The Dividend Cafe - The DC Today - Tuesday, January 24, 2023

Episode Date: January 24, 2023

Futures opened last night about even give or take 20 points, and stayed that way until early morning when we began moving lower and then notably so pointing to a down -150 point open. We opened down about -170 points but were down north of -250 after the first 20 minutes of trading. Around 1145 EST we had slightly better than expected PMI data released and fully recovered the morning losses trading sideways with a small upwards bias the remainder of the trading day. We closed positive on the Dow but slightly negative on both the SP500 and Nasdaq. Dow: +104.41 (+.31%) S&P: -.07% Nasdaq: -.27% 10-Year Treasury Yield: 3.46%, down -5.6bps on the day Top-performing sector: Industrials up +.65% Bottom-performing sector: Communication Services -.69% WTI Crude Oil: $80.16/barrel, down -1.79% Key Economic Point of the Day: A flash read today on US Composite PMI data showed a slight improvement over December, although still handily in contraction territory and the slowest since last October at 46.6 from 45 the month prior. Manufacturing PMI was little changed at 46.8 up from 46.2 with Services PMI at 46.6 from 44.7. Could the data in the chart below pick back up above 50 into positive territory before we end up registering an official recession this year, of course, but that economic margin is about as thin as it gets right now. For what its worth, this PMI data point is what led to markets recovering after the mornings initial sell off and was a ‘less bad’ read following December – not so bad that we fear recession is immanent, but cool enough to back the ‘Fed will pause soon’ narrative. Interestingly enough, the flash PMI read today from the Eurozone actually showed it barely bump back into expansion territory from 49.3 last month to 50.2, although not sure I would call that robust. Links mentioned in this episode: [TheDCToday.com] https://bahnsen.co/3RbWe5R 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 and welcome to DC Today on Tuesday, January 24th. January 24th. My name is Brian Seitel, and it's great to be with you all as I kind of go through today's market and give you a couple of takeaways. But we opened, let's see, last night, we had a positive day, a nice positive day on Monday in markets, and futures sort of opened flat. I'd say we were up and down 20 points for, I don't know, several hours until early morning, something like that. And then markets sort of sold off most likely because of Europe. We pointed to a down 150 open, we opened down 170. So, you know, right off the bat was down and we actually traded lower. We were down something like 250 points within the first 20 minutes of trading. And although that was sort of the low

and we kind of regained a little bit from there, We had some PMI data that came out around 1145 or so that helped markets recover. And we sort of recovered from there and then kind of traded sideways for most of the day, closing just slightly positive on the Dow and then a little bit negative on the S&P and NASDAQ with more technology, heavyweighted indexes in there. So kind of a quiet day in markets, but some good data that we get to go through here. And I'll walk through it with you a little bit. We've had, so the PMI data that came out today, we've been talking about inflation forever. And so that's sort of been the narrative. It's when is inflation going to roll over?

And we definitely have seen that at this point. Inflation, and I'll even call it, I believe it, that we've seen peak inflation here in this cycle. And inflation has been rolling over. And so now we're getting data points, for example, like a services number or manufacturing number that we got today, both showing contractionary readings. We got, I think PMI on manufacturing, both were slightly better than expected following December, which was quite negative. So anything below 50 is contracting. Manufacturing was 46.8 versus 46.6 from the prior month. And then services, 46.6 from 44.7. So yeah, right around that time, you saw markets recover.

And the reason is that those numbers could have been worse. And so you could have shown markets really kind of accelerating to the downside, declining more, and actually speaking more to recession. And you didn't really get that. You got a little bit of recovery, but still showing contractionary, but sort of the porridge was just right, which is that it's negative, but not too negative and a little bit better than last month. And then it kind of speaks to the Fed being able to pause or kind of stop or slow, at least their rate hikes, if you believe in that narrative, which we do here in the remainder of the year. So that was good news. Markets tend to recover a little bit from there. And then we just sort of closed, like I said, a little bit mixed on the day.

We are right in the middle of earnings season. 67% of companies have reported better than expected this season so far, which is good. It's lower than what we've seen in the last couple of earnings seasons, which is more like 70 and 80%. High 70s, low 80s percent, being better than expected. So we'll take that for what it is as we kind of get through this season. Just from a sector breakdown, I guess, if you look at that earnings kind of report card a little bit, you look at where earnings are likely to come from in 2023, about 12.4% of the earnings in the S&P 500 are going to come from just the energy sector. The energy sector, obviously, it's kind of got left for dead in 2020 and has been recovering ever

since. Only represents about 5.2% in market cap. So you have 12% of the earnings coming from 5% of the index. It's a pretty robust sector. And to put that in comparison, technology is going to represent something like 21%, 21.4% of the index's earnings for 2023, but still represents over 26% of its market cap. And so when you think about where tech has come over 2022 and into 23, which is down, and valuations have come down, I don't know that that story is necessary over just because you're still at a market cap north of where earnings are going to come in. And I don't know that earnings are going to recover that much, if at all, in 2022.

