The Dividend Cafe - The DC Today - Wednesday, February 7, 2024

Episode Date: February 7, 2024

Today's Post - https://bahnsen.co/42zrukM A consistently positive trading day in markets today without a lot of new economic data out, but I suppose no news is good news, so we’ll take it. We did have a widening trade deficit data released today roughly in line with expectations but I am intentionally keeping this intro short and sweet today to tee up the more meaty sections in the this podcast. 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. Hello, welcome here to DC Today. It is Wednesday afternoon, February the 7th, and good to be with you. Another nice positive trading day in markets today, frankly, without a lot of economic news. So I guess no news is good news these days. Look, the Fed's pretty clearly on hold for the time being. Earnings are coming out. We're about

80% through Q4 earnings, and they're better than expected. Growth rate of around 6% or so for the quarter. And we're looking at an estimate at least of about 11% for 2024. So all that to say, markets are doing fine. The volatility index continues to move lower. It's just sort of a complacent market, really. VIX is in the 12s now. And we closed almost in the 5,000 range on the S&P.

The Dow was up, like I said, 156 points. Ten-year was up a basis point or two at 412. So all in all, I'll chalk it up to a decent day without a lot of economic data to drive it. There was some deficit numbers that were out today that were largely expected. We ran about a $62.2 billion deficit for the month of December, which puts the total 2023 year right around $1.7 trillion. And what I wrote is, just keep in mind, that's with full employment and earnings growth and positive GDP, real GDP of about 3.1%. So it's pretty stunning numbers, really. But there was a little bit of historical data I would cite.

The Fed raising rates and then staying on hold before cutting, technically, historically, has actually been a little better for stock returns. Usually, they're starting to cut interest rates because economic data is driving them to try to stimulate the economy and help things, help cushion the blow of what usually is a declining economic environment. And that's not what we're seeing here. So not all bad with the Fed sort of staying on hold for a little while. David had a nice section in there on what's on David's mind, I thought, which I've read that quote for many times as well. But it's just reminiscent of another era that isn't exactly the same as this one in technology and some of

these technology stocks, but it certainly rhymes. So this was Sun Microsystems CEO, Scott McNeely talking about his stock price is $64 a share and how it was trading at 10 times revenue. And then he went on to say things like, just understand if I distributed 100% of earnings for the next 10 years in a row without any sort of cost structure or paying employees or R&D or, or, you know, any expense or paying taxes, even then that would just be pricing and what you've currently priced in today. So it's just sort of ridiculous. And the comment was sent with with another earnings report today on, on a company called snap,

which is a social media company that was down 30% on the day, because sometimes these things are just priced to perfection. Okay. So it's hard for any sort of actual results in real life to live up to those expectations, number one. And then number two, just the valuations matter here. You know, the starting point on when you buy something, even if it's a great company, and neither of us, David nor myself are saying any of these businesses, well, I'll set Snap aside for a sec. But when you look at the Mag7 companies, for example, it's not that they're bad companies. They're great companies. They're great franchises. They're part of the fabric of the US at this point, these big tech companies. So there's nothing wrong with them. They're great. It's more just, you know, they can be something like a Cisco or a Microsoft when you buy them in 2000,

and it takes 15 to 20 years to sort of get back to where, you know, you were priced to perfection. And so that's just something to keep in mind. And I think it's a valid point and a good one. The Ask Brian section I put in there today was a very good question. It was sent from someone asking about interest rates. And basically, even if inflation is coming down, he intuitively and rightfully so was thinking that rates would stay higher just because of the amount of indebtedness and deficits that are being run. And it is a segue into the number we got out today on that deficit number. But I put a link in there about what we've written several times about what we've called Japanification, which is that higher amounts of indebtedness, you know, lead to lower growth. And so lower growth often begets lower interest rates and more indebtedness to try to stimulate and manufacture growth. But since you've already borrowed that growth from future, it is just sort of a self-fulfilling cycle of a lower growth paradigm. And in those

environments, the interest rate paradigm tends to be lower, not higher. And you've seen that in Japan for 30 years. You've seen it in Europe. And I would say that a difference between those two areas in the U.S. is a demographic one, with the population being stagnant or declining in some of the others and still growing, at least in the U.S. And so I'll say that there's some difference there. But generally speaking, So I'll say that there's some difference there. But generally speaking, larger amounts of global indebtedness are something that detracts from growth. And so in the other part that I wrote about was that this doesn't happen in a vacuum.

And this isn't just a unique story with one country. This is a global phenomenon. And so even though you might have things intuitively say, well, more debt and more deficits would lead to people demanding a higher risk premium, a higher interest rate on lending money to governments. That's true. But if all those things are tethered together and they're all doing the same thing at the same time on a relative basis, what is the alternative? Where would a risk-free rate of return in a sovereign debt instrument be achieved? And if all those rates are low, then that's sort of the paradigm that you're in. It's sort of the TINA. There is no alternative there. Right now, we happen to have

real rates that are higher on sovereign debt, meaning above inflation. And that may last for some period of time. But I suspect over time that Japanification phenomenon will take effect and we'll end up in the continued cycle of some lower growing growth numbers. Look, the numbers today, this week, you know, is so far has been a fairly quiet week as far as economic data. It doesn't mean that there aren't important things happening in the world. There are. But from a data point perspective, we went through more last week. There is initial jobless claims out tomorrow that I'll be able to walk through and see if the employment picture is changing at all. And then we'll have a revision to CPI on Friday. And so I think markets will be more focused

on that. And again, we'll have some more earnings that continue to come out, which have been largely to the upside. But all that to say, I've enjoyed being with you again here this evening. Thanks for reading. Thanks for listening. And reach out with your questions, and we'll talk to you soon. Thank you. 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. Thank you. 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.