The Dividend Cafe - The DC Today - Tuesday, February 13, 2024

Episode Date: February 13, 2024

Today's Post -https://bahnsen.co/49ze1fb The big news today and cause for the market volatility was the latest read on inflation, with both Headline and Core CPI coming in one-tenth higher than expected (you read that right, above expectations by just one-tenth for the month). There were words thrown around like ‘hot’ inflation and a ‘spike’ in treasury yields circulated around the media to sensationalize it, and I am not at all making light of a down 524 point market day, but truth be told, while we are seeing a continued path of disinflation in this country, that path was never going to be a straight line. Keep in mind here as well that we came into today with 14 of the last 15 weeks to the upside by roughly 20% in stocks and a five-handle S&P 500 starting point. That long streak has only happened five times in history since 1928, with the last time being some 52 years ago. Suffice it today, with a complacent VIX coming into today’s number, we were also frankly due for some of this sell-off. As one would have expected, yields moved higher across the curve on the day, with the 10YR closing up 15bps at 4.32%. We did come off the intra-day lows heading into the close, but a lot of this move felt overdone to me (both in yields and stocks. 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, welcome to DC Today. It is Tuesday, February the 13th, and I'm coming to you here from our Newport Beach office studio this week. I'll be here all week and had a bit of a down day really in markets. We ended up coming off of the lows right into the close, but we closed down 524 points on the Dow. The 10-year was up 1415 basis points closed at 432. So rise in yields across the curve and a sell-off in stocks. And the reason was that CPI numbers came out today. According to the news, they were just far hotter than normal and big spike in yields and this sort of Armageddon kind of scenario with what the number was, which was an entire one-tenth of a percent higher than expected. So we got core, I'm sorry, headline come in at 0.3 versus 0.2 expected, which year over year was 3.1 versus 2.9. Okay, so a tenth higher. Then we had core, which strips out food and energy, of course, also come in a 10th higher.

It was at 0.4 for the month of January versus a 0.3. Year over year, we're at 3.9 versus what was expected at 3.7. So yeah, tough day in markets. Sell-off, I think there was a lot of people positioned for inflation to come down and secretly hoping for a number to come down. And all I'll say is that we're making big progress with inflation. It is moving lower. We have disinflation. So the rate of inflation is going lower and that's a good thing. But it was never going to be in a straight line for people that thought every month would go

down linearly. That's just not how markets work. So we had a disappointment today in markets. I'm not overly concerned about it. You came into this with the volatility index in the low 13s of VIX, which is very low. So kind of complacent. And then you've had now 14 weeks of 15 be up weeks, which, and it's, we're up, you know, since October of last year, we're up something like 20% or so. So it's been a decent move on this thing. And so to have some give back doesn't shock me at all. I think it was a little overdone on the day. And maybe that was the kind of give or the close off of the lows into the close. Maybe the markets realize that. But 14 to 15 up weeks, that's only happened probably 15 times, forgive me, five times since 1928 in markets. So it isn't very common. And that's a long streak.

The last time that that happened was 52 years ago. So just keep in mind the starting point of over 5,000 on the S&P. Disappointing news. Here's your sell-off. There you go. The S&P was down 1.3%, 1.37%. NASDAQ was down 1.8%. Every sector was negative on the day. Energy was the only little bright spot, not the sector,, is still, for the month of January, a 0.6% increase on shelter costs. We basically all know that rents for the month of January didn't go up 0.6%. It's using an average. And if you were to put the actual Zillow six-month number in there, which is about half of that, you'd end up in the twos, mid twos in CPI. So the Fed knows these things. It wasn't a number that they wanted to see,

frankly. And so more of the same, which is that they weren't expecting to cut in March, and that looks to still be the case. And it looks like it'll be something like May or June before they start moving rates a little lower. We do have a PPI number on Friday, which will be a follow through to this inflation read. And we have some jobless claims tomorrow or on Thursday. So tomorrow's a little quiet in the economic calendar, but we get some more juicy data as the week goes on with this stuff. There was an ask Brian, a question I got actually from interest, inbound interest from someone actually in Sweden of all places, which was always kind of neat to get global questions. It was a two-part answer. The question was if rates are going to stay,

higher real rates are going to be here to stay. So something north of the risk free rate, something north of inflation, call it 2% above inflation. If inflation is going to be three, you know, 5% or something treasury, if that's going to be here to stay, you know, what would you want to own in that environment? And my answer was, it just depends on a lot of things. It depends on what the goals are for the investment for the person or institution, on what the goals are for the investment for the person or institution, number one. But if rates were going to be higher on the higher end, then you'd want to own things that had a decent amount of carry to own. High yield bonds, things like private credit would be fine. You'd be clipping double digit types of yields with the latter, which I think is good. And then frankly,

dividend growth would likely outperform. So you'd have a better environment for value stocks over growth. Growth stocks tend to be a longer duration deal. And so if rates were going to be high like this for a long period of time, then there you go. All that to say, I don't think that's a likely outcome with where we are. And I do think with the amount of global indebtedness that you'll still get this gravitational pull back towards those lower rates. And ultimately, the cause for high rates will be that they're too high for too long and you end up with some sort of a credit event in markets. And then, of course, they'll collapse from there. So I hope that was somewhat helpful for some people to read. But all that to say, I'll be back with you on VC Today tomorrow. And I wish you all a great evening.

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