The Dividend Cafe - The DC Today - Tuesday November 1, 2022

Episode Date: November 1, 2022

MARKET ACTION Dow: -80 points (-0.24%) S&P: -0.41% Nasdaq: -0.89% 10-Year Treasury Yield: 4.04% (-3 basis points) Top-performing sector: Energy (+0.99%) Bottom-performing sector: Communication Services (-1.81%) WTI Crude Oil: $88.57/barrel (+2.36%) Key Economic Points of the Day: ISM Manufacturing fell to 50.2, just barely in expansion mode, and the weakest figure since May 2020. New Orders and Backlogs reflected contraction, and only 8 of 18 sectors saw growth on the month. But … Job Openings went HIGHER in September, coming in at 10.7 million (almost a million higher than the 9.8 million expected) Links mentioned in this episode: 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. It is Tuesday, November the 1st. I hope you all had a wonderful Halloween. Hope you all had a wonderful Halloween. I've been on an airplane all day and just walked into my hotel. I'm in Grand Rapids, Michigan. I'm speaking at the Acton Institute's Poverty Summit tomorrow. And I'll be flying back very early Thursday morning. Another one of these little 24-hour trips. But a full day on the market and a few economic things I want to go through.

Tomorrow is Fed Day. And so we'll start with where I normally end, which is the on-deck issue. I'm actually kind of surprised at some of the volumes and the activity in markets. I suppose part of it is that the futures market is so clear, they're going to hike by three quarters of a point tomorrow. But it's been a while since we had a Fed day where there wasn't a volatility, a lot of volatility, and that's gone in different ways. You've oftentimes had the market up when the Fed's announcing and then down the next day. You've had it down as the Fed announced and then up the next day or the day after. It's gone a few different ways. And I've made the point several times this year, I want to continue to make it.

What happens in the immediate aftermath of the Fed announcing or the next day has nothing to do with the market responding to this incredibly surprising economic news. The one thing I'll grant as reasonably, I should say, not surprising, but not priced in news was the Fed speech in August that Chairman Powell gave at Jackson Hole, which upon the reflection of the market was gathered to mean, OK, they really are going to go another 100 basis points than was previously thought by the market, by the futures, by the bond market and by myself, which would be the least important of that list of market responders.

I think that these Fed meetings where it's fully priced in ahead of time, it just is a sort of process of elimination calculus that why does the market move with a lot of volatility if it isn't, when the news is exactly what was known and expected, if it isn't the removal of hedges or the increasing or decreasing of leverage or some sort of short-termism being applied to one or the other direction of markets. And so I don't know where that stuff goes, but I never care, and I'm never going to. That's not relevant. What I do hope we'll get out of tomorrow, and I wouldn't be holding my breath, is the Fed giving us some pretty candid and honest assessment of where they are on the balance sheet

and the challenges they're running into in quantitative tightening. I don't care what that does to the stock market, but I think it's helpful economically to get some more candor into what is happening in financial conditions, meaning liquidity in the financial money system. But be that as it may, as far as stocks go, we know about the tremendous rally I spoke on yesterday that we've seen in the last several weeks. And then here today, the Dow was down 80 points. It got up 250, again, mostly around quite robust earnings. It's been a phenomenal earnings season so far. I shouldn't even be saying this, but for the portfolio holdings within the dividend growth orientation that we hold dear at the Bonson Group. But for the most part, if you get outside of some

of the NASDAQ's key names, it's been a pretty good earnings season across the whole market. Now, there's a lot of names still to report this week, and so that could change. But I'm going to highlight one thing that I learned from earnings season this morning and share with you as far as what its broader kind of economic lesson may be. But today, the Dow ended up going from up 250 to down 250. So you had a 500 point intraday swing, and then it closed down 79 or 80 points.. S&P was down 41 basis points. The NASDAQ was down a bit more, 89 basis points, largely because the worst performing sector today was once again communication services,

which was down almost 2% again. The best performing sector in the Dow again was energy, which was up 1%. The 10-year treasury was down. The yield was down three basis points. I probably should say that more. I hate saying it because I feel like it's so condescending to those of you that know these basic investment things. But I know there's other people that maybe don't have all the investment vocabulary baked in. But always remember that when we talk about yields going up, that's referring to bond prices going

down. And when we refer to yields going down, that means referring to bond prices going down. And we refer to yields going down, that means bonds are going higher. Yields and prices are inversely related. And so today, you did see the Treasury yield down three basis points on the 10-year. The crude oil barrel per barrel price WTI was up 2.36%, closing, getting close to $89. All right. Economically, there is a report of China getting ready to accelerate and expand reopening. And it's not confirmed. And some of it is sort of rumor mill stuff. Some of it seemed pretty legitimate to me.

