The Dividend Cafe - The DC Today - Wednesday October 26, 2022

Episode Date: October 26, 2022

Today was a mixed bag, where we continue to see varying results from the Dow and the Nasdaq. Some market pundits have dubbed this as value vs. growth or categorized these baskets of equities as a difference in “duration.” Regardless of how you describe it, we saw some downward pressure resulting from less-than-favorable earnings reports on a handful of large tech companies, and some continued positive momentum from the sectors leading the market on the year (Energy, Healthcare, Consumer Staples, etc.). Market Action Dow: +2.37 (0.01%) S&P: -0.74% Nasdaq: -2.04% 10-Year Treasury Yield: 4.01% (-9 basis points) Top-performing sector: Energy (+1.36%) Bottom-performing sector: Communication Services (-4.75%) WTI Crude Oil: $88.12/barrel (+3.26%) Key Economic Points of the Day: The trade deficit widened in September by 5.7% (from $87.3 billion to $92.2 billion) There is a lot you could potentially dissect here, but the simplest explanation is that a strong dollar means buyers (exports) can buy less of our goods, and US purchasers (imports) can buy more goods, which expands the deficit – falling exports, rising imports. New home sales fell month over month (from 677,000 to 603,000), but we were still slightly above the average estimates of 593,000 For perspective here, new home sales peaked in August 2020 at 1.04 million Although the number of homes sold declined, the average sale price did rise from $436,800 to $470,600 (slightly below the record high of $479,800) 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. Hello and welcome to DC Today. I got invited back here filling in for David Bonson as he is speaking in Florida. Last couple of days, you guys had Brian Zytel. Yesterday, you have David Bonson back tomorrow. Today was an interesting day in markets. We got more of kind of the theme we've seen all year, where it's this high dispersion. Some people describe that dispersion of value versus growth. Other people talk in terms of duration. But what

you saw was a big difference between the Dow Jones and the Nasdaq. Dow Jones was basically flat on the day. I think it was up two points, which was maybe 0.01%. S&P was down 0.74% and the Nasdaq was down 2.04%. That's the dispersion I'm talking about. You have a Dow flat, you have a Nasdaq down 2%. The next good question to ask would be, where does that attribution come from? It's actually a really easy answer. You had a couple very large technology companies report after close yesterday, and the earnings were underwhelming. So you saw a huge retreat in some very high capitalization tech companies.

What I mean by high capitalization is that if you were to look at an index of something like the S&P 500 or even the NASDAQ, as we're referencing today, and you look at the top 10 holdings, these high capitalization companies make up a huge percentage of the index. So when you have movement there, it has a big impact on what the bottom line or end result is. That's why when you look at kind of by sector performance, you saw energy had a huge up day where energy was up 1.36%. And obviously, there's not really any energy exposure in the NASDAQ. You have something like communication services, again, a newer sector that they created to grab some of the social media companies,

sector that they created to grab some of the social media companies, search engine companies, that was down 4.75% on the day. That's a wild difference when you have a sector up nearly one and a half percent, and then you have another sector knocking on the door of being down 5%. That's not new to us. That's what we've experienced most of this year. And again, if you listen to the pundits, there's a lot of different ways to talk about it. You can say that people are focused on quality earnings, quality free cash flow. You can say that investors are less willing to give companies time to kind of fit into the stock prices that they're at. One way we've heard it said is duration, right? That's a very common term we use when we're talking about bonds.

We understand the sensitivity to movements in interest rates. If I own a three-month bond and there's a move in interest rates, it's going to have a lot less of an impact than if I own a 30-year bond. Now, when we talk about that in terms of stocks, well, over the last decade or so, we've seen a lot of stocks rise up in their valuation, and it wasn't so much a rise in earnings as much of a rise in multiple. And we've come to begin to call those high duration stocks. So when they report earnings or when we see big moves in

interest rates, when you're discounting those future earnings back to the net present value, When you're in one, because when you see your friends and family member making money from the bubble, you begin to get interest. You begin to want to participate. But we also know that the way real bubbles work, imagine if you have bubble gum and you're blowing a bubble, they do get bigger before they pop. If you have bubble gum and you're blowing a bubble, they do get bigger before they pop. Coming into this year, there was a lot of talk about relating 2022 to something that was starting to feel like the late 90s in the tech bubble. Again, it's been said that history doesn't repeat itself, but it sure does rhyme.

So again, what we saw today is very much a theme we've been seeing all year. When we look at treasuries, the 10-year treasury, it moved slightly. It was down about nine basis points. I say slightly because it feels like the 10-year has been so volatile all year. Still above 4%, sitting at about 4.01%. We had two publications on kind of key economic data. You had new home sales, which again, the expectation would be that new home sales would be light. In September, the reported numbers fell month over month. So it was 603,000. Prior month was 677,000. But that 603 was still above estimates. The average estimate

on the street was about 593,000. Keep in mind, you go back to, I believe it was, let me look at my notes, August of 2020. And this would be a good number to remember or anchor to. Those new home sales were 1.04 million. So you can look at that as a number, like a million homes sold, but you can also look at it as what economics really are, human behavior. So we go back to that date of August 2020, we start to think, what was happening? Well, we know the talks of COVID were getting stronger and stronger at the beginning of the year, right? January, February, we saw the markets throw up in March. Then we know the seasonality of home sales, right? If you're going to sell home, especially in Southern California, you probably want to sell it in the middle of summer,

