The Dividend Cafe - The DC Today - Wednesday, January 18, 2023

Episode Date: January 18, 2023

Dow: -614 points (-1.81%) S&P: -1.56% Nasdaq: -1.24% 10-Year Treasury Yield: 3.37% (-16 basis points) Top-performing sector: Communication Services (-0.93%) Bottom-performing sector: Consumer Staples (-2.65%) WTI Crude Oil: $79.25/barrel (-1.16%) Key Economic Points of the Day: The Producer Price Index (PPI) saw outright (and rather significant) DEFLATION in December, with prices dropping on the month -0.5%, well more than the -0.1% expected. November’s number was adjusted downwards by -0.2% as well. The 7.4% year-over-year number came down to 6.2%. The CORE number is down to 5.5%. Wholesale gas prices dropping -13.4% helped the cause, as did the food index’s -1.2% decline. Energy/gas prices have helped downward pressure in recent months, and that could/likely will reverse in months ahead even as other inflationary data see more downward pressure. I expect the core vs. headline reads to potentially diverge significantly in the months ahead. Industrial Production fell -0.7% in December and was actually down -1% when you factor in downward revisions from past months. Manufacturing led the way down. This was the largest monthly decline in more than a year. On an annualized basis, Industrial Production is down -5.2% in the last three months. Microsoft joined the fray of huge tech companies performing massive layoffs as they announced plans to lay off 10,000 employees (5% of their workforce) Retail sales fell -1.1% in December, mostly in line with the level of disinflation of gasoline prices we saw last month. 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. Wednesday, January 18th, where Pacifica Christian is number three in all of Orange County and where the market today got hammered. It's an interesting point in the market that I want to spend most of our time talking about today, because you have had these, you know, 500, 600 point down days over the last year that almost exclusively, I would have to go back and check if there's anything I'm missing, but almost exclusively were related to some form of the inflation Fed narrative. And that is to say you could have had the market down a lot when CPI came in higher than expected one day or when the Fed talked tougher one day or when the Fed tightened more than expected or telegraph Fed tightened more than expected,

or telegraphed more tightening than expected. These various things that kind of took place largely throughout the spring of 22 through the end of the year, or through, let's call it the fall. I think that the markets issue today, to a lesser degree yesterday, is now in the other side of the narrative. And you might be thinking with some rationale, what's the difference? Who cares why a market down a bunch feels the same? Keep in mind the market had been up a bunch and it's still up on the year so far in these first couple of weeks that we've been open. But a lot of these gains that were getting pretty heavy have come back in the last couple of days and yet it's not related. The bond market's rallying like crazy. Bond yields are

dropping and that's up and down the term structure. So the yield curve is moving lower. And at the same time, there's this ambiguity in the stock market. So what does that mean? Because it clearly doesn't mean people are trying to price in more Fed tightening when, first of all, the Fed is about to take a looser posture, not a tighter posture, but also the bond market saying the exact opposite. What it is referring to is economic weakness. And in a way, someone who doesn't like it when bad news is supposed to be considered good news and good news is supposed to be considered bad news

and thinks that that represents a sort of distortion to reality, to me, this is a positive development, even if it's a negative effect in markets for a bit. So what do I mean by concerns about the economy? Well, first of all, the Dow was down, and a lot of it came in the latter half of the day. But the Dow was down 614 points today, 1.8%. The S&P was down 1.6%. The S&P was down 1.6%. The NASDAQ was down one and a quarter. And at the same time, the bond market rallied big.

I mean, this is a stunning fact that the 10-year bond yield is back to 3.37%. It was down 16 basis points today. So how's that for long-term inflation expectations? The best performing sector in the market was communication services. It was down almost 1%. The worst was consumer staples, which was down 2.65, pretty brutal hit in the consumer staples sector. Crude was down a percent, but it's still sticking right around that $80 mark. So first, what happened this morning was futures rallied quite nicely pre-market when the producer price index came out. And what happened was PPI was expected to drop 0.1%, so that would still be disinflationary, but it dropped 0.5% on the month.

This is a sequential drop. From November to December, prices dropped half a percent. And so that is what you call deflation. Now, November's number was adjusted downwards as well. So the PPI number went lower in November than anticipated. And then on a year over year basis, you saw the PPI up 6.2% and it had been up 7.4%. So you now see disinflation year over year, significantly so in CPI and to some degree in PPI, which is producer price inputs or wholesale prices versus consumer prices. Now, wholesale gas prices dropped 13% in the month

of December. That certainly helped, but the food index was down over 1%. You have a number of things that are leading in that regard. And the reason the markets moved higher was that, again, reinforced expectation that, well, if these inflationary numbers are all coming down, the Fed is even closer and no reason to get all caught up on it. So far, so good. I think it's a good way of looking at how things were unfolding. Then what all of a sudden caused the markets to pivot?

