The Dividend Cafe - The DC Today - Wednesday, June 21, 2023

Episode Date: June 21, 2023

Today's Post - https://bahnsen.co/3JpMzpy Brian Szytel here with you today, kicking off the first day of Summer with just what I know you all used to look forward to as kids – discussion on the days market action, Fed comments, and inflation. Not to worry, I won’t let you hit your Summer vacations uniformed with all thoroughly discussed in today’s podcast and video. 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 and welcome to DC Today. My name is Brian Seitel. It's Wednesday, June 21st, and I'm coming at you here live, first day of summer of 2023. I hope everyone has some fun plans in the calendar with family and kids and all that. And I know this is exactly what you were looking for, just the same as when you were kids entering summer is to get a market action breakdown and some inflation talk and Federal Reserve talk. But nonetheless, I've got it all for you and I'll sort of go through the day. The futures hung in there okay last night. Obviously, yesterday was a down day in the stock market. Markets actually opened lower, call it 150, 160, maybe a little bit more points on the day. There was a Fed testimony today on Capitol Hill that markets were sort of anticipating to

see what Jerome Powell would say next about rates and the Fed and the economy and inflation and all that. I mean, we just had their meeting last week. So it's been all of what, two or three days here. So I don't know. Markets were really expecting a whole lot. But market ended up closing on the day off of the lows, although it did pull back a little bit. It was down about 102 points on the day. Rates on the long end of the curve didn't move a lot. 10-year treasury was up two basis points, closed at 372, basically unchanged more or less. Short-term rates have moved. The last couple of days, you've seen something like a six-month treasury move up about 10 basis points, which is a little more meaningful. So on a day like today, you've got some sell-off in some of those more interest rate sectors of the market.

Technology was the worst performing sector today. It was down about 1.4%. And utilities were up, which is a real interest rate sensitive part of the market. They were up something like 0.8% on the day. All in all, I felt like today was sort of a real start to summer, which is it was kind of a quiet day in markets. Not a lot of volatility. Volatility came down again a little bit today, but there was some good news to go through. So speaking of the Fed, so Jerome Powell answered his barrage of questions from Congress, basically stuck to the same message, which is that the July meeting is a live meeting, that they may raise rates, but it's all data dependent. But if you look at their dot plots, which is sort of their estimate of where rates are going to go, they see 50 basis points more increase before the end of the year.

So call it two more 25 basis point hikes. He affirmed that. He basically said, just look at that. And that's about what we think. And so you get a good picture of it. Markets actually rallied a little bit on that. Not a lot, but they were, you know, came up to positive territory at least mid-morning before kind of pulling back down. For what it's worth, the expectation or the Fed futures numbers are predicting a 74% chance of a

25 basis point hike in July, so about a month away. So personally, I mean, I think markets are trading better because the end is in sight. So there's a light at the end of the tunnel. There's some certainty around it, meaning that the Fed's been pretty clear and pretty much just going with Fed futures as far as where they're going to take rates. And so you're looking at 25 bps and then another 25 before the end of the year. Already we're at five to five and a quarter. It's not really that much of a difference. I think the real reason markets are hanging in there is because earnings have come out better than expected. Guidance was low. And so while earnings are going to be down most likely in Q2, call it 6%, give or take, there's different analysts predicting different numbers, but they'll be down a little bit on the quarter year over year, meaning a year from a year ago. They're still expected to be up in Q3 and they're expected to be up handsomely in Q4 year over year.

And so for the year positive. So if you have rates more or less the same, but earnings that have have moved up, then you get markets that have a little bit of bandwidth to trade higher. All that said, I mean, it has been in, I don't want to say unloved, but it's there hasn't been a ton of participation in the rally. The wall of worry that the market is climbing is real, but we are starting to see inflows. So equities took in like $40 billion, which is a decent amount. If you look at sentiment, like a bull bear ratio, something like 54% of those respondents are bullish and only 20% are bearish,

which contrarian is kind of a negative because you're getting more people now expecting things to go higher. That means more people have sort of bought in. We can see some leverage ratios in markets too. So like in hedge funds and alternatives, the percentage of long only S&P 500 futures is high, historically high. So those things aren't necessarily good, but to me that just speaks speaks to short term pullback, not necessarily anything fundamental. The fundamental part is that earnings have been coming in pretty well. And in the economy is, is weathering this, the storm of interest rates, higher interest rates really quite well. David wrote this yesterday, I thought it was clever.

