The Dividend Cafe - The DC Today - Tuesday September 27, 2022

Episode Date: September 27, 2022

Markets took a decent lead at the open but couldn’t hold it, and there is some more to say about the bond market in today’s daily podcast! TheDCToday.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 another DC Today, a daily synopsis for you of all the fun action in the market. We're getting even closer now, just three days to go now to the close of September in Q3, likely a quarter and a month that a lot of people will want to leave in the rearview mirror. The Dow ended up down 126 points today. It doesn't seem like that big of a deal these days, but it was up over 300 early on. Right away, it was clear it wasn't going to hold its momentum. And so the Dow,

after a couple of hours, had gone from positive to negative. But even the high of the day was reached very early on. And that upward momentum fizzled quite early on. The S&P was down 0.21%. The Dow was down, excuse me, 0.4%. The NASDAQ was up a tiny bit. So a little bit of a mixed bag there. But the bigger story just by far, and it's driving everything else going on right now, is the upward surge in bond yields. And the 10-year was up seven basis points today. I want to give you, I know that the five-year closed at 4.2%, but to give you an idea of some of the weird action in the bond market today, you had the two-year down a couple of basis points. You had the six-month down six basis points. And then you had the 10-year, like I say, up 7 basis points and the 30-year up 13.

That's quite a bit of steepening in the yield curve when yields in the low end were coming down, the high end going up. And it's just been so long since we've seen something like that. So a little steepening in the curve. But fundamentally, actually, let me get through the data and then I'm going to give you some commentary on why this matters because it matters a lot. Energy was the top performing sector today. It was up about 1.2%. Consumer staples were the worst performing sector. They were down about 1.7%. And it was kind of a mixed bag among sectors in between. WTI was up. The crude oil was up 2.3%, but it's still sitting there just below $80.

So oil was up today, but it has been down quite a bit here over the last couple of months. And there you go. That's kind of the summary of today's market. Look, the dollar strengthening and what you've seen in the last week versus the sterling pound, massive rally bringing the sterling down and the dollar up. Same thing with yen, to a lesser degree with Chinese yuan. But the dollar strength is the story, and that is a correlated story to the surge in bond yields. When bond yields drop, equities will go higher. When the dollar reverses, equities will go higher. Until those things happen, I don't think they will. It's really that simple right now. So some kind of snapback in bond yields and the dollar could happen in five minutes and it could happen in five weeks. I'm not offering you anything helpful

here about timing a trade, but I'm offering an indicator of what is a catalyst to seeing some buyers come back into the equity space. And that's the huge issue. Well, that gets to the heart of the matter on the bond side. And I want to think through this more. And I'm in touch with several people that I talk to every day or very frequently macro economically. I am increasingly of the opinion that the Fed may not touch the Fed funds rate as a means of lightening up on monetary tightening, but that they will indeed be lightening up. And so what do I mean by that? It's quantitative tightening. The issue of the Fed reducing their balance sheet, I find it impossible to believe right now that it is not a major factor in the upward move in

the long end of the curve. And what the Fed has done is, just to use back-of-napkin math for you, they added about $4 trillion to their balance sheet after financial crisis. They got a few hundred billion off when they were tightening before. Eventually, they broke credit markets, and then they stopped. And then they just ran still. They weren't easing, quantitative easing, QE. They weren't easing or tightening. Then COVID came and they added another $4 trillion. It was a little more with some degree of mortgage-backed securities, Fannie and Freddie bonds, and a much higher degree of treasury bonds. And so then they announced, okay, we're going to start tightening up. We're going to start pulling liquidity out of the banking system. And we're going to do this by allowing $47.5 billion a month of government securities to mature and not be reinvested. And so essentially,

that was a way without selling bonds of reducing the balance sheet. But they said in September, they were going to double that amount up to $95 billion a month. So let's call it rounding up $100 billion a month that they're going to be reducing the balance sheet. It appears to me that there are no buyers. The five-year auction today finally got filled three basis points higher than where they came out at and when issued. And so you're talking about a 4.2 yield on the five-year. There's still inversion between the middle of that curve and when you get out to 10 and 30. 10 and 30. I just simply believe that it is a plausible theory that the Fed can keep talking the way they're talking and allow the Fed funds rate to go in the direction they're referring to,

but then on the other side, which would not be as subject to political backlash or some of the same accusatory environment they would inherit if they reverse direction on rates, soften up on the quantitative tightening. And I wouldn't be acting on this theory, but I would put it out there as a not small chance of something that could play out in the weeks and months to come, which could be relevant to investors when they think about how markets are presently responding to liquidity conditions. So if this seems a bit confusing, you have to let me know, but I don't think it is. I'm effectively saying that there's two ways the Fed can keep tightening and they've committed to doing both. And there's two ways the Fed can keep tightening, and they've committed to

doing both. And there's two ways they can go about trying to accommodate or introduce more loose and easy monetary policy. And one of those two ways is going to be very tricky to maintaining credibility. And that would be to all of a sudden start cutting rates. But perhaps what they could do is reverse their commitment to quantitative tightening in a way that allows the long end to kind of come back in. And it would probably bring in the mid-range belly of the yield curve as well.

That adds financial, it improves financial conditions. It adds liquidity in the banking system. It de-thaws some of what is starting to get frozen up in credit markets and then allows the Fed to say, oh, yeah, we're really out fighting inflation and we're raising rates and all those things. I'm throwing that out there as a working theory, and I have more research and thoughts to do as to where I may be missing, what I may be wrong about, but I wanted to share it real time with you. Economic data, and then I'll let you go.

Consumer confidence came in higher than expected today, 108 versus 104. Some of that probably correlated to gas prices having dropped. Core durable goods were up 1.3% in the month. Really solid new orders on electronics, computers, auto parts, components. Good data on the durable goods, core durable goods today. House prices, not as much. The S&P CoreLogic that follows some of the major markets of the country, still up 15.8% versus a year ago. But you had month over month decline in prices. Here in Orange County, California, you reported a monthly decline in average prices. People always say Orange County can't go down. They shall find

out. But we were at 18.1% year over year in this CoreLogic S&P index, and now it came to 15.8%. So you're seeing some disinflation in that insane price inflation that was taking place in house prices. The best performing markets, if you will, meaning where house price appreciation was highest on the month was still Tampa, Miami, Dallas, and Charlotte. I can't even imagine what is the aspects driving home price appreciation there. And then the worst performing of major metropolitan areas were Minneapolis, Washington, D.C., and San Francisco.

And again, I'm just at a total loss to figure out what that may be about. I'm not going to say that I'm being sarcastic. I'm just going to expect you to follow me. That's the scoop here. Futures haven't opened up yet, so I can't dig in to where we are pre-market. We'll see where things go the next three days. Bottom line, I want to reiterate this. Markets go up and down.

Dividends go up. Keep that in mind. 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. Thank you. Past performance is not indicative of current or future performance and is not a guarantee.

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