The Dividend Cafe - The DC Today - Tuesday, April 16, 2024

Episode Date: April 16, 2024

Today's Post - https://bahnsen.co/3Q5001u A mixed day of trading between positive and negative all morning and right into the market close with the Dow slightly higher and both the S&P 500 and Nasdaq just below fair value. Rates continue their move higher, with the 10-year up 4 bps and now at the 4.66% level. So aside from what so far has been a tougher start to the second quarter, a few things to keep in mind: Rates and Fed futures have reset higher based just as much on stronger-than-expected good things in the economy, such as earnings growth, GDP, and employment, as they have on inflation expectations. We are still only 4% from all-time highs in the S&P 500 when the historical intra-year drawdown is more like 14% on average. So, yes, markets are down a little here, and volatility is up with higher rates, but keep in mind this is pretty run-of-the-mill market consolidation at most at this point. 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 all, welcome to DC Today. It's Tuesday, April the 16th, and if you made it through your tax filing deadline, or at least payment deadline, unscathed, then congratulations and welcome to a less stressful day. Markets were quite mixed today.

The Dow actually did eke out a gain. We closed up 63 points. Both the NASDAQ, though, and the S&P 500 were negative on the day. Just not a lot, 10, 20 basis points on the day, just not a lot, 10, 20 basis points on the day. So kind of a mixed day with a few pieces of economic data out on the day. But still, interest rates continue to move in that upward direction. So we had 10-year up four basis points. Now at 466, forever, we were looking at that range of 425 to 435. And so now we're meaningfully above that. Fed futures, just as we wrote yesterday, are pricing in maybe two cuts this

year instead of the three. And then Jerome Powell actually in a central bank forum today was talking about, they'd been telegraphing that they were waiting for more confidence. They wanted to see numbers come through to give them confidence they're going to 2% before they would start cutting rates. And he said, not only are we not getting more confidence on that, and it wasn't in such a bad way necessarily, but it was just, you know, we're going to have to keep rates a little longer the way they are, and we'll still end up lowering them. But the good news is that the economy and the fundamentals are such that, you know, we don't see it as an issue, just part of the process. So take that for what it is. But as far as the economy goes today, industrial production

was unchanged on the month, it was a point 4%, which, generally speaking is is decent. 0.4%, which generally speaking is, is, is decent. The capacity utilization, which is a measurement of, of factory output in, in the country was, was a little better than expected. It was at 78.4. And we were looking at something just slightly less than that last couple of months. So those two things are positive. And again, there's there are some positive things percolating in the manufacturing sector. We've had ISM manufacturing data above 50 now for three months in a row. And so those things are good. Generally speaking, we're seeing the economy do pretty good things. with rates going up the way they are. And there's definitely one sector, there's many sectors sensitive to it, but there's one in particular, which is real estate. So housing starts today dropped 14.7% for the month of March. So that's a pretty big monthly decline. Builders have the ability to stop building or maybe just not start a project if they're going to be worried about interest rates and mortgage rates higher and not being able to close because it's a huge out of pocket expense to develop and build houses before they're sold and or get them sold before they start building construction.

And so higher rates hurt that. are able to subsidize interest rates lower, but ultimately it's just like when you go to the auto dealership and they tell you it's 0% financing, but the car costs $5,000 more. It's the same darn thing. They're just putting it in a different way that's psychologically more appealing. Same thing on home ownership, but a 30-year mortgage is different than a five-year auto loan. So it does make a difference. But if you're starting a point is in the high sixes or low sevens, I mean, how much can they really subsidize to get rates back down into the fives? It's a decent amount of money. And so they get hesitant.

And you saw that pull a fall off in home building starts, housing starts. That was the biggest monthly decline, by the way, since April of 2020, when it dropped 27%. So that was sort of right in the heat of the moment of the world ending. So we'll keep an eye on there. I suspect that there's plenty of demand for housing, but both because we've underbuilt. And then also, I just think that there's demand specifically for new housing with household formation, that this is probably a temporary type of phenomenon. But nonetheless, it stood out to me today as a decent monthly decline. The two things, David had a section in

there about investment banking deals and leveraged buyouts and M&A activity picking up in Q1. And that's great. And he noted it in his note, which is what I would say, which is great to see. You want to see M&A, you want to see leveraged buyouts, you want to see that private credit market work and have transactions done. We're still about 50% of where we were in 21. But just keep in mind, 21 was extra heated because interest rates were at zero. And there was a sort of feel good moment after the world didn't end the year before. And you had a bunch of business activity happen. Back then markets were high. And so it doesn't shock me we're lower than that time now, but it's good to see it moving in the right direction.

And the note that I would make is that we want to see with these higher rates now, which is really just a phenomenon the last couple of weeks, if that M&A and that leveraged bioactivity can continue in Q2. So we'll be looking at that. There was a Q&A section in there from me about a question that I got last night regarding the DC Today yesterday. And there was a chart that we had in there showing different valuation metrics. You know, trailing 12-month PE ratio was one of them, but there was a bunch of other ones too, Case-Shiller evaluation measurement, price to free cash flow, things like this. And basically all of them, if the left side was cool, meaning at the low end of the historical average and the right

was heated, meaning at the high end of the historical average, they were all in the red all the way to the right. And so the question was regarding, that's the S&P 500, how does that compare to what we're doing in the dividend side of things? And of course, it's vastly different because we're screening a lot of that stuff out. You know, we're not going to own things like that intentionally. And so the numbers do look quite different. The multiple on the S&P now is about 21 times if you look at current earnings, and then maybe 20x if you look at forward earnings and then maybe 20 X, if you look at forward 12 month earnings

and we're at about 15.9, call it just shy of 16 on the dividend portfolio. So there's pretty big differences there with that. I'm going to kind of keep it short here today, this Tuesday and let you go. Again, kind of a mixed day in markets tomorrow. you go. Again, kind of a mixed day in markets. Tomorrow, we have the beige book out, which is more Fed information. Could be a couple of things we might glean from it. I suspect that we know already what's in it. And that's pretty much it tomorrow on the economic side of things, at least. So we'll see. I did make a comment in there about Q2 that we've started here in April. While we're down, just keep in mind, this is 4% lower from the all-time high at this point.

In my book, that doesn't even really count as down. It's basically just normal run-of-the-mill consolidation in markets. But I wanted readers and listeners to keep in mind the average drawdown intra-year forever is about 14%. So we're supposed to get a correction every year. The average is around 14%. So this ain't nothing, I guess, is my point. Don't worry. In other words, we're digesting a lot of these things like higher rates pretty well at this point, and we'll give this more time and see what we get in Q2. Earnings are underway. So that'll be what we're focused on at TPG. Until then, I wish you all a lovely evening and reach out with questions. Thank you.

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