The Dividend Cafe - The DC Today - Wednesday November 2, 2022

Episode Date: November 2, 2022

I would have to go back and look at the exact shape but I believe the market action today was quite identical to the last time the Fed announced a known rate hike, where the market bad been down, rallied huge to the upside on the news, sold off substantially, rallied all the way back, then sold off into the close with no new news. It’s all just so, so dumb. But I have more to say than that here … MARKET ACTION Dow: -505 points (-1.55%) S&P: -2.50% Nasdaq: -3.36% 10-Year Treasury Yield: 4.09% (+4 basis points) Top-performing sector: Utilities (-1.02%) Bottom-performing sector: Consumer Discretionary (-3.79%) WTI Crude Oil: $89.35/barrel (+1.11%) Key Economic Point of the Day: ADP private sector number came in at +239k for October vs. 198k expected. BLS jobs report is Friday Links mentioned in this episode: 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 welcome to Fed Day in the DC Today. I have just returned to my hotel room to record this briefly and then I'm heading off to a dinner event. Just returned to my hotel room to record this briefly, and then I'm heading off to a dinner event. And we'll be back in the Newport office tomorrow to bring you another DC Today on Thursday. It's uncanny, the deja vu of today. The market was down most of the morning, but not a ton, but it was down over 100 points. Then the Fed announcement came that they were hiking rates 75 basis points, just like the last meeting, just like the three before today, and that just like had been priced in 100% more or less in the futures markets. And then immediately markets bounced up almost 500 points. They were up over

300. They had been down over 100. And then over the next hour and a half, you had a bunch of up and down volatility. At one point, the market had gone up over 300, then down a few hundred, then back up again, and then it closed down 505 points. And so you just had this massive volatility, and I've explained over and over what causes it. And it's just about as dumb as anything I even know how to comment on. But it did lead to selling into the final hour with accelerated selling in the final 20 minutes. The S&P was down two and a half percent. The Dow was down one and a half percent. The Nasdaq was down almost three and a half percent. Dow was down 1.5%. The NASDAQ was down almost 3.5%. So obviously the quote unquote long duration stocks were hit most in the short duration stocks hit much less. But even then utilities was the

best performing sector on the day and it was still down 1%. But consumer discretionary was down again 3.79. So people who want to argue, well, the market went down because of Fed tightening, would probably have to explain why the initial response to Fed tightening was about a 500-point rally from the downside to the low side. There was just an awful lot of high frequency, very high volatility action. And I wouldn't make heads or tails of it fundamentally. One thing I would point out is that in this November meeting, they do not update their dot plot, which is the Fed governors all indicating where they see the Fed funds rate being at different future points in time. I think they generally go out a couple of years. I've commented a lot that they're always pretty much wrong about

their own projections, but at least it gives you an idea in the present tense of what they're anticipating. But they didn't update the dot plot today, so we won't get that till the December meeting. So look, they raised rates by 75 basis points. You now have a Fed funds rate that is 3.75%. And the announcement that accompanied that the first couple of paragraphs was verbatim, cut and paste from the last meeting. The ongoing, the subsequent paragraphs had some minor tweaks, basically saying something to the effect of that they will be slowing down the pace of rate hikes. And you really didn't get much more info until you got into the press conference with Chairman Powell. I immediately went into the Fed Funds futures

market as I was watching all this real time. And at one point, the odds of a 75 basis point rate hike in December went from 60% down to about 35%. They closed at 30, excuse me, 43%. So less than half. And the odds of a 50 basis points, a half a point rate hike at the next meeting were up in the about 70%. And there was a 5% chance of no rate hike at all. 70%. And there was a 5% chance of no rate hike at all that went away. And now we closed the day at 67, excuse me, 57% chance of 50 basis points and 43 of 75 that'll move around over the next month. But that's kind of, I think the consensus expectation now is that the 75 will go to 50. And then my view is that they'll wait and see where they are from there. The only thing that Chairman Powell said to help set forward expectations, and again, there's no dot plots, and the press release itself, the announcement from FOMC, the Federal