So more to come there. If you sort of look at other sectors and you're going to go across all of them and you look at percentage of earnings that represent in the S&P 500 versus percentage of its market cap weighting, they're all basically in line. Healthcare, industrials, utilities, staples, real estate, financials, you know, you'll get something like, you know, five and five or 10 and 10, something like that. They're pretty lockstep, except for energy, which is a 7.2% differential to the upside, meaning that there is either likelihood for earnings to come down, which is unlikely given where oil prices are in the economy and demand and China reopening, or you'll get multiple expansion, one of the two. And I think it's a combination more of on the multiple expansion and energy, just because there's

trading so cheap, still, they're not expensive. Whereas technology is kind of the opposite, where you kind of have a 4.8 differential between the earnings that are going to come out through the S&P and the actual weighting. And I think it's going to go the other way, which is you'll have multiple contraction continued in this year of 2023. Discretionary too, consumer discretionary is also off where I think you'll get some multiple contraction. And that's what we saw in 2022. That's what we saw last year. So I think it's kind of also along the theme of our theme, one of those themes for 23, which is that continued rotation from growth to value. Those things all line up pretty well. I guess top news for the day, other than PMI data, which is top news for me, but maybe not for everyone else. There was an antitrust lawsuit filed from the Department of Justice against

Alphabet, which is the parent of Google. And looking at the potential monopoly that they have on digital ads. And I sort of broke down where they are. So they've got a 26% market share in digital ad space. And by the way, this isn't the first justice suit against Google. So we'll see how this shakes out. The stock was down a little bit today. I don't know if I'd read too much into that as far as the industry goes or even the company, but definitely notable for the day. And you saw communications services down on the day. I guess that was the biggest detractor for sector performance in the market. Bonds, high yield spreads right now at about four and a quarter, something like that. And what I would say is,

if we are looking at contracting PMI data, which is contracting, the bond market is not signaling recession. It doesn't mean that we won't have one. In fact, I think we will have one, which isn't going out on a limb to say at some point we will. But we're skating on some thin ice here with some numbers. We have interest rates that have moved really far, really fast. We have economic data that is in contraction territory. And we have inflation that is, we don't have inflation. We have deflation. Inflation is moving lower, meaning it's deflating. So the spread of a four and a quarter on a high yield bond doesn't speak to an imminent recession. And I'm sort of watching those spreads pretty closely. You do have coincidentally a little bit of CDS widening in the sovereign debt market for the US with this debt ceiling debate, which I think is a little bit funny. I really don't know

much, much if anything will come of it, but there's only a few times when you've seen those CDSs move out. And the other two times were really 2011 and 2013, when we were doing the same thing on the debt ceiling, which of course they'll end up raising. Some interesting to note, I was looking at just transfer payments today. So meaning money that's moving from government hands into the private sector. And if you think about things that are indexed for inflation over the last year, you have Social Security, Medicare, Medicaid, you know, 8.7% increase on that going to people. You also have a Fed balance sheet that is very large that they're winding down with quantitative tightening and they're in the process of moving about $95 billion or so a month out of the balance sheet, actually selling bonds in the market. But the actual balance sheet itself, about half of it, so call it $4 or $5 trillion,

$4.5 trillion, something like that, half of it matures in less than three years. And the average yield on that half is about 1.8%, meaning that the holders of that debt are getting paid about 1.8% to hold it. And that's going to roll over and most likely reset at something around four, could be three and a half, something like that. But to roll over and most likely reset it something around four, could be three and a half, something like that. But close to four, if we did it today. And so my point is just with things that are indexed to inflation, that's more money, especially Social Security, technically, you know, going into those receiving it. And then also you have just the holders of this debt going to receive more as that stuff matures

and roll over. So there's a lot to be said about deficits in this country as we move forward. I mentioned this earlier, but the narrative as I see it now is really moving from inflation. We were waiting for so long to see any sort of rollover in those numbers. And now we're seeing them dramatically across the board. So we check that box. The Fed's mandate is price stability and full employment. Well, price stability is not stable because it's deflating, but it's going towards their 2% mandate, and that steps in the right direction. So that's good as far as Fed policy. The employment picture, however, is still not something that we're seeing much of a change in. So I just sort of view it as before I felt like we were in a waiting game to see when inflation would finally roll over and hopefully the economy wouldn't break before that happened and that we got that covered. Now it's on the

employment side. We do need to see the labor market kind of unfreeze here a little bit. It's far too tight and it's too tight for what the Fed wants to see. And we are playing a waiting game to see that number sort of correct before the Fed can really stop raising rates or ultimately go the other way. And hopefully, they kind of achieve this soft landing, which is what they think they'll accomplish, of course. The markets are a little less convinced of that. And part of those forward-looking numbers on manufacturing services is indicative of that. But all in all, fine day. Obviously, we're off to a positive start in 2023. And like we said before, a lot of what has moved up the sharpest is what moved lower the most last year, which is, go figure, almost always the case.

There was some interesting data out of housing today. If you look at where NAHB numbers are, which are really rolling over harshly in historical terms of housing, meaning that higher rates is definitely causing housing to slow. And you look at total employment in the construction sector, being at all-time highs, it either speaks to one of those things changing. And I don't think it's the housing data. I think that's going to continue to be weak. So unfortunately, those in that sector, in the construction sector, I'm not sure if the all-time highs of employment are really going to stick around. I unfortunately, those in that sector, in the construction sector, I'm not sure if the all-time highs of employment are really going to stick around. I guess the silver lining is that you could see some overall employment picture get a little bit better if part of the reason is that

the housing employment is going to come off a little bit here and help the overall number. But all in all, a report card for the day, a solid C plus, B minus. Not a bad day, not a good day. It's slightly up. A lot of data that we digested, so I'll take that. Tomorrow, we have David back with you on DC Today, which is Wednesday. No economic data that I saw or noticed for tomorrow, so pretty much silence for tomorrow in economics. economics, but then we get a ton of it on Thursday and Friday. I know there's goods orders, there's some inflation data, some PCE data, and so forth, some jobless numbers in there too. So there should be more to chew on as the week goes on. But with that, I appreciate listening as always. For any of those who are still in the playoffs in football, I wish you the best of luck. I certainly am not. So I'm a little bit indifferent here on how we go, but we'll be watching nonetheless. Thanks for listening. We'll talk to you soon. Reach out with questions. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment

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