The Dividend Cafe - The DC Today - Wednesday, June 14, 2023

Episode Date: June 14, 2023

Today's Post - https://bahnsen.co/467JeWa Brian Szytel here with you on today’s highly anticipated Fed Day. After 10 back-to-back rate increases from the Fed over the past year and a half where they raised short-term rates from 0% to just over 5% the Fed today paused (not necessarily ended) their rate tightening campaign with a ‘wait and see’ message on how their policy changes which operate with a lag will further affect the economy before their next meeting in July. The hawkish language in the statement and in the press conference afterward however left the door wide open for further rate increases should the data warrant. Main takeaways here: The median forecast for terminal Fed funds in the Fed dot plots was raised to 5.6% by the end of this year, 4.6% by the end of 2024, and 3.2% by the end of 2025. Only two committee members saw the current rate as appropriate, with all remaining 16 members supporting further 25 bps rate increases before the end of the year, nine of which saw two more 25 bps hikes. GDP estimate was revised UP to 1% from .4%. The unemployment estimate was revised DOWN to 4.1% from 4.5%. At the end of the day, 1. actions speak louder than words and I think they want to be done and 2. the economic outlook on growth and employment was upgraded not downgraded. Markets had been slightly positive most of the trading day (other than the DOW that was dragged down by just one price-weighted stock), then initially sold off over 400 points following the statement with yields rising, only then to normalize into the close. Wash, rinse, and repeat on almost every Fed day. I unpack all the nuance and what to make of it all in markets in greater detail in the video podcast link below. 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. Well, hello and good evening and welcome to DC Today. Today is Wednesday, June 14th, and I'm lucky to get all of you here on Fed Day, highly anticipated day where the Federal Reserve released their statement and kind of walk through all of that. The markets last night following yesterday's CPI data, inflation data, that was a little bit pretty much in line for a change, had been coming in hotter for quite some time.

Futures last night were a little lower into the open, but really the market was just sort of on pause most of the day until about two o'clock Eastern when the Fed sort of made their announcement to keep rates unchanged. They have increased rates now 10 consecutive meetings. So this is sort of a first time in about a year and a half where they actually did something different with keeping rates the same at about five to five and a quarter. The market initially sold off. This is kind of what we've seen the past many different days the Fed has come out with an announcement, which is that the market initially knee-jerk reaction, sells off a ton, yields rise, and then kind of markets participants are able to digest a little bit and understand a little

bit more about what's going on, kind of get through the press conference with the Fed. And then we get normalization through the end of the day, which is exactly what we saw today. The Dow closed down 232 points on the day, but probably half of that or more than half, probably like 140 points of that, something like that was just related to one stock, which was UnitedHealthcare. We don't own that. I guess we've discovered that with people during the pandemic not having surgeries and then now needing to still get those surgeries, healthcare costs might go up a bit. So that stock was dragging down the Dow itself, which is a price weighted index. So the company had like $450 a share price and a 7% move in one day is really most of the downturn in the Dow. The S&P was up on the day just a little bit. It was up like almost a tenth of a percent. And the NASDAQ

was up something like 0.4, four tenths of a percent following the Fed announcement. So we can kind of walk through this a little bit because it really is the news for the day. So the left rates unchanged. So the actions of what they did were basically in line with expectations. There was a roughly a 90 percent chance going into this thing that that's what they were going to do. And the Fed has been really good about following the Fed futures every time that they've gone into these things. We're now at about a 60 percent chance in July, which is their next meeting, that they will raise rates again by 25 basis points or whatever that's worth. There's too much data from now until then for me to really care a ton about that. Those Fed futures change a lot day to day on economic data. So all that to say, of the

18 members in the committee, you had only two of them say that rates where they are was appropriate. Nine of them are sorry, all 16 of them wanted rates to be higher sometime before the end of the year. And the nine of them wanted two more rate hikes, so call it 50 basis points before the end of the year. So it kind of gives you a breakdown of actions that were somewhat in line and frankly dovish. In other words, they didn't hike, they kept rates the same. And then words, which were more hawkish. And to me, what that says is, I really do think the Fed wants to be done with this thing. They're going to be data dependent. And so if things in the inflation world come out hotter than expected, they have every right to raise rates. But I just think that the statement today allowed sort of the more hawkish people

in the committee to get what they wanted while also being able to sort of hold rates steady. So with that, I mean, you know, one of the other parts of this thing today was really, it wasn't all bad. I mean, they revised the economy up, not down. So they took GDP from an estimate of 0.4% to up 1% on the year, which is something good. They took the unemployment rate, which they thought would hit 4.5% by the end of the year, to just at 4.1% for perspective. We're at 3.7% now. So all in all, I don't look at this as necessarily anything bad. I don't think markets do either. They recovered.

And I don't know, most people know this or realize, but we're up something like 22% on the S&P from the low of October. So I guess we can sort of call that a technical bull market, although the Dow is up something less than 20%, about 18% from the low. But I say that just because at the end of the day, the economy has actually been weathering this really pretty good. There's not a lot of reasons to think that or to be real bearish here at this particular moment. And the fact that they're going to kind of keep rates where they are and let things play out, I think is a good thing. Some of the other

things for the day, you had another inflation data metric, which was PPI. So the producer price index yesterday, we had CPI came out in line with expectations. The producer price index today was actually quite lower than expected. It was negative 0.3% month over month, which is an annualized 1.1% increase, which is really low. It's the lowest since December of 2020. So we are seeing inflation come down in those numbers, which is really low. It's the lowest since December of 2020. So we are seeing inflation come down in those numbers, which is, again, some justification for what the Fed did today, which I think is generally a move in the right direction. All in all, I think as we get through some of this, the most interest rate sensitive sectors of the

market, for example, real estate, we're continuing to see weakness there, although that seems to be sort of leveling out a little bit. Mortgage applications today were up technically on the week, about 7%, a little over 7%. Rates have come down on the long end of the curve, which I think is the reason. But just remember, they're still down by almost 27% year over year. Yields on the day were a bit higher. Immediately following the Fed announcement, they sort of popped up quite a bit. We ended up closing just modestly higher on the yields. The 10-year was about unchanged on the day. It was up like three basis points, something like that on the day. So not a lot to report there. Volatility has pretty much collapsed in the market. So with prices going up, people

feeling a little bit better here about where interest rates are going to kind of potentially peak out. The volatility index is down far below where it was pre-pandemic. So we're at something like a 14 on the VIX versus like a 35 during the height of volatility last year. So all those things are fairly positive. Going into tomorrow, Dave will be back with you on DC Today. For tomorrow, then we'll have Dividend Cafe. We've got a good amount of economic data coming out tomorrow. We've got some jobless claims. We've got some manufacturing data that will come out, so on and so forth, which I think will be useful. But all this to say,

much of this anticipation with the Fed meeting, they did what basically we thought they would do. Markets took it in stride. And now the story is going to be fundamentals, which is what it should always be. And earnings technically are looking to be coming in fairly well. So all that to say, as far as what we're doing at Bonson Group and with your portfolios, it's a lot of business as usual. We do read into a lot of these numbers specifically into how they affect our individual holdings. But I'll take today as more of a glasses half full and I'll take it as if we were at the bottom of the eighth inning now or somewhere middle of the ninth inning here on where we are in this rate tightening cycle moving forward. All that to say, I appreciate listening.

If I don't speak with you, happy Father's Day this Sunday to all those dads out there. And otherwise, please reach out with any questions, and we'll talk to you soon. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Please reach out with any questions, and we'll talk to you soon. Thank you. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change

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