Open Market Committee, and Chairman Powell's comments themselves were equal to, if not even more so than normal, boring in their lack of kind of specificity and color and really relying on very high level platitudes. But there was a comment about the fear of them overdoing and entitling and him saying that if that happens, he's not particularly worried about it because he knows they have the policy tools to ease and pull it back the other way. And so this kind of is in line with what I've been talking about for a while, that they want to go until they break something. And when they break something, they want to spring back the other way. And Powell all but sort of said that today. I mean, the language was a bit more couched. What I call that and what we in the investment world call it is a boom-bust cycle, the exacerbation

of a boom-bust cycle. Chairman Powell didn't necessarily use those words, but he kind of freelanced his way into talking just about that. By the way, bank reserves are down $1.2 trillion since last December. And so there's a lot of money that has left bank deposits. It's reduced the excess reserve level on deposit with financial institutions, banking institutions, and then replaced it with that cash money funds, money market funds primarily being increased by more or less the same level. And so a lot of that quantitative tightening has been done for them. And it reinforces my theory that quantitative tightening will be done before it even really gets started. The quote from Powell that was different here than last meeting is a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

And so that there's not a whole lot of specificity. They want to tighten. They're looking for any kind of data excuse to do so to, to not tighten, to reverse the tightening rather. And then there was, um, no talk at all about M2,

the money supply level, which is now, which was way up post-COVID, has come way back down. And as fact now, for a month or two, been at a slightly negative number. And no reporters asking about M2. No one else seems to bring it up. I don't believe it's been addressed even in the last couple of FOMC meeting minutes. We won't get the last two days meeting minutes for another few weeks, but how they're talking about reducing inflation with monetary policy and yet somehow money supply doesn't play into it, only the interest rate, I just think speaks to the brokenness of the model they're using. So, you know, if what you want out of your life right now is to see the Fed stop raising rates and to start cutting rates,

then you want to be rooting for a lot of people to lose their job, even though I don't believe that that is the case. I don't believe that, in fact, high unemployment is a great thing for inflation and low unemployment is a horrible thing for inflation. But that is what they're forecasting. Their models are built around. Take that as you wish. Okay. So more or less, let's see. I think I covered the major points. Consumer discretion got killed. Oil was up over 1% today. It's sitting there just shy of $90 again. They announced a seven-day lockdown in the Chinese city where Foxconn is. Essentially, they call it iPhone City. It's the world's largest iPhone factory.

So there's continuous reports that Xi Jinping is looking to loosen COVID restrictions, and then there's other reports that they're doing another lockdown in a somewhat economically sensitive city to global supply chain. Last I checked, people love their phones. The ADP private sector number came in, 239,000 jobs in the private sector for October. There was about 192 expected. You've heard my spiel before. This is not necessarily prescient around or predictive around the BLS number that will come Friday. The jobs number from the Bureau of Labor Statistics sometimes is correlated to ADP and sometimes is not.

So we'll see what happens there. That's kind of the day in review. And we'll see what happens for Thursday. Just to give you a look, every single day is a new day. Just to give you a look, every single day is a new day. The last couple of times we've had big market volatility with the Fed announcement, then a big up day, then a big down day. We could have two down days. We could have an up day, then a down day.

It's just volatile. I'm not predicting that tomorrow's up a lot or down a lot. Either is possible. But there hasn't been a day in a while where the Fed day was followed by a boring day. More volatility is likely. The only difference, I suppose, is that there was definitely more traders caught off sides on the last meetings, and there just simply has to be less people trying to game the gamers in this case. That's my take here in the DC today. Look forward to being back in Newport early flight out tomorrow morning, headed out to my evening dinner event here in beautiful Grand Rapids,

Michigan. Fed day is the best day. And if you have any questions, you can send them to questions at the Bonson group.com and we will answer. And, and there is a question today that I loved in the dctoday.com if you are looking at the written version. Okay, thanks again. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC,

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