The Dividend Cafe - The DC Today - Tuesday, December 13, 2022

Episode Date: December 13, 2022

The CPI report came in well below expectations, and futures were up as much as +830 points pre-market (on top of yesterday’s +520 point rally). The rally basically peaked at the open and then fizzled from there, going negative mid-day, before closing up just a hundred points or so. Dow: +104 points (+0.30%) S&P: +0.73% Nasdaq: +1.01% 10-Year Treasury Yield: 3.50% (- 11 basis points) Top-performing sector: Real Estate (+2.04%); Energy (+1.77%) Bottom-performing sector: Consumer Staples (-0.17%) – only negative sector WTI Crude Oil: $75.25/barrel (-0.19%) Key Economic Point of the Day: ASK DAVID “You (and just about everyone else) focus on the three major stock indices when reporting on the daily market. The Dow, the S&P 500, and the NASDAQ often move together, but when they don’t what does it mean? How did these get to be the Big Three, and what do each tell us about the market?” I actually think the difference between the three indices is quite noteworthy, and even if they often directionally move together, the magnitude of moves is quite different. The Dow is down roughly -7% on the year, while the S&P is down roughly -18% and the Nasdaq roughly -30%. This is really a by-product of the Dow being more diversified than the Nasdaq (i.e., broad American sector diversification in the Dow vs. heavy technology penetration in the Nasdaq). Then the S&P is market-cap weighted (that is, the S&P is well-diversified, but because its constituents are weighted to their size, it becomes very, very tethered to a few mega-cap tech companies. The Dow was constructed to be the bellwether representation of the American economy reflected in the stock market that it is. It wasn’t like there were competitive index options in the late 19th century and early 20th century when it was constructed. It has stood the test of time, to say the least. 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. Well, hello and welcome to the Tuesday edition of the DC Today. See, today I am going to pretty much spend all of our time today just focused on one thing, and that was today's market action in response to the CPI number for November that came out today. CPI being, of course, the Consumer Price Index that, you know, quite structurally flawed, but nevertheless consistent metric used by so many to measure price inflation. The Fed, the Federal Open Market Committee, will announce their interest rate decision tomorrow, Wednesday the 14th. You're sitting at about a 79, almost 80% chance of a 50 basis point rate hike, which to me is at this stage of the game, pretty close to 100%. It is odd that it's not all the way there. Yet, it sure seems that with

market expectations so fully priced at a half a point rate hike tomorrow versus three quarters, at a half a point rate hike tomorrow versus three quarters, you would think that if that was not the case, that the Fed would be correcting it with some sort of guidance or messaging. But be that as it may, we'll get that announcement tomorrow. The last several times that the Fed's had announcement, I think there was one of the last three times that there was a major market rally there were two times that there was a major market sell-off and one or two of those times included a rally followed by a sell-off so a whole bunch of volatility in the 30 to 60 minutes that came after the announcement so any of those things are possible. And of course, it could even be a big dud tomorrow.

But we haven't had a dud in a while. We've had upside. We've had downside. We've had up and downside volatility immediately after. Not necessarily a dud. Here's a little theory of mine that I think is reasonably defensible as to why you may not have a huge spike in volatility. I've argued all year that most of these immediate moves, meaning the day of a Fed

announcement, have been very, very short-term traders that get pulled one way or the other when the news is kind of the opposite of what they may have been hedged for or positioned for. And today, I got back from New York City and was walking into my house at 2.30 in the morning. And at 5 o'clock this morning, when I got up after just a short stint of sleep, the futures were up 500 points and the CPI number had just come. And by the time the coffee was made, the futures were up 700. And by the time the coffee was consumed, the futures were up 830 points. The market opened up 707 and then it never ticked higher from there. The peak of the day was the very first print and

markets then went down steadily throughout the day. Then at one point actually went negative on the Dow and then it did close up a little bit over 100 points. The exact number was 103 points, 104. That was 30 basis points of upside on the Dow. But again, that came after being up 800 points this morning in the futures. The S&P was up 73 basis points, 0.73%, and the NASDAQ was up right at 1%. Bonds rallied again. The 10-year was down 11 basis points. We're back down to that 3.5% level. The top performing sector was real estate up over 2%. That's a rate sensitive market. Energy was up 1.77%.

Continues to be holding in extremely well with oil in the 70s versus the 80s. The only negative sector was consumer staples, which was down just 0.17%. negative sector was consumer staples, which was down just 0.17%. So even though the total numbers were well off of highs, overall, broadly speaking, it was a pretty good day. So I want to get to some of the actual numbers from the CPI read in a moment. But I want to explain kind of why I believe that some of the short-term trading that would normally be happening tomorrow might have happened today. Now, don't get me wrong. It's entirely possible that you end up getting something in the Fed announcement that spikes volatility to the upside or downside tomorrow. And it's also entirely possible that you don't get much of a reaction at the announcement. And then Powell says something in the presser.

