The Dividend Cafe - The DC Today - Wednesday, October 18, 2023

Episode Date: October 18, 2023

Today's Post - https://bahnsen.co/48YpBB6 This is Trevor Cummings filling in for David Bahnsen. David is in the midst of day three of his annual TBG Money Manager Due Diligence trip. As mentioned, he will be back with you for the weekly Dividend Cafe on Friday. Markets were a bit more active today than yesterday. We also had a rebound in housing starts, another L for Jordan’s ballot push, and Biden seeking a monumental aid package for Israel. And off we go… Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello, welcome to DC Today. I'm Trevor Cummings, again, filling in for David Bonson. I was here yesterday, I'll be here tomorrow, as he is with Kenny Molina and Brian Zytel in New York, their annual TBG money manager due diligence trip. As I explained yesterday, great time of the year for them to meet with managers, download everything that's going on, understand what's going on economically and how

that applies to our portfolio, our philosophy, and how we manage money for clients. So great time of year for them to collect all that information, synthesize that, and then you will be getting a lot of that over the next couple months in DC Today, Dividend Cafe, and some special white paper that David will do at the beginning of the year. So markets today were a lot more active than they were yesterday. As you might remember, markets were fairly flat yesterday. We also had housing starts, building permits. We had round two of Jim Jordan making his run for speaker. Joe Biden is in Israel. We'll talk about that a little bit. And then the 10-year treasury hit a

16-year high. And that has a huge impact on markets, real estate, and much more. So as far as today, like I said, markets were flat yesterday, but the Dow was down 332 points today. It's almost down about 1%. S&P was down 1.34%. And the NASDAQ was down 1.62%. The top performing sector today was energy. There's actually only two sectors that were positive today, two sectors that we happen to love here at the Bonsai Group, two sectors that were positive today, two sectors that we happen to love here at the Bonsai Group, and that was energy and consumer staples. Energy was up nearly 1%. And then the bottom performing sector was materials, which was down 2.58%. When you look at housing starts, there's a positive and a negative, I guess you can say. So housing starts were pacing at about 1.36 million. That's

positive when you compare what it looked like in August. We had a pretty steep drop in August, but still kind of below the desired pace. One thing you want to remember from like demographic standpoint, there's a lot of people in this country that are 30 somethings. A lot of people that would be first time home buyers or first time home upgraders. And one thing we want to make sure is that there is sufficient supply. So what would slow down the house building or permits, which would be future construction, would be concerns that there wouldn't be buyers on the other end. What is dictating buyers? What rates they borrow at. Right now, the mortgage, the 30-year fixed mortgage rate

hit a number it hasn't seen in a couple of decades. That's at about 8%. So when you looked at permits, that's future construction, it fell about 4.4%. And again, I say this all the time on DC Today, I don't mean to be redundant, but that entire world of real estate is sitting on their hands right now to see where interest rates go, because that dictates a lot of how their business works. And that is a definition of an industry that is cyclical. Again, I mentioned the 30-year mortgage at 8%. Haven't seen that in a couple of decades. President Joe Biden did land in Israel last night. As all of you read on the news, I won't even repeat it here. There's a lot of tragic things going on.

President Biden said that he would show unprecedented support for Israel. And that came also in the package of humanitarian support. I don't think we've seen this large of a package before. I think it was something around $100 million. As I mentioned, Jim Jordan had strike two, went for Speaker of the House ballot. And last time, first round came up about 20 votes short and now 22 votes short. I will direct you, if you don't mind, to go look at the written DC today. Brian Zytel, who's along with Kenny Molina and David Bonson on that annual due diligence trip,

sent me a note this morning. And he probably sent it to me specifically because I find this topic incredibly interesting. So in 2020, if you remember, we had something that happened called COVID. One of the things that we analyzed about the stock market in 2020 was this bifurcation between the top five companies in the S&P 500 and the other 495 companies, a big disparity on how those companies behaved when we're talking about stock price and performance. So if you break this year down in 2023, you can break it down and bifurcate into the 493, I would guess you'd call it smaller companies, and the seven largest companies in S&P 500. By separating those two groups and isolating them, there are some very interesting factoids.

The 493 companies have hovered around 17 to 19 times earnings. That's the PE ratio. The top seven companies in the S&P 500 started out this year at around 29 times earnings. They right now are sitting at 45 times earnings. Again, if you're not a financial nerd like me, then maybe you don't find that interesting. But going from a multiple of 29 to 45 is huge. So the conclusion, what you get from there is if you're wondering where the results of the S&P 500 have come this year, the attribution is 100% from the biggest seven companies. And the attribution of those biggest seven companies is all multiple expansion. And the attribution of those biggest seven companies is all multiple expansion.

Now, why should that concern you? Well, PE ratios or multiples are mean reverting. So typically the highest correlation between long run stock returns are earnings growth. So if you've read about or understood what bubbles look like, they usually start with multiple expansion that is not supported by earnings growth. And again, this is why David Bonson and Kenny Molina and Brian Zytel are spending hours in meetings right now to understand why markets are behaving the way that they are. Because the other thing that I highlighted in the written is that if you zoom in on the technology sector, which is usually considered a long duration asset, which means it has a negative correlation with rising rates. But that hasn't

been true this year, right? We've seen rates rise. We said the 10 year treasury sitting right now at 4.9% hasn't seen that rate since 16 years that typically would have a negative impact on the technology sector it's not true for 2023 so again it's worth slowing down studying asking questions and make sure that you're posturing your portfolio in a way that is prudent exactly what we like to do for our clients. So I appreciate you welcoming me into your YouTube or your podcast today. And I will be back to serve you tomorrow on DC Today. 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

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