The Dividend Cafe - The DC Today - Tuesday October 25, 2022

Episode Date: October 25, 2022

We notched a third day of gains in markets today, up now 11% on the S&P from the intra-day lows a few weeks ago in a broad-based rally in both stocks and bonds, and I have plenty to go around the horn in my video and podcast links below. I have also sprinkled in a few takeaways from over 20 portfolio manager meetings last week in New York to add to your listening pleasure. Take a listen, and reach out to me, Brian Szytel, with questions. Market Action Dow: +337 points, +1.07% S&P: +1.63% Nasdaq: +2.25% 10-Year Treasury Yield: 4.10% (+ 13 basis points) Top-performing sector: Real Estate +3.94% Bottom-performing sector: Energy -.05% WTI Crude Oil: $84.92 barrel +.40% Key Economic Points of the Day: Consumer sentiment came in lower than expected at 102 versus expectations of 105. The Richmond Fed index came in weaker than expected today at -10. The US Dollar was lower on the day by about 1%, along with interest rates across the yield curve that both aided today’s equity rally. Terminal Fed Funds Rate shown ending north of CPI in all of the last rate tightening cycles is shown below. Today we are at 3.3% versus 8.2%, and while those rates will likely converge, we just aren’t there yet folks… 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 today's DC Today. My name is Brian Seitel. It's Tuesday the 25th here in Newport Beach office and kind of a nice up market day to kind of go through with you a little bit and come back from our trip from New York City last week where we do every year sort of a 20 plus manager meeting type of marathon trip together to kind of go through, go through positions, go through the managers that we work with. And so I'll have a little bit of a couple of takeaways that I can probably sprinkle in throughout this, this recording for today as well. But update today, actually futures last night

were slightly negative. We had an update yesterday, not a huge update, but an update yesterday, futures were negative last night, pointed to probably a negative 100 open on the Dow. But I think what happened was markets opened and you immediately saw rates come down kind of across the yield curve. So with falling interest rates, you had dollar came off a little bit and you kind of started to see the bid catch in equities. And the nice thing about the day was that it sort of built on itself. And so we ended up sort of closing up 337 points or so on the Dow, which was right about the high for the day. So this is the third straight day of gains. We've had a couple of negative days last week. We're up about 11% or so from the lows of October.

And I definitely wouldn't say that it's off to the races or anything like that. We've got a lot to go through here today, but positive signs nonetheless. Of note today, you still have the volatility index kind of hovering around this sort of 28, 29 level. It's not hyper elevated, showing mass stress, but it's high enough to just sort of show you that we're not out of the weeds here on this thing yet. Some of the top news stories, I think we may have mentioned yesterday a little, but there was what I think is the third prime minister in the UK here over the last couple of months, came into office yesterday, and he's got kind of a steep hill to climb economically with getting

UK house in order there. Elon Musk pledged to close his Twitter transaction by Friday. Tell by the look on my face how likely I think that that actually is. We'll see. Interesting, yesterday, there was a big sell- off in Chinese equities, particularly the tech sector. And we spoke about that a little bit. And frankly, I had I had assumed that you would have seen a rebound today. Just given the massive 15 percent sell off in a day, markets are kind of notoriously unfriendly to having what essentially is a third and potentially a term that will last in perpetuity with the president in China kind of keeping hold of his power. And his goal is more, less to do with growth, which is what they have, their mantra has been for many years, and it's shifting more to staying in power. And so the goal there is to sort of democratize the

wealth in the country a little bit. And tech the goal there is to sort of democratize the wealth in the country a little bit. And tech sector is really kind of falling out of bed with that. And so I would have assumed you'd seen a kind of a rebound rally just from yesterday's sell-off, and you really didn't see that today. So there's some real staying power there. Consumer confidence was lower today. It's a lagging indicator. I don't put a lot of time going into consumer confidence. It's basically a number that tells us what we already know about what we've just gone through and a little less predictive about what the future may hold. But nonetheless, it was a little bit weaker today, along with the Richmond Fed index that came in a little weaker.

So, you know, for better or for worse, some slowing numbers. And ultimately, I think Fed is starting to get what they want. for better or for worse, some slowing numbers. And ultimately, I think Fed is starting to get what they want. David had in the Ask David section today, the question was regarding, are interest rates alone enough to bring down inflation in the economy? Is that enough to slow things down? And what if rates go up on their own, that type of thing? And his answer, I thought, was really well said. And I've included a chart for you to take a look at. But the premise is basically two things. Number one, there are parts of the market that are more sensitive to rates.

Housing, for example, would be very sensitive to interest rates, whereas things like food, some other things like energy really aren't. And so to answer the reader's question, the answer is yes and no. The chart is there to sort of show you perspective over time. And it kind of goes over the last Fed tightening cycles going back for 40 or 50 years. And you can see where the terminal rate is, meaning where they stop raising rates. When is the point at which they stop hiking and then ultimately cut? And then where is CPI when they do that?

