The Dividend Cafe - The DC Today - Tuesday, October 10, 2023

Episode Date: October 10, 2023

Today's Post - https://bahnsen.co/3S0qSBs Markets today moved higher as bond yields came lower. One can argue that bond yields are dropping in response to comments from Fed governors yesterday (see below) but the more prominent factor is likely a slight flight-to-risk out of the war situation in Gaza. What it has done, though, is exacerbate the stock-bond correlation whereby they were both dropping in September and now are both rallying. Earnings season launched with Pepsi announcing their results before the market opened. Markets liked it. President Biden joined with European leaders in a joint statement taking an unambiguous stance against Hamas and for Israel. He gave a speech this afternoon that conceded there are American fatalities and hostages. Congress and even the White House are not really the challenge here – a rare thing to be able to say in this day and age. The challenge for the President will be, to borrow from my favorite political commentator, Mark Halperin, “the squad, and then Harvard students.” But there also will be a real challenge for the administration to maintain their posture with Iran (it will likely be impossible), and what can be done about American hostages taken by Hamas is not going to be easy either. Add to that the complexity of getting aid for Ukraine and Israel in the next 2-3 weeks, and this is going to be a challenging time at the White House. The death toll appears to be over 1,500 now. The reports all seem to indicate that one of the reasons Israeli intelligence picked up nothing on what Hamas was doing was that there was simply no electronic communication about it at all – none. The Republican mess over the next Speaker of the House is as blurry, evenly divided, and unclear as it was a week ago. 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. Well, hello and welcome to the Tuesday edition of the DC Today. We had a fully normal day in markets, meaning stock and bond and banking markets were all reopened after the Columbus Day holiday where only stock markets were open. And you did see exactly what would have been predicted in the aftermath of the homosetrosity against Israel, which was a significant drop in bond yields that rallied bond prices higher. And yet you saw

stock prices rally yet again. And I think we're now up 850 to 900 points from the bottom on Friday. But you got about 300 points up Friday. You had about 200 yesterday. You got another 150 or so today. And then there was an intraday move that accounts for the difference on Friday. This is a very important thing for me to say. Generally, when you have a big event that freaks people out, a war, an invasion, exogenous shock, yields drop, bond prices rally as part of a fight to safety. That part is pretty easy. But of course, that is the opposite of risk assets rallying. You can't get a fight to safety rally in non-risk assets because people are trying to get out of risk and still have a fight,

because people are trying to get out of risk and still have a rally around risk. And yet on a small scale, it's not huge. Let's not get carried away here with the Dow up 350 points since the Hamas attack over the weekend. Could the Dow have been up 200 yesterday, 150-ish today without bond yields dropping today, without the action out of Israel-Hamas, of course. It doesn't take any reason to go up 350 points in two days or to go down 350 in two days. However, the notion of bond yields dropping today and equities going higher, it really reinforces what has been one of our biggest themes for months, which is that stocks and bonds are heavily positively correlated right now. When yields drop and bonds go higher, stock prices are going higher with it. And inversely, which was more often the case,

obviously, in the latter half of September, when yields rise and bond prices drop, equities are dropping with it. And what I think we got today was nothing more than a continuation of stock bond correlation. And it just so happens that while traditionally out of a weekend military, you know, distress event, you might see bond yields drop, bonds rally and stock prices drop or whatnot. In this case, that stock bond correlation held and bonds pulled stocks along with them. And yesterday, of course, you saw energy up a lot as oil prices were up. Today, technically, energy was the only negative performing sector, but it was minus 0.02%. So if you don't mind, we'll go ahead and call that flat. The worst performing sector today was energy at flat. And then utilities were up 1.36%,

which shouldn't be a big surprise based on how they have traded with bonds and gotten hammered as bond yields rose. And then now with bond yields dropping today, it caused utilities to rally. It caused utilities to rally. You know, the yield move was pretty significant. Within the 10 year, the yield dropped 13 basis points. It closed at 4.65%. But you know what? I'm going to pull up where it was across the yield curve. You know, the three month, six month are only down two to four basis points.

The two year was down 11. The three-year yield was down 13. Five-year, 13. Seven-year, 13. Ten-year, 13. Thirty-year, 10. So in that intermediate part of the curve from about the three-year to the ten-year, all were down 13 base points together.

That's a pretty meaningful move higher in those bond prices. But I think that if people thought there was a real significant risk off thing, you may have seen the 10-year drop below four and a half. But interestingly, it didn't get up to five percent last week when things were really moving higher. What did top out at i think for a brief minute it got to four eight something hold on real quick here yeah i just shy of four nine about four eight eight um and then you know now we're sitting here it's down about 24 24 basis points or so in in the last few days uh some of that from before the weekend events and a lot of it today. So all that to say, we'll see where bond yields go from here,

but I still continue to believe that wherever bond yields go is where stocks will go inversely. As yields drop, then it means bonds and stocks would be rising and vice versa. Now, earnings season also started today and PepsiCo released their earnings. There's more numbers coming from other companies throughout the rest of the week. But that was the big headliner today to launch the next earnings season that will be in heavily for the next three weeks. And by the end of the week, we'll have a lot of big banks and financial firms releasing. But the market liked what it saw thus far. President Biden did speak near the end of the day today. There wasn't a whole lot of new information said. I mean, he confirmed that they do have, Hamas does have American hostages in Gaza. We knew there were some