You know, if you if you went back 14 months, and you looked at where Fed funds was then, which is one quarter of 1%, so zero basically. And the S&P something around 4,400 at that point, beginning of 2022. And you looked at S&P at 4,400 and you said, well, I'm going to raise rates 500 basis points in the next 14 months. Where will the S&P be? I mean, few would say it would be at the same level of 4,400, but that's exactly where we are. And my point to saying that is, just as basically nobody predicted that rates would go up so much in such a short period of time, you've got to be humble enough to expect that the opposite is possible. I'm not necessarily predicting that. I'm just saying that I think it's foolish to say that rates are just going

to stay where they are for a long period of time. Historically, that isn't really that accurate. And, you know, just like I said before, I think if they were late to starting the party, the tightening party, you know, they may have to end it earlier than expected as well. And I don't say that is a good thing. If they're going to do that, it means that the economy is starting to break. So that's the real question. Like, what are they going to cause them to, what's going to cause them to have to reverse course in interest rates? It's not going to be something good. So all that said, there was a number out in the UK, it was an inflation read that came in a good amount hotter than expected. It was 8.7% on headline, which is a big number. But although they've been historically true, but also recently on the inflation numbers,

they've been behind something like the US. So we technically haven't really seen what could be conclusively peak rates, inflation rates there yet, although they're down from where they were, but they're real sticky. They're staying in that real high 8% range, which isn't good. And core, I think there was 7.4%. So these are big numbers. So the expectation on terminal rates for the Bank of England, the BOE, is now almost 6%. And to me, that just feels a little bit outlandish, meaning that I do think peak inflation has happened. And I also do think that they won't get all the way to 6%. They're at 4.5% now on expectation as far as terminal.

The other thing I'll say to you on that is that we've written about this a lot, but we feel, or I feel the reason for the inflation globally, but also the U S was more supply related, supply chain related. It was more related to the pandemic. It was related to things not being able to be shipped and input prices and commodity prices, spiking and all those sorts of things more than it was for monetary policy. And I would say the same thing in the UK, except that the difference is that the proximity in all European nations to Ukraine and the effect of the supply chain issues because of the wars is something that matters too. But at the end of the day, if the ECB has

a terminal rate prediction of something like three and a half. And I just don't know the Bank of England is going to get to six, if that's the case. I think that would cause something to break there to closely interrelated economies. Housing has been a bright spot. We had numbers out yesterday that I thought were pretty shocking. New home starts were up 27%, which was several hundred thousand more than expected. It's a big, big pop in housing. And it's interesting to me on the new housing side, because these home builders, all the big ones that you know of, are able to offset high interest rates by just buying down the rate, basically an incentive. So if a 30-year mortgage rate is six and a half percent normally, and you go to one of the

big home builders, and they're going to offer you a four and a quarter, which is what they're doing, and also a slight discount or maybe some other incentives, upgrades or something on the house, it's pretty attractive. I think human nature cares more about locking in a 30-year obligation at 6.5% versus four and25% than they necessarily do about pricing, just because I think one is considered longer term and more of a liability, more of an obligation. So I'm curious tomorrow, we've got existing home sales to see where those come in. Inventory is basically at all-time lows. So people aren't selling their existing house to buy another existing house as much because they have a 3% rate and they don't want to lock in something

that's in six. But on the new home builds, it's the opposite. That stuff is really moving because of those incentive discounts. The builder's able to offset, subsidize the rate and just take a lower margin. And this is the index speaking. The home builder index is is at all time highs right now. So the stocks are reflecting all this, which is why I love markets very efficient. You know, the fact that input costs on home building a house have come way, way down lumber, cement, copper, all that stuff has come down. So their margins have have done better the last 12 months, they can take a little bit of a subsidy and still make a good amount of money. And I just don't see it as a bad thing. I think we underbuilt homes in this country for several generations, at least two, and we're playing catch up. And so if the counterintuitive

result of higher interest rates is that it actually fuels new home builds, I think that's very interesting. I also don't know that many would have predicted that. I think people would have predicted the opposite. I would have a year ago. If you said rates were going from zero to five, what's that going to do to housing generally, including new homes? I would have said that it would have hurt it. And we are seeing some stress in the housing industry, but it's kind of a bright spot with the new stuff. And I think it's pretty interesting. Not a lot else. Like I said, kind of a quiet day. Secretary of State Blinken was in Beijing last couple of days, I call it a week, and it was sort of uneventful. I'll call it a nothing burger of a visit. Not a lot was said or done, good or bad. So maybe that's a positive. retorted back that it was absurd and you know that irresponsible and this type of stuff so just sort of round and round we go with the two biggest economies in the world whatever you want to call

it name calling or not getting along as well as they as they could or whatnot so all that to say i'll sort of end it end it here a little bit keep it short today's the longest day of the year so hopefully you have some plans this afternoon to do something enjoyable after work day is done if it's still light outside i don't know that will it will be for me, but we'll see. But it's been great chatting with you. I'll be with you next week. I don't know if we've done a good job telegraph when I'll be speaking, but it's Tuesday and Thursday of next week. I'll bring you some interesting market data.

So I look forward to that. So with that, enjoy your summer solstice. We'll talk to you soon. Thank you. So with that, enjoy your summer solstice. We'll talk to you soon. Thank you. advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein

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