go. But I would disagree to say that it isn't having an effect. It is having an effect. Rates have gone up a lot. Mortgage rates are part of that. Housing numbers have slowed. You haven't seen it in the jobs numbers yet. I suspect that you will at some point, and we'll have to keep an eye out for it. Inflation figures, whether it's energy, whether it's housing, rents, they are coming down. And so I think as we go through the remainder of the year, hopefully we get some numbers for the Fed to kind of take foot off of the gas pedal a little bit. So all that to say, a lot going on

the past two days, no question. I'm sure there'll be more tomorrow. We'll have Dividend Cafe in the inboxes tomorrow from David. And I know he's going to go over some history lessons in bear markets and things that I think will be really timely for where things are now. But all in all, we're here for questions. I certainly love to hear from everybody. So please do reach out an email or a phone call. And thank you so much for listening to DC Today. do reach out an email or a phone call. And thank you so much for listening to DC Today. Thank you. 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. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational

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