The Dividend Cafe - The DC Today - Tuesday February 21, 2023

Episode Date: February 21, 2023

Today's Post - https://bahnsen.co/3XR3bLi Good afternoon, Brian Szytel here with you today, helping you navigate in a sea of red ink in today’s trading day. A volatile day with the VIX up big, with much of the narrative revolving around interest rates moving higher across the spectrum, along with mixed earnings and economic data and all of which I fully unpack in today’s video podcast 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. Well, hello and welcome to the DC Today. Today is Tuesday, February 21st, and it's the first day here on Tuesday after a nice President's Day weekend. I hope everyone had a nice weekend with family and friends. We had actually one of the worst, or actually the worst down day in markets so far for 2023. So there's a good amount for me to kind of walk through and unpack here as we get into today's market action. But on the day, the Dow ended up closing down six hundred ninety seven points, which was a little over two percent. The S&P was down exactly two percent and the Nasdaq was down a pretty stunning two and a half percent.

So pretty broad based sell off in stocks. So, pretty broad-based sell-off in stocks. The 10-year treasury was up 13.5 basis points on the day, and that was kind of probably the largest narrative of the day of why it was down. Futures last night were negative, but not as much as the market sort of let on as the day went on. The futures were pointing to something like a negative 300 open. And then after about two, three hours in markets, we were down obviously significantly more. We closed off the lows for the day a little bit, but I think if I sell the low, it was down something like 710 points roughly. So just barely off of the lows. So the last time we were down this much was in December. So for the calendar year

of 23, it's kind of our winner for the worst day at markets. I guess that's why I wore the red tie. Kidding. So let's talk about what caused this because it's important. So interest rates today across the spectrum and kind of last night going into today, we're moving higher. And basically we're looking at rate paradigm that is looking to be a little bit higher than it otherwise would. The 10-year closed at 396. The two-year, though, closed at 472. So you can kind of see how inverted the yield curve is. A two-year treasury trading at 472 yield and a 10-year at 396.

It's kind of supposed to be the other way around. So we have an inverted curve. But Fed Fund futures are now pricing in a terminal Fed Funds rate of closer to 5.3, whereas before, call it a couple of weeks ago, it was more like a 5% sort of terminal rate. So if we're at about 475 or so on Fed funds, then you pretty much know that we're looking at maybe two or three more rate hikes here before we sort of hit to that terminal level. And when you price in assets, whether it's bonds or stocks or real estate or anything, anything that you want to price in, estate or anything, anything that you want to price in, the risk-free rate is a really important number to factor into that equation. In other words, what can you get without risk versus what

can you get with risk? And so if you get a higher rate paradigm, which is what markets are now pricing in, then you get risk assets that sell off. So today it was across the board. Oil was down. The dollar was slightly up, just barely. But stocks were down. Bonds were down on the day. And so that's kind of where we're at. There was some economic data out today that was notable, both in services. We got a sort of a flash read, which is kind of a preliminary read into PMI on manufacturing and PMI on services. The manufacturing data that came in was, both of these numbers, by the way, were better than expected, which is a good thing.

Manufacturing was up 0.9% for the month at 47.8, and it was expected to be something like 47.2. And so while I'll say that it's better than expected, just remember that the 50 level is sort of your break even on expansion or contraction in the economy. So manufacturing still kind of floundering here a little bit. Not good, not bad. I call it benign, I guess, would be the number as far as how the Fed would look at that. The services number, on the other hand, was quite a bit better.

It was up 3.7 points for the month of February, which was at 50.5. And we were only expected to get to about 47. So services, robust, much better than expected, significantly. So that's a good thing for the economy. And I think that added a little bit to some higher rate narrative, which again, was repricing some risk assets, particularly stocks in that paradigm. Some of the input costs we saw in the services side were significantly lower, which I think is a good thing. And if you think about profit margins and businesses, if you've got sort of inflation that, you know, caused prices to get passed through and so higher prices moving along to consumers.

But if those input costs start to come down a little bit, I don't know that companies are going to be real fast to lower prices per se. And I think what you might get is a little bit of profit margin expansion there. But that'll be seen. We've had about 80% or so of the S&P 500 has now reported in about of the 80%, 70% of the 80 was a little bit better than expected. So earnings are holding in there. But if you think about earnings growth for 2023 and what's expected, call it 2% at the most. It's hard to have multiple expansion when you're expecting earnings to grow by 2% and the yield on the S&P is a whopping 1.7%. So it just, you know, the backdrop isn't, you know, really robust for stock prices from here. And so that's what markets

were telling us today. That, you know, the idea that the Fed's going to pivot and then that the Fed is going to go the other way is starting to be taken off the top of the table here a little bit. And so that's why it was a little cooler day. We had some existing home sales today, weaker than expected, which, you know, this narrative on housing being weak or real estate being weak, it just sort of continues in the numbers. We were expecting something like a 4.1 existing home sales number, and we got a four. So, you know, uh, some big earnings reports out today. Um, I won't go through all the individual names of the companies, but, um, the largest

US retailer in the largest US, uh, home improvement business. I'm sure you can guess what those two companies are. Um, both had mixed bag as far as earnings go. They actually were fine. The earnings report was in line, but forward guidance was quite negative and markets reacted accordingly and sold. You also had over the weekend, I guess, you had Joe, President Biden visit Kiev, Ukraine, and support another $460 million or so of aid. And at the same time, he had Vladimir Putin give his sort of State of the Union to his parliament and talk about the support for the war and continuing that effort and also to suspend its participation or I guess participation will

be the word in the nuclear trade treaty that we have with with Russia, which in and of itself doesn't declare anything other than just they're going to not abide by it and recognize it as they as they once did for many years for the time being. And it's just further signs of geopolitical tension. Tomorrow, we have some Fed minutes out from the last meeting, which was February 1st. And so I think that'll be most likely the topic. There isn't a lot of other economic news on the calendar. So I think that'll probably be what I talk about the most, which is what the Fed spoke about during their last meeting. And I think it will, again, you know, could it move markets a bit, depending on dovish

or hawkish? Of course it can. But I suspect it'll be something along the lines of data dependency and, you know, keeping rates higher for longer. And so, you know, so we can see inflation kind of come down. Natty gas was down about 9%, a little less, 8.8% for the day, which is meaningful. It's at a lowest level it's been in a couple of years at this point. Oil was slightly weaker. Today, I think it closed around 47.63. I'm not looking at the number, but I believe it was 47.63, something like that, on the day. Sorry, 73.

Forgive me, $73, down about half of a percent on the day. Sorry, $73. Forgive me, $73 down about half of a percent on the day, something like that. So all in all, I'll be with you on DC today, obviously, then tomorrow, which is Wednesday, and then Thursday. And then we'll have Dividend Cafe for you on Friday as usual. A little more volatility in markets. So feel free to reach out. I really do appreciate you listening and watching and feel free to reach out and ask me questions. I always appreciate it. With that, I'm going to sign off here. We're right at about nine and a half minutes. I'm going to let you go for the evening and we'll talk to you soon. Thanks so much for listening. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC.

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