The Dividend Cafe - The DC Today - Wednesday, November 30, 2022

Episode Date: November 30, 2022

A monstrous rally ensued today when Jerome Powell verified Fed plans to slow down on rate hikes. Do I think this makes sense? Well, I will tell you what I think about all of it in today’s podcast and video! MARKET ACTION Dow: +737 points (+2.18%) S&P: +3.09% Nasdaq: +4.41% The S&P 500 ended the month of November up +5.37% and the Dow ended up +5.7%. Combined with October Q2 has been monstrous, so far anyways. 10-Year Treasury Yield: 3.61% (-14 basis points) Top-performing sector: Technology (+5.03%) Bottom-performing sector: Energy (+0.56%) – one of those days where the WORST sector was up this much WTI Crude Oil: $80.45/barrel (+2.88%) Key Economic Point of the Day: Q3 GDP growth was revised upward to +2.9% annualized (from +2.6% before) Job Openings fell in October to 10.3 million, down 353,000 from the month prior and 760,000 less than a year ago 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 welcome to the Wednesday DC Today, also the November 30th DC Today, meaning the month of November is. And we most certainly ended with a bang, not a whimper. I'm going to walk through the whole thing. I want to talk to you guys today a little bit about what's going on. It was a very odd day. The Dow was up 737 points, which was 2.18% today. The S&P was up 3.09% today. The Nasdaq was up 4.41 percent today. On the month of November, so just the last calendar month, the S&P was up 5.37 percent

and the Dow was up 5.7. And the month of October was monstrous for both market indices as well. So there's still a whole month to go in Q4, but right now Q4 is up quite a bit. You're talking about a Dow. I just want to give you a little context on this. The Dow is sitting at34,590. The all-time high in history of the Dow, which was hit basically around 12, 13 months ago, is in the $36,000s. I, I, I, it's just surreal that we're basically not really, look, if you had two days like today, two days, you're back at where the all time high was. Um, so let's, we'll talk about what, what I think about that here in a moment. Um, S and P and NASDAQ are still down quite a bit. There's a different composition of those indices.

OK, but just let me read off the rest of the data and so I can take the readers off and then talk to you face to face about a few more things. The bond market rallied huge today as well. The 10 year Treasury is all the way back to 3.6 percent. It was down 14 basis points today. It's basically down 100 basis points from where it was. It's high in the cycle, which might have been a little over a month ago now. That's a monstrous rally if someone was buying 10-year bonds to have the yield drop 100 basis points in that period of time. Technology was the leader today at 5%. Energy was the worst performing sector today, and it was up 0.56%. So it's one of those days where the worst sector was up over half a percentage point. Oil was up almost 3%, closed back above $80 at

$80.45. Q3 GDP growth was revised upward. We'd already gotten an earlier estimate for the third quarter. The GDP was up 2.6% annualized. Remember, every time we talk about quarterly numbers, you don't have to times it by four. The actual number has already been essentially annualized. There's a formula. And the annualized number that was slightly down in Q1 and slightly down in Q2 was originally estimated to be up 2.6%. Today, it was revised upward to 2.9. And then job openings fell in the month of October. The amount of available unfilled jobs came in at 10.3 million. It's now down 760,000. It was a little over 11 million a year ago. It was down 353,000 just in the last month. Then you had James Bullard, one of the voting members of the FOMC, has been far more hawkish than most of the Fed governors coming out and saying that he thought 4.9 percent would be needed to constrict inflation.

And that sounds just very specific and precise. So what an amazing ability to highlight what the exact number might be at which inflation will be constricted. He wrote an op-ed saying that, by the way. I don't know where these people come up with some of this stuff. I certainly know they can't go out and say what I'm telling you, which is that they have no idea and no one does either. And prices are supposed to be discovered by the market and set between buyers and sellers, including lenders and borrowers of capital. And that therefore the price of capital, just like the price of anything else, is not something that can be or should be imposed by anyone,

let alone someone without direct involvement in a transaction. But be that as it may, the central bank in our country does set the federal funds rate. And here was one governor saying what he thought it was going to end up needing to be. So there you go. But then the whole thing that happened today, the market didn't kick into high gear. It was the Dow was down a couple hundred points most of the day. Then it kind of went flat. Then it rallied and took off in the last 90 minutes of the day. And let me make sure I'll come back to some other stuff.

Effectively, the reason for all of that was that J-PAL speech at the Brookings Institute was very clear that he's telegraphing a pause. That his view is that the Fed has done a lot of tightening and now they need to slow down. Look, I'm kind of surprised. The futures market is still only pricing in a 77% chance of a 50 basis point rate hike at the next Fed meeting, which is two weeks from today, and a 23% chance of 75 basis points. It seemed to me that Powell was basically telling you it's 100% chance. So either way, 50, 75, I believe it's going to be 50. And then I believe they're likely to be done or really slow going into 2023 to allow.