A couple hours later, the industrial production number comes out. And you are talking about a 0.7% drop in December alone, not year over year, one month, which really, because there was 0.3% additional downward revisions from prior months, you're actually talking about a 1% drop in industrial production from where we had thought we were, manufacturing being the biggest contributor to that decline. This is the largest monthly decline in over a year. And on an annualized basis, industrial production is down 5.2% in the last three months. That is brutal. So you add to that things like a very

large software company, Microsoft, announcing 10,000 layoffs, laying off 5% of their workforce. layoffs, laying off 5% of their workforce. Retail sales had fallen in December 1.1%. That does mostly refer to the disinflation I'm referring to, particularly gas prices being lower. It led to a lesser number in retail sales. Nevertheless, downward pressure in terms of economic strength and activity. I want to talk real briefly about Bank of Japan and the Fed. But my big takeaway here is that the economic weakness narrative is very possibly about to replace the Fed inflation narrative. The good news of that is it means you're all the closer to that inevitable point of markets pricing in the bad news and moving on to the next. But I continue to believe that the right play is humility around expectations of what happens in the economy,

because there is increased talk about soft landing. And then now there is increased talk about soft landing. And then now there is increased talk about some of the economic weakness that is clearly present. All this stuff has been there for us for some time. It's not new information that manufacturing is weak, industrial production is weak, and those things can get weaker. And I think we live with this idea. There's a lot of vulnerability in business investment, capital expenditures, the investments into future productivity that are necessary to feel good about economic growth and economic activity.

Yet the job market, wages, all the other stuff we've talked about continuing to hold in there. Nothing's really changed in that tension. And so I'm all for not being overly confident in an economic outlook in 23. But that doesn't mean that we can't see what the market may be responding to at a given point in time. Where it pans out is where it pans out. And I do find it mostly immaterial to what we believe about managing capital. But I'm trying to give you some context and explanation for the day-to-day movements in the market. I mentioned I wanted to quickly say something about,

oh, just real quickly on the market. I'm sorry. This is, I gotta make sure I'm reading this right. 65 days. I typed this myself about 12 hours ago, or let's see,

10 hours ago. The market's low. Let's call it the S&P 500. The market's low in this cycle was October the 12th. And it has not re-hit that low. And really, it's quite a bit above it. I mean, it's pretty significant. And that now is 65 trading days since October 12th. And so you've gone 65 days without making a new low.

And people are wondering, is this a sign technically speaking that the market won't make a new low? What do we make of it? And of course the answer is who knows and who cares? Why would, how many days it's been above a number of anything to what it ends up doing at some point going forward. But I do think that there is this concept of market, prior market bottoms, representing kind of reference point for where we go. And I think it's highly unlikely that you get both of the things at once that can disrupt markets. And that would be

Fed substantially tightening and surprisingly tightening. At the same time, the economy and weakness substantially worsening relative to expectations. And I think those two things are now in conflict with one another. And so therefore, it puts a certain floor as to how low things can go. But of course, that floor can be taken out if global recessionary fears are worse than expected. The China reopening thesis is why I'm not a big believer in that idea. But some erosion of U.S. corporate profits, it's worse than expected. Some changing, some deterioration of what is right now quite healthy labor markets. There's a lot of things that could happen. I do continue to wonder when I see not only some of the stock market weakness over the last year

and what we know in terms of kind of valuations and so forth in the tech sector. But then now the fundamentals of where the bulk of the job layoffs are there, they're in Silicon Valley, they're in tech. There's a part of me that just feels a certain rhyme, not an identical experience, but to the inflation, excuse me, the recession that we went through at an earlier stage of my investing career where there was a recession and it was really quite isolated to a certain group in the aftermath of the dot-com blow up. And I don't know that that thesis I've thrown out there for over a year now, I don't know that I'd dismiss it. I think there may be something there. I'm not ready to declare a victory or grade myself an A on some kind of a call, but that thesis is out there. And so again, a number of things up in the air

with the economy. I mentioned Bank of Japan. This was, I don't think I have any data I got to share here, but last night, yeah, the 10 year, they have put kind of caps in that they're not going to let it go higher than 50 basis points, a 0.5% rate on their 10 year bond. They more or less announced that they're going to leave that there where they were expected they might increase the cap, which is part of their yield curve control policy. So people thinking, oh yeah, the Bank of Japan's about to capitulate. They're going to have to go the other way and not be so accommodating and instead try to tighten. And again, their central bank saying, no, we don't have to do that. No, we're not. And so they maintained that 10 year level. Why? It's 100% fiscal, 100%. Bank of Japan is the

accomplice to their ability to run debt to GDP of about 250%, to run huge deficits. They need a monetary accomplice to their fiscal activities. And I guess I would ask you why our Fed would not be at some point in the same boat. I'll leave you to think about that on your own. By the way, the Fed, James Board is trying to carve out his niche as the most hawkish Fed member. He did say to Nick Tiburis at the Wall Street Journal today that he anticipates they want to get to 5.5%, keep going and leave it there a long time. He tends to be a bit of an outlier. I don't hear other Fed governors talking the same way, but I want to throw it out there. That's what Fed Governor James Bullard said of St. Louis.

That's all I got for today's DC Today. Bad couple days in the market. We come back tomorrow, Thursday. And please do send any questions you have on any topic to questions at thebonsongroup.com. Thank you 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. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities.

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