The Dividend Cafe - The DC Today - Wednesday, October 25, 2023

Episode Date: October 25, 2023

Today's Post - https://bahnsen.co/45RiZ4B Yesterday’s little market move was pretty weak sauce (not even 2-to-1 advancers to decliners and not even 1% in any index). Yields soared back today, putting downward pressure on the S&P and Nasdaq in a 2022 kind of day. Yesterday, I recorded DC Today in the studio in our Newport Beach offices, had already submitted the final written edition, and then walked down the hallway to my office to eight pop-ups and notifications and alerts that Tom Emmer had removed himself for contention for the House speakership. Five minutes earlier, I had talked about how he was the most recent candidate, but I still didn’t see a path for him to get the votes. Twenty-four hours later, Congressman Mike Johnson of Louisiana is the new Speaker of the House. In one day, our Q3 earnings season theme of divergent results amongst companies was on high profile display as the largest software company and an up-and-comer in cloud applications (Microsoft) posted positive results, while the largest search and advertising revenue firm in the world (Google) posted negative cloud revenue. The S&P earnings yield is still higher than a 10-year treasury yield (total earnings dividend by share price). Of course, that differential is less than it has been in the last twenty years, but it is actually much more historically in line with where it was in the 1980s and 90s. The highest earnings yield in the market? Energy. China increased its tolerance for a deficit to the highest in thirty years last night (above the 3% limit of deficit-to-GDP) and stated that deflationary risk will not be tolerated. President Xi actually made a trip to their central bank (he has never done that). The fiscal side of Japanification seems to be coming. The monetary side is the question mark. 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 edition of the DC Today. It's actually going to be the last DC Today of the week because we will be in our team retreat tomorrow, Thursday. If you feel like I've been announcing that a little too much and overstating it, it's because I know how profoundly

disappointed some of you are. And I'm trying to ease the pain and prep the hole that will exist in some of your hearts on Thursday when DC Today doesn't come. But today was a very party like it's 2022 kind of day. The Dow was only down 30 basis points, but the NASDAQ was down 250 basis points, a kind of pummeling in that tech space. And the communication services sector was down no typo, almost 6% on the day. Now, that's a cap-weighted sector, and Google is one of the largest companies in the world. They got crushed today, and that was really most of that attribution. But nevertheless, I have a link to what happened with Google and so forth in the DC today. But you did have utilities up about half a percentage point and consumer staples were the only other sector that were up on the day. So a pretty classic

defensives did well, and then the really junkier, techier things got hit. But all of it was not really just about that one story regarding Google. I mean, bond yields just soared higher today. And the 10-year was up 11 basis points back to 4.95%. And so when bond yields are going up like that, the stocks are going down. It's that simple. And oil prices, by the way, came back up to above $85 today. They were up almost 2%, not quite. The news side of things did see, so yesterday I record, I say, I don't really think this Emmer has the votes. I walk down the hallway, I'm in the studio in our Newport Beach office. And you know, my office is from one corner to the next corner of the building. And by the time I sit down, I was popping on Bloomberg and CNBC and news and fact set and all the things telling me that

he had pulled out after recording that he had been received the Republican nomination would go to a vote. And so he obviously didn't have the votes he pulled out. And then now today, not only did they reappoint a new nominee, Michael Johnson, but goes by Mike Johnson out of Louisiana, but they actually got the votes to pull him across the finish line. So somebody just got sick of this dysfunction and clown car. And the House of Representatives now has a speaker, and that is Congressman Mike Johnson of Louisiana. Markets obviously didn't really care much about it. I think most people were kind of numb to the whole story, but nevertheless, that is a newsworthy event from today. The earnings yield of the S&P 500, that's not the dividend yield. The dividend yield is what

you get paid. The earnings yield is the total profits of the S&P divided by the total share prices, current price, is still right now higher than the 10-year bond yield. Now, only by about 80 basis points, but it's worth pointing out that, look, we definitely had a long period where the earnings yield was quite a widespread, but the 80s and 90s, which were two of the best decades for stocks in history, the earnings yield and the bond yield kind of went up and down in tandem. They were very, very highly correlated. So I put a little info on that in D.C. today. I found it interesting.

The other bigger news, which was more of a very early David Bonson morning story and didn't get a lot of play by the time the real day started. But nevertheless, there's a significant issue in my own study is China's fiscal policy. Seeing President Xi go visit the central bank and then having them relax this kind of soft restriction on deficits running no more than 3% of GDP. than 3% of GDP. You are talking about profoundly new circumstances in what China's doing and using language that they will fight vigorously against their deflationary conditions. This is heavy leaning in to fiscal side of Japanification. Not yet on the monetary side, but that's the part I'm watching. But nevertheless, one way or the other, and I talk about this in the Friday Dividend Cafe about China and their weakness, what it means to global growth, what that could end up meaning to bond yields, what that could end up meaning to the Fed. We'll talk more about that in Dividend

Cafe Friday. But China's weakening economic condition is a big story i think we're we're it we're not it's not catching uh here in the u.s for a number of reasons so that's the day in a nutshell not good for the nasdaq not much of a big deal for the dow like i said kind of 2022 like day and uh we will look forward to seeing you in the dividend cafe on friday and i'll be back with you in D.C. today on Monday. But in the meantime, wish us well as all of seven offices of our employees embark upon Southern California for a couple days of a team off-site. Thank you so much. The Bonson Group is a group of investment professionals

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