But I do think that there's a market anticipation of perhaps China discovering what many underclassmen in high school discovered over two years ago. And so if that were the case, it would be quite interesting in its impact globally and economically. But there's nothing directly and tangibly reported this time. Simon Property Group is the nation's largest owner of malls, particularly high-end shopping mall assets. And they reported results this morning and they grew their dividend on a quarter. They beat their expectations and revenue and profits. And I only bring that up because despite it being a holding of ours at the Bonson Group, I bring up Simon Property because their report on the state of the shopper was just totally contrary to what some might be suggesting is happening. Simon is seeing very strong foot traffic, strong wallet expenditure, particularly

in high-end brands. And I reported on this a couple weeks ago when some of the early luxury goods names were reporting really quite big numbers, Tiffany's and Louis Vuitton and things like that. Now, that doesn't speak to the whole economy when you start talking about those high price point items, but Simon and other malls are really reporting, shall we just say that the reports of economic decline in the consumer have been greatly exaggerated so far. Now, let's go the other side, because this is the theme we've had all year of economic news being very difficult to read when there's one hand and on the other hand. The ISM manufacturing number was at 50.2. So 50 is the breakeven level.

Below 50 in ISM means you've contracted. Above 50 means you've had expansion. 50.2 is obviously expansion, but it's the lowest level we've had since May of 2020, which you may recall we were in the middle of lockdowns at that time. So the manufacturing number was not good. New orders and backlogs contracted, and only eight out of 18 sectors saw growth. So you're just sort of barely squeaking out a net positive number of manufacturing. And then on the other side, job openings went higher in September. There was 10.7 million unfilled jobs. We had come down quite a bit from the high, but they were expecting this number to come down to about 9.8 million. And it ended up coming in almost 1 million jobs higher than expected as far as job openings that

remain unfilled. So this data is as conflicting and challenging as I've ever seen it. And I've followed economic data my entire adult life. And I've never seen it this sort of schizophrenic, if you will. On the housing front, the only thing I want to report is that the average monthly mortgage. So this is kind of worthless statistics, sort of like talking about average weather, because some houses cost $200,000 and some houses cost $5 million and there's median home prices and what have you. But I'm just referring to a median number of a new home purchased. There is an average of down payment. There's an average of price point and then there's an average mortgage rate. And when you blend these

things for whatever it's worth, it is worth something, by the way, because it speaks to trends, speaks to its relationship and ratio to historical data. The average monthly payment is over $2,500. And that is the highest in history. And so there is one of two ways that this gets resolved. The interest rate comes lower to make the monthly payment lower and the price either does or doesn't move or the price comes lower or both. But regardless, we're in an affordability situation where you just can't get houses sold

when they're not affordable and the resolution to affordability lies in the price or the price of the capital buying it. Finally, as I mentioned, the Fed going tomorrow, 88% chance in the futures market of a 75 basis point rate hike. All eyes will be to December where the futures remain pretty evenly split, tiny bit favoring the higher, another 75 next month. But we're looking at either 75 or 50, and then all eyes go into 2023. And we can start doing this all over again, where the deified entity of the Fed becomes the central actor in all economic life. It's just wonderful, isn't it? A reminder for whatever it's worth, we're not Canada and

our central bank's not the Bank of Canada, but they were widely telegraphed to do a 75 basis point rate hike last week and they ended up shocking markets and doing 50. A big difference is that our Fed doesn't surprise markets. They haven't since 1994, but I'm just putting it out there that some of the global banks are getting up against the line of where they're concerned about breaking something in this policy regime of tightening. So that's where we are. I'll be having a report on it. I'll be on Fox Business tomorrow afternoon briefly talking about the Fed report. And then I'll look forward to sharing with you our insights after my symposium tomorrow back at the DC Today podcast video and your written delivery.

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