that there have been some American casualties. We knew there were some. were some, that there have been some American casualties. We knew there were some. Yeah, I think that it's a really awful thing we're watching right now. And yet the notion of Israel going in for a prolonged counter in Iran doesn't seem to be what markets are expecting. And I think that the reason is that markets are in a more of a wait and see mode. So I don't think this is a case where markets are just pricing in everything. Now they price in what they know, but there's a lot that is unknown hour by hour and day by day. And so we'll continue to watch this and let it play out. And in the meantime, believe that we are positioned around what we can be positioned around with the varying uncertainties. I also have a couple other real comments right now,

some in the political realm. Keep in mind always the DC Today was named as a double etendre that my weekly commentary that we've labeled and branded and named for years and years was Dividend Cafe. So when we decided to change the naming of my COVID and markets daily missive into something not COVID-ish, the DC Today had a kind of connectivity to Dividend Cafe. And that's really sort of probably the primary meeting is like a daily version of Div Cafe with the Friday weekly commentary being the big one. But then obviously, because there is a kind of synthesis on money and politics and government, the Beltway, public policy is a better way to put it. There's a kind of D.C DC connective tissue there as well. I don't think politics is the primary mover to markets, and I don't even think it's one of

the primary movers. And yet I do think a lot of the readership and the commentary and the interest level is in that vein where economics and politics mix, where markets and policy mix, etc. OK, so I say all that to just rationalize that I'm making a few comments here. I think Robert Kennedy pulling out of the Democratic primary to run as an independent is a reasonably interesting event. I think that Cornel West announcing he would do the same last week, not in the Green Party, but instead as independent. In the sense that I am so convinced our presidential elections in this country are now, have been for several cycles, and will be for several more, one on the margins, that in the margins of a very select number of battleground states,

these kinds of things can matter. These kinds of things can matter. And it probably was tremendously helpful to President Biden or whoever the Democratic candidate may end up being that Cornel West would run as an independent where he'll be on many less state ballots than he otherwise would have been as a Green Party candidate where they had more infrastructure in place to put a candidate on a on a ballot and and then i also would argue but not with a lot of conviction it may be something outside of my understanding other political commentators that i respect may very well disagree but i think that it's entirely possible that robert kennedy running as an independent rather than Democrat might hurt President Trump or whoever the Republican nominee ends up being more than the Democrat, despite the fact that Kennedy is coming out of the Republican or the Democrat side. Now, I would have to see what states he ends up qualifying for, because if he pulls some votes from both alike, but it ends up being 60-40 or 55-45, and that's

only in primarily states that already had a very clear likelihood of which candidate, you know, a real red state or a real blue state, it's sort of irrelevant. But if he qualifies for the ballot in some of the battleground states and then my general feel holds, which is not data driven. It is a feel that right now he has a bit more appeal with a certain fragment of the Republican Party. You know, I don't say any of this is like a good thing. I don't actually say it's a bad thing either. I have a whole bunch of thoughts on it. I don't really want to get into right now, but I'm just being kind of descriptive and analytical. I suspect that that's a big chain turn of events could have an impact on the overall electoral cycle. Finally, the biggest thing today

is that dividend cafe on Friday, I wrote about tighter financial conditions, which are clearly apparent to anyone paying attention, that they would, could, and certainly should substitute for any additional rate hikes. And I made my case using the FedZone data that their proxy funds rate was already showing real effective policy rate of something around 7%, not 5.25%, 5.5%. And I thought it was interesting that yesterday, Monday, Fed Governor Jefferson and Fed Governor Logan in Dallas both said almost the exact same thing. So I think that they are prepping futures markets for no additional rate hikes. We do have a CPI number coming Thursday and there's other things floating around, but my general feeling is that they are far past where it was appropriate to be hiking and that they are likely past where they will be hiking. But rather, the question then pivots to how long they stay high, especially with this additive premium in the proxy rate continuing to tighten.

Beyond that, the data today economically, the NFIB small business optimism, it dropped half a point, not a lot on the month. Yesterday, I think it was the Fannie Mae home purchase sentiment index came out. I just thought it was interesting that that home purchase sentiment dropped two and a half points. Only 16% within that index are saying it's a good time to buy a home. And that is actually an all-time low. Now it's tied for an all-time low. But my point is a lot of people just, you know, the inverse of 16 would mean 84% apparently don't think it's a good time to buy a home.

And this may have a lot to do with the stalemate in prices we talk about a lot. All right, there's an AskDavid at the DCToday.com. Other than that, I'm going to leave it there. Definitely a couple links you might be interested in. I was on set with Varney at Fox Business this morning for an hour, and my team put together a little highlight reel. So you may want to watch some of those links. But other than that, I'm going to let you go here. So I will be back with you tomorrow on Wednesday with another DC Today. And I would be happy for you to reach out with any questions. In the meantime, thanks for listening. Thanks for watching. And thanks for reading the DC Today. The Bonson Group is a group of investment professionals registered with Hightower Securities

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