The Dividend Cafe - The DC Today - Tuesday, January 17, 2023

Episode Date: January 17, 2023

Futures opened last night pretty flat (down a pinch) and dropped to down -50 points or into the evening as the Cowboys were having their way with Tom Brady. This morning futures pointed to a down -50 point open pre-market and that went a bit lower after results from Goldman Sachs. The market opened down close to -200 points and fell further in the next two hours before leveling around that low throughout the day. The reason for the Dow’s much worse result than the other two is that really the Dow’s drop was led by just two financial names. The Dow closed down -392 points (-1.14%), with the S&P down -0.20% and the Nasdaq +0.14%. The year is off to an interesting start – with just nine days of trading behind us (due to two Monday holidays so far), a lot of “shinies” are up on the year, and yet market breadth has been very strong with the highest percentage of stocks in a 10-day advance since 2020. As good as some of the shinies have done, the equal-weight (average stock) is still doing better than the index itself (cap-weight). The ten-year bond yield closed today at 3.55%, up four basis points on the day A pivotally important fact – yes, bond yields are all down, BUT they are down proportionately (essentially, the 2-year has dropped 30bps AND the 10-year and has dropped 30bps, meaning the yield curve inversion has NOT improved) Top-performing sector for the day: Technology (+0.44%) Bottom-performing sector for the day: Materials (-1.07%) I want to make sure I consistently reiterate my theme with data around the history of growth-value rotations (primarily, that they are secular decade-type rotations, not quarterly or annual ones) Links mentioned in this episode: [TheDCToday.com]https://bahnsen.co/3IUuwbA 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 a very special DC Today. It's special because it's our long-form version, and yet it's a Tuesday, and this is the second time in just three weeks, the way the year started off that we happen to have a Monday holiday. And so I try to do the Monday treatment of DC Today on the Tuesday so as to not rip you off of our elongated DC Today commentary. There's a lot today, a lot of charts and so forth at the dctoday.com. And yet I'm going to go through and just kind of hit some of the major points for you watching the video and listening to the podcast. The market was down today 397 points, or no, excuse me, 392 points, but don't be deceived. The S&P was only down 0.2% and the NASDAQ was down, was up 0.14%. So it is, this happens sometimes in time, but it's very rare,

but there are two stocks in the Dow that were down one over 4%, 1 over 6%. And the one down 6% is a $380 stock. And the Dow is price weighted, meaning that the bigger the price of the company, as opposed to the market capitalization, like the S&P is weighted, the bigger impact to the overall index. It's a very weird way, but it just kind of has worked for 130 something years. And yet today it became a little bit distorted. The Dow shows down over 1%, yet in reality, that just kind of well over half of the downside was related to just two So the futures were down a bit last night, not substantially, but you have a three-day holiday weekend. You don't really know what to make of Monday night action in those situations. I've gone through this for many, many years.

But then this morning it was down a bit. Then when the earnings results from Goldman Sachs came, it dropped further, and then that's where we went. So bottom line, I have a few more important comments to make than just what happened in the market. I do think that looking at the price to sales ratio as a valuation metric in the market, the S&P 500, and how high it had gone and then how it's come down and then where that ratio, again, you had a big kind of bubble at valuation in 21, and then it's come back down, but it's come back down to a level that is just sort of high. And so both those charts that look very identical to one another, they tell a similar story, are in the dctoday.com today. I'd check that out as you formulate thoughts around the state of the market.

But, you know, the state of market is interesting. The stuff up the most so far in the year has mostly been shiny objects from last year, yet not all of them. And the average stock is up more than the cap-weighted market, is up more than the cap-weighted market, meaning your typical company is still outperforming like Fang and some of the big cap names of the market. And yet some of the shiny object stuff is up double digit in the last couple of weeks.

The major thing to look to if you're just wanting to know overall market health is breadth. What is the percentage of things that are doing well? And that's been very high. The amount of companies that have advanced over the last 10 days is in the 99th percentile at a number not seen in two and a half years. So you do have high market breadth at this time. But let's remember too, as I mentioned earlier, you had a Monday holiday to start the year. You had a Monday holiday yesterday. So really we've only had nine trading days coming into today all year. And I wouldn't make a whole lot out of that. The 10-year bond yield today was at 3.55%. It was up four base

points on the day. An interesting thing, and I guess I kind of knew this, but hadn't thought about it. Now I thought about it. But it's up and down the term structure. The yields have come down. And so the two-year, the yields are down, meaning the two-year bond price is way up. And the same for the 10-year. But here's the interesting thing. The yields are down about the same, 30 basis points, give or take.

And the yield curve was substantially inverted. So it doesn't matter if all bonds have come up and the yields have come down. The inversion hasn't changed because the relationship between the two-year and 10-year is still the same. And so I think it's important to start to look at yield spreads and inversions as more interesting than just where the basic bond yields themselves are. If you had had the 10-year drop as it has, I think that's always and forever indicative of a longer-term perspective. But then if the 10-year had dropped less than the two-year had, then I think you look

at it and say it's shorter-term players looking at the Fed changing a pivot in short-term monetary policy. In this case, I kind of think you're seeing the bond market price, lower growth growth expectations on the long end, and then some degree of more Fed dovishness, but not that much on the short end. Otherwise, it would un-invert the yield curve, and it hasn't done that yet. Okay, what else do I want to go through here? Technology was up the most today, 0.4%, yet its cousin, communication services, was down second most. And so you had a mixed bag in some of the sectors.