right? Where the weather's good, people want to be in the pool, they want to be outside. You get a premium price. There's a seasonality to it. So again, what's happening in 2020? Human behavior. Everyone's staying home. Everybody's getting very familiar with their own home. Everyone's staying home. Everybody's getting very familiar with their own home. Everybody's getting a little bit of cabin fever. Then you hit summer, where again, home sales should be peaking. So that $1 million, the 1 million home sales, I think it's a to kind of think through, oh, that's what economics is, right? It's the psychology of how we all behave intersecting with this idea of supply and demand. So in August of 2020, you had low and favorable interest rates, and you had people that were very interested in buying more home and new home, second homes and different things like that, as they didn't know what the future had in store, and they were spending a lot of time at home. The other key economic data we got was looking at the trade deficit. So September, that trade deficit widened by 5.7%. Again, one of the

things or my goals here on the DC Today is not only to give the economic data, but also for those of us that don't maybe follow this stuff on a daily basis is, hey, what does this mean to me? So we understand that that deficit number is going to have a somewhat significant attribution to the GDP numbers, which is kind of like the main scorecard or report card for economics. And why would that deficit be widening? Let's keep it really simple. why would that deficit be widening? Let's keep it really simple. There's a lot of things we could talk about, but the US dollar has been very strong. What does a strong US dollar mean? It means foreigners wanting to buy stuff from the US, they're not gonna be able to buy as much stuff because as they transition their money into the US dollar, strong dollar means they're gonna be able to buy less. It's gonna be the opposite here. If we're buying things overseas, we're

gonna be able to buy a little bit more. So that strong dollar is gonna mean that you're going to see a falling of exports, but you're gonna see a rise of imports, which the way the math works, that's gonna widen the trade deficit. So the U.S. dollar has been extremely strong. One thing David mentioned is one of the curses is that if you end up on the cover of Barron's magazine, that usually does not bode well for you in the future. Barron's did a cover story on the U.S. dollar. It was a picture, I believe it was the dollar. So it was George Washington with a big muscle and flexing.

So for any of us out there, the few people that play video games, it's kind of the curse of the Madden cover. You never want to be on the front of the video game cover because that usually means you're going to get hurt next year or something of that nature. So we'll see how the US dollar performs. Again, for all of us out there that are disappointed that we have some sort of exposure to the emerging markets in our portfolio, I will remind you that that strong dollar is a big headwind for emerging markets. And when that does reverse, a headwind will become a tailwind. And we'll see if that becomes opportunistic for investors. Looking at my other notes here, I did add a little tidbit today. And it was just kind of something I found interesting that I read on Monday on Bloomberg. One of the quotes I mentioned last time on DC Today that I find pretty interesting is that somebody said, and I can't remember who said it because I want to give them credit, but they were saying this is the most anticipated recession of all time. And the point that I'm making there is that you have to think of the narrative and the numbers. You have to think of the average feeling of every single American versus the data

that's actually getting published. And there is a slight amount of cognitive dissonance there. So what I put in here was three different charts that Joe Weisenthal from Bloomberg posted on Monday. And the first chart was basically just showing survey results. So they're going to do these surveys about confidence surveys. And they're trying to give a general idea of kind of how do people feel out there, investor sentiment, things of that nature. And there's going to be average estimates of what those surveys will come out as. And then there's going to be the estimates of what those surveys will come out as, and then there's going to be the actual results of those surveys. So when you look at the first chart, you'll see that the actual results of the surveys

were worse than the estimates. So there was a higher amount of pessimism than the average economic forecaster would have guessed. Now, the next two charts that I put in here, one is on, I believe it was industrial production and the other was labor markets. And then you see all the data there was a surprise to the upside. Now this is actual data. So these are, you know, economists on average saying that we think labor markets are going to look like X or we think industrial production is going to be Y. And then the actual results are compared to the average estimates. So those were, on average, a surprise to the upside. Again, I'm sharing a lot

there, but all I'm saying is that the general feeling out there, going back to what I said, the most anticipated recession of all time, the general feeling out there is pretty negative. And that general negative feeling means that the averages that people think are going to be results on a lot of this published data is not as good as it comes in. So what do you take from that? Maybe people are a little bit more pessimistic right now than they need to be. And I always mention this book. There's a book that is basically a yearbook of stock market results all across the globe. And the title of the book, it's republished every year. The title of the book is The Triumph of the Optimist.

Now, why is that important to you? Well, if everybody you go out to coffee with and everybody you watch Sunday football with and everybody at your Bible study is telling you how bad things are going to be, that's going to have an influence on you. And I just want you to be careful to not let that influence lead you to take action because right now it feels like

there's a greater amount of pessimism than probably is warranted. Now, again, that's not me making a prediction about the future. That's me trying to protect you from an investor behavior standpoint. So last thing, I'll encourage you to go to the actual written where David has his Ask David section. Really simple, easy question today. A reader was asking, how do you go about picking dividend stocks? Is there certain metrics or measurements, minimum dividend yields or things that you focus on? David elaborates on that. minimum dividend yields or things that you focus on. David elaborates on that. Tomorrow, you'll have quite a big amount of economic data being published. And also you'll have your normal DC Today author, David Bonson, back with you. And he will be with you for the long

form dividend cafe on Friday as well. And that's all I have for today. So this is Trevor Cummings signing off on the DC Today. to our advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee.

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