And at some point, 23, and I'm going to write about this a lot in my white paper that I do for next year, because I'm in that mode now where I'm starting to think about it every day. I think you're going to see a big narrative in 2023 about when the cuts are coming. And so then there'll be people that get overly dovish and say the cuts are coming in February, and there'll be others that say the cuts aren't coming all year and there'll be a big wait and see thing and some of it will be media hype and some of it will be legit but whether they pause or whether they cut is not the market's focus today it's when they stop hiking at the rate they've been hiking and that's what pal seem to be telegraphing so the question is is, is it justified? And the answer is that there's a

whole lot of things going on that I try to write about all the time where you get a lot of distortions in the market. You do get far more euphoric moods in the market when rates are excessively low and staying low and markets believe the Fed will keep them low. And then when things move the other way, you get things selling off very quickly and you get a kind of thinning of the herd. A lot of stuff that deserves to die does die. And then there could be the risk of overdoing a sell off for other more high quality assets. But as far as the possibility of the Fed going too loose on one end and too tight on the other, I don't think it's possible. I think it's almost assured that they almost always do it. And the question is,

have they gone too tight now? And I absolutely believe they have. And I don't believe that because housing is slowing down. I think housing is slowing down because it was overpriced. And the interest rate was the instrument that helped it get overpriced and the instrument now that has to help moderate that. But for the most part, I don't believe and never have that the Fed needed to go make a bunch of people lose their job to control inflation. And so the idea that the Fed operating outside of a rules-based approach from monetary policy was going to control this, I think is odd. And then you say, well, should the market have been down those last 5,000 points it was down, or should it be up the 4,000, 5,000 points it's up in the last month or two? And those questions

are not answerable. I can tell you what I can answer is companies growing free cash flow and paying us dividends. So it's not a cop-out. It's just a theme rooted to a philosophy. You want your investment thesis to be somewhat connected to something that has knowable inputs to therefore give you an output you can have confidence in. I have no confidence what the Fed's going to do or why. I don't think anybody should. And especially what's really driving markets is not what the Fed's going to do and why, but it's what people think the expectations are going to be for the Fed. So if you get people bidding up the market, the same reason they were bidding it down before is that they're reacting to what they think a reaction function will be in market sentiment. And I don't like that at all.

I'm a fundamentalist in this sense. And I think that this is outside of fundamentals. So is the market going to correct from this level? We'll see. What's Powell going to do in two weeks? We'll see. And I think we're getting very close to the point where the whole narrative of what's driving markets is going to switch from the Fed's terminal rate, which it seems obvious to most people. OK, those of us, including me, who thought it was going to be something in the twos and threes ended up being wrong. And then it gets to threes and fours.

And, you know, there may be a camp of people and some of them I read every day that still think you're going to fives and sixes. I don't. And right now the market doesn't. And to the extent that that means if we are near that terminal rate, the market now has to have something new to respond to. That thing will largely be more about the depth of a recession coming. The yield curve isn't clear as could be. It is forecasting some form of recession. The yield curve can't create a recession. It predicts one. These are two different things. a recession. It predicts one. These are two different things. But if you end up having what gets deemed a mild recession in 2023, there could be more issues in markets and there could be no

issues in markets. You could have markets having already priced it into the other side of such a thing. But if you get a very severe recession, significant cutbacks in corporate America, really wide credit spreads that cut off liquidity in the financial system. That's a different story. And I don't think markets have any confidence that is going to happen. Otherwise, there would be much more doom and gloom and negative sentiment. But do you want to have excessive amount of confidence that it won't happen? It's a tricky world. I prefer to weigh myself on a scale that I can rely on. And I think that the scale right now is not all that reliable. I'm going to leave it there. I'm going to be talking a lot more about

the Fed at Dividend Cafe on Friday. Real quickly, for the month of November, the dollar was negative on the month and oil was negative. And this is a very odd thing. In 22 years, going back to when the year 2000 began, 84% of months, if the dollar was negative, oil was positive. 84% of the time, there's an inverse correlation for obvious reasons. Oil is a commodity denominated in dollar. So both being negative in the same month is very rare. I'll talk more about that in DC Today on Monday. So we get the PCE, the personal consumption expenditures, which is the Fed's inflation metric more than CPI.

We get the PCE data tomorrow. We get the BLS, Bureau of Labor Statistics, jobs data for the month of November on Friday. And you get a dividend cafe from me on Friday. If you get a chance, go to the dctoday.com. We have a link there to an article I was interviewed in Investment News Magazine, which is actually just an industry trade pub for other people that work in finance and wealth management. And yet I thought some of you might be interested in the interview there because they asked me some peculiar questions about my religion and my politics.

And maybe you'll find it interesting. So I got to say thanks for listening to watching the DC today. We'll see you tomorrow. 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. Thank you. Last performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. 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.

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