The Dividend Cafe - The DC Today - Tuesday September 13, 2022

Episode Date: September 14, 2022

The Consumer Price Index (Headline CPI) came in +8.3% over where it was a year ago. Core CPI (which excludes food and energy) came in at +6.3% versus a year ago. Food prices and the lagging effect of shelter cost put upward pressure on prices while energy prices and used cars put downward pressure on prices. TheDCToday.com 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. Well, hello and welcome to what I guess is more like the official first DC Today where we're doing the podcast. We did it yesterday, but first of all, we had some audio challenges, but second of all, it was still with the long form written DC Today. And it was actually a particularly long DC Today. So now we've started this new program.

And I'm coming to you today with a podcast. And in your inbox, you've also received a written kind of summary of the market and asked David and some of those things. And of course, on the first day we decide to do this, you have the worst day in the markets since summer of 2020. It's over two years. I think it's about 27 months. And I didn't look at it across each index, but at least that's the case with the Dow. So I want to be able to kind of address to you a few things that happened. I'm going to keep my readers nearby to go to the screen with some data points.

But let me do this normally here so I don't have my eyes go out on me. Look, initially, the futures were up this morning about 200 points. And the Dow has been up about 1,500 points or something in the last 10 days. And you then had the futures go from plus 200 to minus 300 in a matter of minutes this morning. So that immediately tells you that there was some positioning that got real throttled by the CPI report. Now, the headline number when you say, OK, CPI was up 8.3% and we were expecting it year over year, and we were expecting it to be up 8.1%, you don't really think that that's going to cause a 1300 point drop in the markets. And this is the thing I cannot explain emphatically enough.

It was not merely today in the selling pressure that people were so distraught by the CPI being 0.2% higher than projected. It's that they had been positioned for the opposite. There was a significant amount of money betting that the CPI was going to underwhelm expectations and push the terminal rate expectation for Fed funds rate lower and have this sort of overall kind of dovish message embedded into monetary policy. And that bet obviously had to get blown out. So a good portion of the selling pressure today was people unwinding trades that was based on a very short-term play that was the exact

opposite of what happened. Instead, you got the short-term play of, okay, well, CPI number came in a little higher than expected. And so then I think throughout the day, you see this all the time, especially with the advent of index funds, where the selling pressure begets more selling pressure. So we will see in the days and weeks ahead, fundamentally, where this story goes. I will just point out, and this is a staggering thing to say, the S&P is higher right now today after a 1,300-point drop in the Dow today, an over 4% drop in the S&P and over 5% drop in the NASDAQ in one day, and it's higher today than it was a week ago. I mean, September 6, the markets were higher than they are right now. Excuse me, lower than they are right now. I'm saying it

backwards. So you basically had a huge mountain up over the last week. And now in one day, you had a mountain back to the other side. And technically, the S&P is 20, 25 points higher than it was at that low of literally just a week ago. So as far as what it really means for investors, you should feel like your life's dreams are shattered today if you felt that way one week ago. And I hope you don't feel that way today. And I hope you didn't feel that way a week ago. Now, this is, of course, not to say people should like this type of severe volatility.

3%, 4%, 5% drops in a day are significant. They are part of the risk premia that markets exist for, that severe volatility is what people are paid for as long-term holders of equities. But I don't doubt that this is quite disruptive. But let's go into a few other numbers. On the short end of the curve, the two-year bond yield blew out another 18 basis points, 3.75%. Earlier, it was at 3.79%. That represents the highest we've seen in 15 years in a two-year bond. The 10-year is still sitting around 3.4%. It's still about 10 basis points lower than it was three months ago, back in the middle of June. Now, it is coming right back up to retest that high in the 10-year yield, and perhaps it will. The spread, by the way, between the 210 is 35 basis points. So it's still not to a new high

in that 210 spread that we had seen several weeks back. But either way, you had short-term yields push higher. And now, I had mentioned yesterday, there was a 12% chance in the Fed Funds futures market of a 50 basis point rate hike and 88% chance of a 75 basis point rate hike next week. You're now at 100% on the 75. And in fact, there's, I think, something in the range of 10%, 12% betting for a full 100. I don't think the full 100 is coming. But my point is that it's not about whether or not we get to 75, it's does it 75 or higher? And that's more or less

the way the Fed wanted it. So, okay, let me look over a couple other data points here while I have your attention. I do hope that perspective is useful for you in terms of some of the violence of the movement up in the last week and then down here today. But when the market takes four days to go up 1,300 points and four hours to go down 1,300, it feels asymmetrical, even when it was, in fact, quite symmetrical. So by the way, Bitcoin was down 10% today. The financials were down a little less than 4%. And when you look at the banks and things, but then asset managers are down over 5%. They have a lot more leverage to how markets are doing.

