The Dividend Cafe - The DC Today - Tuesday, October 4, 2022

Episode Date: October 4, 2022

The second violent rally day in a row took place today, with the market up nearly +6% to start off October, erasing all of the downturn of the last ten days of September (for now). More to say in our daily podcast, of course! MARKET ACTION Dow: +825 points (+2.80%) S&P: +3.06% Nasdaq: +3.34% 10-Year Treasury Yield: 3.63% (-2.2 basis points) Top-performing sector: Energy (+4.34%) Bottom-performing sector: Consumer Staples (+1.53%) WTI Crude Oil: $86.30/barrel (+3.17%) Key Economic Points of the Day: Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Tuesday edition of the DC Today. I'm your host, David Bonson, and we are two days into the month of October. We are two days into the month of October, and the market is up about 5.7% in the last two days, effectively may not seem like that big of a deal because you just went from a low spot that went really low to now has come back to where it was. But nevertheless, it's noteworthy. You're talking about over 1,500 Dow points in two days. It doesn't happen very often. By the way, just for those of you that don't keep fresh in your math, 1,500 points off of 29,000-ish is a lot different than 1,500 points up around

35,000-ish. The percentages matter, and that's why some of this is pretty noteworthy. I want to talk to you about why I think it's happened here in the next few minutes and give you a little update on some things happening in our world. So the futures were up 400 early this morning, had not been up that much last night. I watched futures kind of stay in that range. And then the market opened up about 700 points within 30 minutes. Excuse me, the market opened up, but within 30 minutes got to up 700 points. It kind of stayed in that range for the rest of the day, but you know, pretty tight trading range within about plus 650 and plus 850 on the day. So went way up and then stayed there and ended up closing up 825 points on the Dow,

2.8%. The S&P was up just over 3%. The NASDAQ was up just over 3.3%. Bond yields have come way down from where they were at their high last week, but the 10-year was only down 2.2 basis points. So bond market rallied again today, but those yields were not down a ton. The 10-year treasury is now sitting at 3.63%. I'm going to suggest there may be a couple other things at play in this rally, and I'm going to suggest those things to you in order. First, I'll get through other report card stuff. Energy was up 4.34%,

was the top performing sector. And consumer staples were up 1.53%, and that was the worst performing sector. So again, when you have your worst performing sector up 1.5%, that's going to be a heck of a day. Oil was up over 3%, closing at $86.30 a barrel. Just in terms of news events, Elon Musk announced he's now going to go forward with his Twitter deal at the prior price. Janet Yellen announced that some of these rumors about her leaving in a few months are in an imminent fashion or not true. We'll see. The only thing I can say about that, I have no information that she is leaving or isn't leaving, but I do know that one's denial of their plan in politics generally doesn't mean much. People can, you know, if they are planning to leave, they can't really say so. So it isn't necessarily a big surprise. The economic data,

I just want to point out that I said yesterday about how ISM manufacturing was up a bit, but it was a mixed bag. It was up less than expected. It was up much less than it was last month. And that nine out of 18 sectors actually had contraction on the month. The piece I didn't share yesterday that I kind of want to do a makeup on is that new orders, which is one of the components of ISM manufacturing, was actually down on the month. And so even though other areas indicated expansion, new orders, which is a pretty important part of manufacturing, was in contraction mode. In terms of energy, then I'm going to come back to the market, the big event tomorrow is OPEC plus meeting and, and potentially announcing large production cuts. We hear that Saudi is pushing

for that. We hear Russia's pushing for that. It makes all the sense in the world that both Saudi and Russia would be pushing for that. And if both Saudi and Russia want something at OPEC+, it's almost inevitable they're going to get it. But maybe the market's overdoing their expectation of a million barrel a day cut. Maybe it only is 600,000. And so oil prices come down tomorrow. We don't really know. I have spent so much time as a professional investor getting whipsawed around by OPEC that I just prefer to wait for the news as opposed to try to discount what they may or may not do. The White House is asking U.S. producers to export less oil and gas concerned about stockpiles here in the U.S. By stockpiles, I presume they might be referring to the strategic petroleum reserves,

which the White House has ordered, drawn down to their lowest level since the early 1980s. So do with that what you will. Gas prices have come up a bit. They hadn't really come up for several months. And this has pushed a big rage of what the White House ought to do to U.S. domestic oil and gas companies that are allowing prices to be higher. Okay. Here's a couple theories as to what moved the market higher. Number one is the Occam's razor. And all of these are not contradictory from one another.

