The Dividend Cafe - The DC Today - Tuesday, March 28, 2023

Episode Date: March 28, 2023

Today's Post - https://bahnsen.co/3TNPuMZ There are two things I think I have amply covered over the last few weeks: (1) Equity market volatility; and (2) the Bond market rally. Both things are true – equities have been all over the map, up and down, even as they are mostly flat (or actually slightly up) since all this banking commotion began. And bonds are indeed up a great deal, with the 1-year yield down a stunning 75 basis points since this began just three weeks ago and the longer end of the curve itself down 50 basis points. But what is not covered in there is bond market volatility. The swings we have seen in bond yields in the last month are not like anything we have seen since Lehman in 2008. The “VIX” for bonds has elevated beyond what it did during COVID and beyond what it did during the taper tantrum of 2013. This is despite all the quantitative easing that has been done and the general “flight to safety” government bonds represent. Now, much like equities (if not more so), one could argue these “day to day” swings in bond yields (and therefore in bond prices) really do not matter, and that would be true if all we were talking about was the investment return of one holding these underlying government bonds. But I bring it up because I think it speaks to something more than an expected return in a given asset class, but rather a deeper uncertainty, unpredictability, and general directionlessness that is perhaps permeating more than people understand. The policy milieu is not coherent right now, and rip-roaring bond market volatility says so. 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 the Tuesday, DC Today. Apologize if this is getting to you a little later than normal. I had a meeting after the market closed and delayed me putting this together. But here we are. First of all, I just want to say you likely got the announcement in your inbox bright and early this morning. We're very excited to announce. I've been holding on to this for quite some time, the opening of the Bonson Group's first office in the great state of Texas. We have secured a brand new beautiful office in Austin, Texas, the state's capital. As a matter of fact, we're just a couple of buildings down from the state capital on Congress Avenue and are very excited to open May 1 in Austin, Texas and be

bringing back to our firm, Robert Graham, who was a private wealth advisor at the Bonsai Group for many, many years and is rejoining us to launch this Texas office expansion. Couldn't be happier and wanted to share that news with you. More information, of course, is at our website. So let's talk markets today. Just quickly, the Dow is down about 37 points. It had been up, lost that, but then kind of didn't end up down that much, about 12 basis points. S&P not much behind there. And then the NASDAQ was down closer to half a percent. Communication services was the worst performing sector today.

And energy was the top performing sector. It was up, you know, close to one and a half percent, which you recall oil spiked up yesterday. We had gotten down to about $67 plus change a barrel a week ago, and we're back up to $73.50 today. So in less than a week, you've had almost 10%, maybe right at 10% move higher in crude. But the thing I want to focus on here, okay, there's two things I've already been focused on.'m going to reiterate, and then go to a third thing that I just haven't said enough about, and that's on me. One is the point about equity market volatility that we have clearly been in a very heightened period of vol since the Silicon Valley bank collapse.

And I mentioned that you've had used triple point, triple digit point moves up and down almost every day for now, 12 days. It's 11. Well, today didn't. So as of yesterday, we were at something like 11 out of 12 days. And some of those days, pretty significant, 500 points down, 400 points up. And yet the market was actually up 100 or 200 points in that period. High volatility in equity, which is not to be unexpected when you're dealing with this kind of skittishness and uncertainty with something undergirding the financial system. And then the second thing is the bond rally, which is totally accurate. I mean, like the one year, two year yields dropping over 100 basis points, the 10 year dropping over 50 basis points.

So really big moves higher in bond prices across the term of the yield curve over the last couple of weeks. And so it's definitely been big price gains in the bond market. But the third thing I want to bring up is something I don't think I've emphasized enough, and it does bring up an important point. Equity volatility, but still kind of flat. Bond market rally, all true, but unbelievably high bond market volatility. Forget the up and downs, which have mostly been ups in terms of this bond rally. Forget the ups and downs of equities, which have really kind of been flattish a little bit up. The bond market volatility is highly uncommon. And the violence

of this volatility, which does not suggest something negative in terms of the return over this period of time, because I just got done saying that the bond market has actually rallied significantly. But the violence of the volatility speaks to the uncertainty, the kind of chaos, the skittishness, the unexpected realities that exist right now in the financial system and in financial and capital markets at large. Let me give you a case in point. It's called the MOVE VIX. So the equity VIX measures the kind of fear index, what people are paying for options around the S&P 500. The MOVE VIX does the same around bond market level. So it's essentially a measurement of volatility in the bond market. It has been higher over these last couple of weeks

than it was during COVID, during the immediate aftermath of the whole March 2020 COVID implosion, significantly higher. It's been higher than it was during the taper tantrum after Bernanke's famous speech in the summer of 2013. You have to go back to Lehman to 08 to have seen bond vol this high. Now that bond vol has netted to a positive and quite significantly positive total return, but you're seeing day-by-day movements of 20, 30, 35 basis points up and down in yields. I'm not saying it's a good thing or a bad thing. And certainly, if you're an investor and you don't look at your bond portfolio, don't care day by day, nobody should, and you're just holding different bonds, it's irrelevant to returns and so forth.

I'm not saying it for what it means to the investment reality of those bonds. I'm saying it for what it means to the signifier effect across capital markets. You just don't get this kind of enhanced volatility in a totally rationalized market environment. And we do not have a rational market environment. There's uncertainty, there's skittishness, there's questions. And the reason is monetary policy. The reason is fears about the stability of the banking system and so forth. Things seem to be settling. We haven't had any major dramatic announcements on the banking front since Credit Suisse. We're still kind of waiting to see what's going to happen for First Republic,

but I still think that has more to do with the shareholders of First Republic than anything to do with depositors. So it may be that right now the Fed, the FDIC and Treasury is starting to feel like, okay, the efforts we took to insure uninsured depositors have worked and that the major flows out have calmed down. But bond vol, equity vol is saying, yeah, but what else lingers? And more importantly, what's the impact to credit? What's the impact to the economy of this much erosion in the deposit base you know we're getting close to trillion dollars going into money market funds out of it's not that high yet but it's it's six seven hundred billion dollars of

money that's flowed out of bank deposits which are lendable assets in the banking system going into money market which are investment assets and do not serve as a deposit base from which money can be lent against. So it's better yield for those investors. I think it's money good. I talk about it in the Ask David today, but is this going to impede lending for small businesses, impede lending or refinances for automobiles, excuse me, refinances for homes, new credit extension for automobiles, excuse me, refinances for homes, new credit extension for automobiles, things like that. I just think that the vol is going to continue. And I think this is the system that's been created right now, current monetary policy. I'll leave it there.

You want something more stable. You want something that'll better valuation in the midst of enhanced volatility. Technology as a sector is trading at 23 and a half times forward earnings, averaged about 17 to 18 times. Energy is trading at 9.2 times forward earnings. It's averaged double that. So our valuation basis, which is no timing mechanism, it doesn't help for timing. Energy can go lower, tech can go higher. All I'm saying is as an entry point, when you look at a quality level,

your portfolio, valuation is a compelling story around why we have the position we have on excessive amounts of tech, especially big tech, new tech, cool tech, and why we're overweight in the energy space. Thanks for listening to, thanks for watching, and thanks for reading the DC Today. We'll see you tomorrow. 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 advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities.

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