The Dividend Cafe - The DC Today - Tuesday, July 18, 2023

Episode Date: July 18, 2023

Today's Post - https://bahnsen.co/3DhRwgD After crickets last night in futures, we opened up nicely on the day right out of the gate and continued to trade higher in both stocks and bonds throughout the entire session closing just off the highs. For all those waiting for the data or news indicating some recession shoe to drop we just aren’t seeing it and flows are quietly but steadily moving more towards risk assets with short positions covering. Its still early innings in earnings season with only about 9% of companies reporting so far, but with the majority of the largest banks out and beating expectations, a common theme: resiliency in the US consumer offsetting the negative affect of yield curve inversion on net interest margins. Also of note, high yield bond spreads are at the lowest level in over a year at 380 wide, a full 100bps lower than they were at the start of the last recession in comparison. So there you have it, markets remain resilient, and are now up 27% from the October lows, and we continue to climb this wall of worry in another heavily doubted equity bull market. Check out the podcast video today for more color on my resiliency theme and more. 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 and welcome to today's edition of DC Today. Brian Seitel here with you today in what was basically an up day the entire day. So some good news to report. Futures last night were flat, not much going on really. And so I wasn't expecting this coming into the market today, but we had a nice day. We're closed up 366 points on the Dow. Bonds rallied a little too, rates were lower, pretty much across the curve. Bonds rallied a little too. Rates were lower pretty much across the curve. Tenure was down a basis point on the day, but still in that sort of 379, 375, 379 range, which is good. Retail sales was the largest economic data point out on the day. It was actually lower than expected. We got a 0.2% increase for the month of June versus a 0.6%, which is what was expected. So quite a bit lower on consumer spending and retail sales. May, though, was revised up about 15 minutes later from 0.3 to 0.5. Markets actually rallied after the news. It's just sort of porridge is just right

type of thing, at least on the consumer, which is the strength in the economy, still spending, still expanding, but maybe at a little slower pace, which gives more of the narrative to this sort of soft landing camp that they've been able to raise rates and not have the economy fall out of bed. And not only not fall out of bed, but the economy is hanging in there. And I think as more time goes on, you're just sort of seeing that this recession shoot or drop just isn't happening. You've got markets that have moved higher. We're now 27%, at least on the S&P, we're 27% off of the low in October, which is a big move. And it's handily into bull market territory, at least on stocks. I could argue that a lot of that move has been with 10 of the largest technology companies driving most of it. But you can't deny what it

is, is that markets have moved higher and people are feeling better about interest rates starting to peak out a little bit. And we saw more of that today. One of the effects of having interest rates come down, terminal Fed policy looked like it's going to be sometime next week. They're going to sort of raise rates next week and then sort of be done with it, is that the dollar has traded quite a bit lower. It's down about 2% the last week and is at a 15-month low. And so what was a bit of a headwind, obviously, we want a strong currency in this country. That's not what I'm saying, that bad news is good news with the weakening dollar. But technically, the strength in the dollar was a bit of a headwind in earnings, at least on

exporting companies. And that's likely to be the opposite in the second half of the year. So you've got a weakening currency, the widgets or things that we sell overseas become more attractive, become less expensive. And we sell more of them, You could see that in the second half of the year. The other thing I pointed out is that it wouldn't shock me if you had a declining US dollar benefit some of the emerging market economies. We've seen China slow, and so their stocks have still remained a tough spot. But I have a feeling that you'll get a little bit of a tailwind with a weakening US currency. Goldman actually was out today, speaking of my resiliency theme on the consumer, and said there's now only a 20% chance of a US recession. So take that for what

it's worth. But all things considered equal, there's more and more in the camp of soft landing and or positive in the economy and in markets than there was before. Earnings are now just starting to come out. We're, I think, maybe something like 8% of companies in the S&P have reported. So just first part of earnings season. As time goes on each day, more and more companies will report. But a lot of the banks have reported. So call it Citi, JPM, B of A, Morgan, all these companies have come out and reported. And there is a common theme in most of their reports, which is the consumer. They're basically citing resiliency in the consumer. And so whatever negative they have,

at least in bank land, with net interest margins being impacted by an inverted yield curve, If net interest margins being impacted by an inverted yield curve, it's just offset by the strong consumer, which I'll take as a positive. High yield bond spreads, which is another metric that I look at, that we look at quite a bit as far as how markets are feeling. If there's confidence there and if default risk is perceived to be low, if credit risk is perceived to be low, then that's a good thing. Right now, high yield bond spreads are at 380 wide, meaning there's a 380 basis point spread over a risk-free rate in which you'd get in a junk bond, which is low. It's low historically, and it's definitely low this part of the cycle. And for those still looking at it as sort of sign of recession, that's definitely not speaking to that. It's speaking to the opposite of that. There was some numbers today, again, in home builder numbers, home builder confidence ticked up again. This is the seventh straight month in a row that you've

had an increase in home builder confidence. Quite remarkable, really, when you think about interest rates having gone from, call it in the low threes to either the high sixes or low sevens and mortgage rates, that part of the market has been, again, resilient as well. So all in all, not a lot of negative to report on the day. This was a pretty much up day. We closed basically at the highs on the day in stocks. So I'll take that for what it is. And with that, I'll kind of leave it to you to enjoy your evenings. Thank you for reading and listening. My colleague Trevor Cummings will be out on DC Today with you tomorrow. And I wish you all a great rest of your week. Reach out with questions. Thank you. The Bonson Group is a group of investment professionals registered with Hightower

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