And you can kind of see where history shows. Ultimately, the Fed raising rates and CPI tend to move together. So rates tend to go up and CPI comes down and they converge and then they either cause the next recession or there's no need for them to continue hiking and they begin cutting at some point. But you can sort of see where we are today, which is a Fed funds rate effectively at 3.3% and CPI at 8.2. So, you know, those two numbers need to converge. And so when I get rallies like today, I'll take them. And I like to see some green on my screen. I know clients do as well. You just have to put this in perspective. This isn't the ninth inning here. We're probably something like sixth or

seventh with the World Series coming up, to use that analogy. But there's some time to come. The real question is just going to be how long it takes for those numbers to converge. How quickly can inflation come down before the Fed is going to have an official way to pivot? And so in the meantime, maybe you'll get rallies like today with rates coming down and dollar coming off. That's fine. But we're just not quite out of the woods there yet. And I thought that chart went well with David's Ask David section. The reason is, and this was actually a strategist comment today that I thought was good. It was anecdotal, but there was an American economist, Samuelson, last name. And when talking about what it does to have negative real rates over time,

he said it would make sense to pave over the Rockies because over time, of course, your investment would be recovered just by the fuel savings in the vehicle over 20 or 30 or 40 years. And the point to saying that is that negative interest rate manipulation like that negative real rates is not natural, number one. And number two, it's distortive of markets. And David had a nice comment on that as well, separately in his Ask David section. We still see weakness in housing. I mean, that's nothing new. It's not something we've already spoken about. But we are seeing month over month declines that we haven't seen since technically 2009. So just keep in mind, 7% mortgages and rising rates affect different parts of the market more than others. Also interesting,

I thought when looking at flows, and I do pay attention to this, you can see ETF, exchange traded fund flows in different sectors. So energy is up, call it 60% on the year and fund flows are something like 600 million, something like that on the year. So it's taken in some money. People are noticing energy has been left for dead, basically, for many years. And people are kind of paying attention and moving money. And that makes sense. But when you look at sort of the high valuation tech part of the market and there's an ETF particular to that sector, it's down 60% on the year, and it's taken in over $1.3 billion. My point to saying that is just energy has run. It's the clear outperformer in talking about, or speaking of our New York trip, it was one of the themes that permeated most of the

meetings, not every meeting, but most of the meetings was a very positive atmosphere for energy and the energy sector. But just given those flows, I mean, it's picking up some momentum and it's getting noticed, but not like I would expect with an up 60 year versus some other things that are down. In other words, I'll say, I know David has in Friday's Dividend Cafe spent time kind of going through our literally 40 pages of notes each on this meeting trip. So I don't want to steal his thunder and go through it too much. But I'll give you a couple takeaways that aside from the energy sector during these meetings, there is value on the short end of the high quality bond curve right now. And so when we looked at our fixed income

portfolios and when we're talking about them, there's always a point in which you want to go out on the risk spectrum. When you think that you're maybe coming out of a recession or, you know, things can't really get much worse, you know, time to kind of risk up a portfolio in bonds. I think that's fine to do. But in the meantime, first off, we're not there yet. So what we've kind of talked about and what we heard a lot of was, you know, don't feel like you need to really go out on a credit risk spectrum in bonds. You can get nice yields, 3%, 4%, 5%, 6%, staying high quality, staying short term, and then kind of let things play out and then do your rotation when you feel more comfortable or convicted that things are kind of moving through. We've talked about China a little bit. I wasn't sure originally when Xi Jinping, the president, kind of started enacting some of his policy to bring down the cost of education, to try to spread wealth around the technology sector and is that not the managers are giving up on it or anything like that.

China is here to stay and it's a big growth engine in the world. But the patience of waiting for that to happen is getting a little long in the tooth. And so people are basically moving on. And you're seeing that in investment around the world coming outside of China, too. So I thought that was interesting. And we'll have to see how that that plays out over time. Most managers are looking for a shallow recession in 2023. I don't know that I would take a vehemently opposed view to that.

Historically, in rate tightening cycles, they do tend to move the pendulum a little too far, and that's the result of it. But what I would say is that markets will price that in and are pricing that in well in advance. That's what we're seeing right now. I wouldn't draw the distinction between potential of a recession next year, and that means another 25% down on the S&P at all. In fact, if anything, I would say something to the opposite effect. Listen, with that, that's sort of around the horn on the day. I appreciate you listening. As always, fun to be with you today. I'm traveling to our Bend, Oregon office tomorrow at the Bonson Group and having some meetings there. So Trevor Cummings will be joining you tomorrow.

And please reach out with questions. I'm here to answer them. Thanks so much. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and 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. No investment process is free of risk. There is no guarantee that the investment process or investment

opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and

information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the Bonson Group and do not represent those of Hightower Advisors LLC or any of its affiliates. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client's individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for any related questions.