They can all coexist. And you can pick which one you think is the biggest reason, the smallest, middle, maybe one of them. You don't think it's the reason at all. But I'm going to share three thoughts with you. Maybe four thoughts. Number one is just reality of things that were oversold. And so markets bounce when they come out of oversold conditions. People who were not buyers, as there were a lot of sellers, allowing price to the downside to cascade, which we saw last week, then become buyers at lower prices. And

then it has a reverse effect and pushes prices higher. There is technical considerations there. You also didn't have a lot of room to get some of the low level buying going Thursday, Friday, as the month and the quarter came to an end. and perhaps some people kind of waited. So that's sort of a more technical potential explanation, and I definitely think it plays in. And it's not very helpful, but just simply markets went up because they were done going down, at least for now, is tautologically true, and we'll determine what role it plays relative to these other factors. I woke up to about 3.30 in the morning to the announcement that the Royal Bank of Australia, the central bank, the Fed, if you will, of Australia, was hiking interest rates a quarter point when they were expected almost certainly to be hiking half a point.

And this is the first sign across global central banks. Australia's is not exactly the most prominent in the world, but this is the first sign of weakness from central banks who have been in this very hawkish resolve. And so I think there is a chance that some of it was taken in the markets as, okay, this is not the first dovish lean-in from a central bank in the midst of a hawkish moment. Again, they still hiked rates. They just did it by half of what they're expected to.

It's only Australia. It's still a quarter point up, but there is a real sense in which expectations came in on the dovish side where everything for about nine months has been the other direction, more monetary tightening across the global central bank apparatus than has been expected, I think that explanation is worthwhile. But then a few hours later, the jolts data came, the monthly job openings and open jobs dropped by over 10% on the month, meaning the open job positions. That's over a million. I think the number is that it would have been a little over

11 million and it came down to a little over 10 million now that is still a high number of job openings and it's higher the amount of people looking for jobs and we already have discussed how a skills mismatch explains a lot of that but the available jobs are the lowest in 15 months, even though the number itself is still elevated. I hate this idea of bad news is good news and good news is bad news. And that's what you get into when the Fed is in charge instead of earnings and human action. But the fact of the matter is that if markets are saying, OK, this is the first sign we've seen that labor markets are weakening. And then you combine that with Australia's factor. And then you combine it with the fourth thing I now want to say,

which is the Fed funds futures are now pricing the peak Fed funds rate at four and a quarter. And it was 4.6 two weeks ago. So that means that over 30 basis points of terminal rate expectation has come down. So forget if we're doing 50 or 75 or 25 or 50 of the next one and two meetings, the end result as to where we are going, the futures market is now pricing that 30 base points lower than before. The futures market could be wrong. The Fed dot plot is generally wrong, but I think the futures market is far more accurate than the dot plot. But my point is, is the market starting to say, okay, we are maybe getting to that point that no one has thought we were getting to yet of some needed central bank kind of

some needed central bank kind of weakening is this just purely about markets saying, okay, we were oversold. Now there's a little bit of a rally from opportunistic buyers. I can tell you that the Bonson Group was in the market buying and reshuffling some things and we would not be alone. There's always some of those things lingering there. Buyers under stress, expectations being repriced perhaps around the Fed. But at the end of the day, we're just way too early. It's two days. It's a big rally, but it's two days. And so there was so much carnage done to risk assets in September. We're going to wait and see where things go.

In the meantime, earnings season is going to start next week. I care about that a lot. I'm excited. We're very happy to answer any questions you have. Read the DCToday.com for the Ask David dealing with quantitative easing and quantitative tightening. And in the meantime, I'll be back to you tomorrow with another podcast and video and written market synopsis for the DC today. Thank you for listening and watching. 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.

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