You know, he's been doing these press conferences after the announcement, and you can get any number of movements around those things. But if I'm right on my year-long theory that a lot of the volatility around these types of things have to do with the fact that if there's a big blowout CPI number that is to the upside on inflation, there's a whole lot of people positioned for something the opposite and then vice versa. And I don inflation, there's a whole lot of people positioned for something the opposite and then vice versa. And I don't think there are a lot of people that were betting on a lower than expected CPI number. I don't think there are a lot of people betting against it, but there were some because there's a major amount of money to be made if you are guessing on the right side of an upside CPI. And essentially bond yields going higher,

equity prices and risk assets going lower. And so a number like today with a CPI number came in less than expected. Inflation was to the lower end of expectations. So interest rates went lower, risk assets rallied. I don't think there's a very good reason that, and you know, this is kind of my life, but there's plenty of things I don't know. And I don't, and I don't, I didn't hear any other theories today from people that I would consider their theories worth hearing as to why the market would have been up 800 points at all on this news, and then why I would give it all away. And the best theory I have is that there were people positioned for the other side of CPI and they were covering in the midst of getting their faces ripped off and that covering doesn't

take very long it got done and then markets normalized and you know look you were up over 500 yesterday you got another 100 today it's a decent little rally mostly offsetting some of the downside from the last couple of days last week. But nevertheless, still just thousands of points to the upside in equity markets. Since this theory has been baked in, it's a theory I hold to, that the Fed is ready to pause and that the inflation data that has been the rationale for Fed tightening has mostly played out. I think we're either our sixth or seventh month now of core goods disinflation. It's actually the second month of core goods deflation. Not just that the rate of inflation peaked back in the very early part of the year, which is a fact. It was the very month that I said I think this is the peak, did prove to be that peak. But you still were getting more ongoing inflation of core goods.

It's just that the rate of that inflation was dropping month over month. That's called disinflation. But now this month and last month, you actually had deflation prices dropping. Core goods were down half of a percent month over month. So what is core goods? It's the element of prices being measured that are not related to services. And core means it's excluding food and energy. Energy prices were down 1.6 percent in the month. So the headline number wouldn't have been much worse, although food prices were up half a percent, which was still less than it had been last month. So the key data point to me and all of this inflation data remains rents and owner's equivalent rent, which is three quarters of the shelter amount, which all in total equals a third of the CPI number. And rents showed last month is up 0.7% on the month, 7.1% year over year.

So if you believe that, I'll tell you another one, but it's something we've talked about a lot, that most certainly in real time, rent numbers and housing prices are showing in a deflationary mode. And yet the way in which the owner's equivalent rent is measured, that lag. Now they're catching up to it because this was the lowest in four months of the overall shelter inflation, but it's still, I think, behind reality. And that is the largest contributor to the CPI numbers. So it's a big deal. So medical care costs were down half a percent on the month. That's the second month in a row. I already talked about food and energy.

It was kind of a mixed bag. But look, the core goods year over year inflation is now up 3.7%. So that remains a little bit above the Fed's target level, but it is literally more than half disinflated from what that peak level was. So that's where I think the services side is going. Services will be a little stickier and slower. And the housing pause in terms of lag effect will take a little longer. I think most of this is known. I'm glad that I don't have to update my projections yet again, because I have had to do that along the way. When you can be right on a call, but early on a call, it's the same thing as being wrong on a call. And I've done that many times in my career. But in this particular case, I still think that the major takeaway is not being able to predict what the

CPI is doing. It's what the Fed's reaction around it will be. And I stand by my theory. Right now, I'll tell you what futures are showing. Not only that we're going to get a half a point rate hike tomorrow, but then going into December, there's a 50% expectation of a 25, excuse me, going into the new year, February 1 is the date of their next meeting, a quarter point rate hike at a 50% chance of a half a point. And so it's a little bit more, you know, 50 to 40, the 10% that makes up the difference is spread out a few, a number of different options. So I think that that's where we'll have to see as we go into the new year, what data points cause them to say, let's pause, let's do one more 25 basis point, whatever. But I've never cared. And I don't care now. Are you talking about 475 is where they stop? Are you talking about five is where they stop? Do they do 25 twice? Do they do 50 once and then nothing more? I don't know. I don't know. It's in that range, 450 to 500. And the market seems to now agree with that.

450 to 500 and the market seems to now agree with that and then you do end up getting another question which is do they sit and pause for three months or do they um sit and pause for six months and is the next move a cut which which i i've whatever point they do pause i'm pretty darn confident the next move would be a cut not a a hike. But nevertheless, those are things we'll start talking about and hearing the media talk about into next year. For now, this is what we're dealing with is the Fed meeting tomorrow and so forth. I'll leave it there. Clients are going to get their portfolio holdings report for the week bright and early in the morning. There's a couple links and there's definitely the standard Ask David Q&A in the written DC Today. And other than that, Brian Saitel is going to bring you DC Today tomorrow as I will be out of the office and out of the office meetings all day.

And so I want a real fresh, robust Fed Day podcast from Brian. He'll bring that to you tomorrow and I'll be back with you Thursday and I'll be bringing you Dividend Cafe Friday. And that's where we are. Thanks for listening to and watching the DC Today. Thank you. and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice.

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