Materials were down over 1%. There's a chart on the relationship between growth and value decade by decade. I think it's kind of interesting to look at. Emerging markets had been below their 200-day moving average until just Friday's trading session. It's come out of that. Now it's come back up above its 200-day moving average for whatever that's worth, which I think is not much. The public policy side, get ready for all the debt ceiling talks.

I don't think a lot of people want to hear my opinion on it, but I'll share it because I want to be able to make a kind of as necessary context to how I'm viewing this from an investment standpoint. I'm a fiscal hawk, personally. I'm against excessive government indebtedness. I'm a kind of a balanced budget type guy. I do prefer a smaller size of government and certainly a smaller size of government relative to GDP in the sense that I think that allows a larger private sector activity to roll, which is better for productivity and growth and quality of life. There's a lot of basic economic opinions I have around this, but I don't believe that the way to deal with the size of government is around the debt ceiling because the debt ceiling

has to do with the level of debt you're taking to fund government and the level you're taking to fund government has to do with what kind of funding you approve for government. So I find it a little bit political and a little bit gamesy to approve a budget for X, but then not approve the funding necessary to pay for X and play coy about it all. And so, I don't know. There's an argument that some people believe it's one of the only strong-arm tactics you have available

in desperate times to call for desperate measures, but you're not going to get anything you're not going to get spending cut um out of that either playing chicken and and you know the media is against it and it just it to me it's um doesn't generally end well so i'm expecting the media to go crazy about it make a lot of hay threaten that they're not going to pay the bond bills, threaten they're not going to pay Social Security pensioners, and all of which will be untrue. But I still think the kind of stunt itself is a little bit silly and counterproductive. there will be some sort of market drama out of it. Not media drama, not political drama, but true pain within financial markets. And historically, the answer has been no.

People love to bring up 2011, but I really got to point out, I lived through this thing very intimately. It's tough to say that a lot of the market turmoil of July and August 2011 was related to a fight over the budget between John Boehner and President Obama, when frankly, Europe was falling into the ocean at the time and Greece was on the precipice of default. And so were other countries, including Italy and Portugal and Spain. And so there was such an extraordinary amount of global angst at the time. And it was playing out at the same time that we were having our debt ceiling debate in the US. And a lot of people like to look back on

it and say, remember last time when that debt ceiling debate generated that kind of heat? But I have never really been convinced that that's true. But then six or seven times since then, we've gone up again into a debt ceiling moment and sometimes even a shutdown and markets have just shrugged it off. And so I don't know what kind of leverage exists out of this moment, but we'll see. Something to keep an eye on. I'm told a tax bill may happen this year where the R&D tax credit to full expensing, which some Republicans want, may be back on the table right now.

They've gone to a five year amortization of R&D and in exchange for a renewed child tax credit, which is something that a lot of the Democrats wanted. A lot of the Democrats wanted, and it may be that I'm hearing both things could be on the table for different reasons to pacify the respective bases of each party. The New York manufacturing number that came out today was absolutely god-awful, but that, for the first time in a while in December and November. But the January numbers don't take place until after January. The regional numbers are not on the same calendar. And the New York number came out, saw both new orders and shipments were way down. It was really quite bad. What else? China's economy reported 3% GDP growth for last year, which is the second weakest they've had since 1976.

The other one was 2020, where you may recall what was happening in China during 2020. So 3% GDP growth at a country of China's economic growth stage was obviously quite pitiful. And to me, it speaks to the pen of demand that I expect is in China now from a roiled up economic opportunity. What else? What else? What else? I think I've covered kind of the basics. The Fed is it's pretty much a foregone conclusion in the futures market. cover kind of the basics. The Fed is pretty much a foregone conclusion in the futures market, something like 95% chance that they're going to raise rates just a quarter point, which is what our forecast had been before. But it was really kind of evenly divided between a quarter point

and half point. And the half point camp is reasonably off the table. And that next Fed meeting is in exactly two weeks. Oil was up 1.3% today, back up close to $81 a barrel. I think that on the Fed side, by the way, the other piece I want to bring up is about Japan. Their quote-unquote Fed, what they call the Bank of Japan, bought $100 billion of bonds last week. Most ever.

They've been at a high level of buying ever since. I think this speaks to what they're up against as a central bank, based on the path they've chosen. They don't have a lot of options. But, you know, they're not trying to quantitatively tighten. But when they have had to kind of pull back on yield curve control and do some other things to defend their currency, then they end up having to go right back out into the bond market. And this is kind of the whack-a-mole that they're playing. And I don't know how long our central

bank gets away with quantitative tightening, but what you're seeing in POJ right now is why I don't believe it. I think that the only antidote to quantitative tightening that goes against you is quantitative easing. You just go back to the very thing you're trying to unwind. You're kind of stuck. And POJ is living with it, has been, and that's what I'm forecasting for our own Fed as well, unfortunately. So do check out the dctoday.com. Do let us know if you have any particular questions. I do think that, let's see, what do we got on the docket?

We're going to have a regular, you know, DC Today tomorrow from yours truly. And then another regular one on Thursday, but it'll be my partner, Trevor Cummings, bringing that to you based on my meeting schedule on Thursday. And then I'm going to do a dividend cafe on Friday about housing and a real kind of special deep dive into the housing market. We did one of those last year as well, but there's a lot of new information I'm going to present. So that'll come out in the div cafe on Friday. And other than that, I'll let you go. Cowboys are moving on in the playoffs. And we'll see if we can't get it going by next weekend. Reach out with questions at thebonsongroup.com. Thank you for listening to, watching, and reading the DC Today. The Bonson Group is a group of investment professionals registered with

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