That was a big part of what happened. I said, I made a joke yesterday about energy. It wasn't really a joke. It was just the numbers of it. But the worst performing sector yesterday was consumer staples, and it was up 42 basis points on the day. And now today, the worst performing sectors were the two technology sectors, communication services and tech were each down 5.5% or worse. But the best performing was also still negative and actually violently negative, but comparatively not so much. That's energy down 2.4%. And if energy wasn't being included in some of the index sell-offs, it probably would have been about flat on the day. Oil was only down 10 cents or something like that. So you had a far better relative result with energy and utilities, which we've seen. And then the numbers that are really most correlated on the bond yield side and valuation

and multiple compression narrative, high PE places like energy and so forth were wiped out pretty severely. So I think that that's really kind of the major story. I don't think there's a lot to focus on around the rest of the country. Look, this was not expected that the CPI number would be a tad worse than expected. And it wasn't just that a lot of the financial side of things or traders were caught off guard. But whether you're Republican or Democrat, you know that the politicos are not

idiots. They don't go schedule a White House event and have James Taylor performing in this big celebration moment for the Inflation Reduction Act, as they called it, if they know it's going to be a day like today. I believe there was a lot of whisper and leakage that the CPI number was going to come in lower. And for whatever reason, everybody just simply got that wrong. It was primarily food inflation that kept both the core higher and headline. The energy number put downward pressure on the headline number. And then you had the used cars were more or less much lower inflation than there had been, but new cars were not. And so there was some push-pull. But I think the food price thing is the most concerning and frankly, kind of confusing. So across the board, I would

just suggest that it's going to take a few days to kind of let things settle, see where they go. I would repeat where I was back in June, that ultimately, if a three and a half level at the 10 year proves to be a high, then I think markets are able to kind of go about finding a bottom. They're well off of their June lows now. And so they could easily come back down to that low and retest it, and they can go through it. But if you end up getting the 10-year bond yield dropping 10, 20, 30 basis points in the next couple of weeks, that probably is a pretty bullish indicator. Well, how do you say that if the Fed's going to be raising rates 75 base points and another

75? Look, I know that they're going to get raising rates, 75 base points and another 75, look, I know that they're going to get into that three and a half to four range. The entire question that really matters is what they do from there. And there's a lot of focus in a day like today on the next meeting, the next CPI, the next rate hike. And that's fine. But that is most certainly not really what's going to price risk assets in a meaningful way into the future. It is going to be more into 2023 what the Fed's posture will be. And there are some who believe the Fed's going to take it up to 5%, 5.5% in the Fed funds rate. I just simply don't believe that. I think by then, equity markets will

be in a worse position. Credit spreads would be in a worse position. And at that point, the unemployment rate projection would be much higher, and there would be calls for capitulation. Everyone telling you how it's going to play out is wrong. That would include me if I were telling you how it's going to play out. I'm just not. I don't know exactly when and what will be the case with various catalysts for a Fed reversal. I only can tell you that going past the next immediate round of rate hikes is silly. It's just silly. So that's where we are. Very volatile day and period.

And now we're still higher than we were a week ago, for whatever that's worth. Reach out with any questions. We want your questions. Questions at thebonstonegroup.com. But I will leave it there. And, of course, come back to you with more of an update tomorrow. And we'll see if, indeed, there's a bit of relief in the immediate aftermath. It may not come tomorrow. It may take a few days.

We're doing our job. We're buying where appropriate. We're holding steady where appropriate, allocating always and forever how is appropriate for each given client. Thanks for listening to and watching the DC Today. 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.

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