The Dividend Cafe - The DC Today - Wednesday, November 29, 2023

Episode Date: November 29, 2023

Today's Post - https://bahnsen.co/3N5Ec4C A mixed but ultimately flat day of trading in stocks following another decent move up in bonds as the 10 Yr came down another 8bps to 4.26%. Hard to believe we were north of 5% just last month. I was actually expecting yields on 10’s to pick back up after a better than expected upward revision to Q3 GDP mid morning, but this bond market is dead set on lower rates in 2024. All eyes will be on the inflation read tomorrow with PCE to see if that changes the narrative. If the seven largest US technology companies were its own sector it would make up 18.2% of the market cap of the MSCI World Index and account for only 10% of the earnings. In comparison, the entire Financials sector in the MSCI World index equates to three precent less at 15.1% by market cap, but makes up over twice the earnings at 21.9%. Valuations may be a poor timing tool short term, but they do matter longer term and the multiple expansion in tech we have just seen can be easily disappointed if lower rates don’t keep pace next year. 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. It's Brian Saitel with you. Here today is Wednesday, the 29th of November, and I hope you all are doing well. Pretty quiet day in markets. The Dow was only up

about 13 points. We opened up this morning, maybe 90 points, something like that. Gave it back mid morning, rallied up about 150 or so, and then just sort of lost momentum into the close. It was interesting that bond market rallied pretty much throughout the entire day and really was sort of unchanged. The 10-year was up eight basis points, closed at 426. And what we've been seeing recently is just as bond yields come down, stocks have been rallying. And I think a little of that has just kind of priced in at this point. It's baked in. But rates continue to move lower and meaningfully so. And I think part of it was Fed President Waller yesterday was talking about potentially a rate cut in the first quarter. He didn't quite say it like that, but he alluded to, you know, if inflation is down, of course,

we would lower, you know, rates where they would need to go. And it's not necessarily indicative of a slowdown or recession. It's, you know, our job is full employment and steady prices. And so if that's what we've got, we'll lower interest rates, which makes sense to me. I mean, ultimately, they're restrictive right now. And if we get the numbers that we want, then it would make sense to go more neutral. And so what neutral is, is the question mark. It's most likely somewhere a little north of where inflation would be. So if inflation is two and a half or three, then maybe Fed funds would end up gravitating towards that range, which I think it ultimately will. It's about timing at this point.

But there was a revision of Q3 GDP. Maybe it was later morning, and it was significantly better. They revised it up from 4.9 to 5.3 annualized on real GDP, quarter over quarter. And a lot of it was consumer strength. And actually, I thought when that number came out, you were going to see more of a pullback in bond prices, meaning a rise in bond yields, just because growth is coming in hotter than expected or better than expected. And so you think of higher rates, not necessarily lower rates. But that didn't happen. And again, I think it was part of Waller's comments yesterday. And then we had the release of the Beige Book from the November meeting out of the Fed today that spoke to just cooling economic

conditions in most of the districts, not all of them, lower inflation numbers, employment picture that was coming off a little bit. So it was kind of what the Fed and what the market frankly wanted to see on the day. So you had some support with rates is the point. I did have a comment in there on just valuations. If you took out the seven biggest tech companies, which has been coined the Magnificent Seven somewhere in media. But if you took those companies, and you probably know what they all are, the ones that sold off the most last year and the ones that have rallied the most this year, if you took the market cap of that and just made it its own sector in the MSCI World Index, it would be around 18.2% of the whole world index, the market cap of it. It's huge.

If you think about that, it would only make up about 10% roughly of the earnings of the MSCI World Index of all companies. And again, this is seven companies. Put that in perspective. If you took something like the entire financial sector in MSCI world, it would equate to less. The market cap would be around 15% of it, but the earnings amount that would 15% generate would be almost 22%. So basically the point is you're getting a much lower market cap size of companies, much more diverse number of them, and about double the earnings. So the point that I'm making is just evaluations of some of these big tech names following this year's run up and last year's sell off are pretty lofty. And if they're expecting, you know, rates to go back to

zero, they're likely not going to do that, barring something really catastrophic. And so if you end up getting a Fed funds to sort of normalize in the threes, you know, or the four is even, you know, call it three and a half, something like that. I don't know that a 60 X or a 70 X multiple is really warranted, even for some of these great companies. So it's just a point of the starting point on valuation really matters. We don't want to start in the year 2000 with tech.

We want to start in the year 2000 with tech. We want to start in the year 2002. So all that to say, again, market was pretty benign today. We have some numbers out tomorrow that I think will be more meaningful, particularly with inflation. There's a PCE number coming out. There's a jobless number coming out, I think pending home sales. So we've got some good stuff in the mix for you tomorrow. I'll actually be back with you tomorrow. I know David's traveling, um, of North San Francisco,

some meetings and things. So I'll be back with you tomorrow. I appreciate it. I did a little tribute to, uh, our, uh, um, uh, to Charlie Munger who is a Warren Buffett's right-hand man for, for, you know, decades and decades and decades, and vice chair of their company, just because he's got such a great way of looking at things that was straightforward and just no frills, no thrills, and just great, sage advice. And so I put a couple of quotes in there that I thought you might find fun. I do. I like them. So with that, RIP Charlie Munger. I wish you all a wonderful evening, and please reach out with questions.

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