The Dividend Cafe - The DC Today - Wednesday September 14, 2022

Episode Date: September 14, 2022

The day after the market sell-off you had a small move higher in each equity index but I unpack it all and then some here … MARKET ACTION Dow: +30 points (+0.10%) S&P: +0.34% Nasdaq: +0.74% 10-Year Treasury Yield: 3.41% (- 1 basis point) Top-performing sector: Energy (+2.85%) Bottom-performing sector: Real Estate (-1.39%) WTI Crude Oil: $88.68/barrel (+1.57%) Key Economic Point of the Day: Even as the Consumer Price Index came in a bit higher than expected yesterday, the Producer Price Index dropped -0.1% in August (consensus was for no change) ASK DAVID “When you refer to the futures market predicting a 88% chance of a 75bp rate hike or whatever the percentage and outcome may be, how is that determined?” ~ Don D. The CME (Chicago Mercantile Exchange) makes a market in fed funds rate futures. Real people using real money to buy real futures contracts on what the real rate may be at real future intervals. This futures market is the gold standard of measuring market expectations around the fed funds rate. ON DECK I will be on set co-hosting for an hour tomorrow with Stuart Varney (9am-10am ET) on Fox Business. CHECK OUT I was on set with Maria Bartiromo on Fox Business early this morning talking energy, inflation, markets, growth, and more. A worthwhile interview! 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. Well, hello and welcome to another day of the DC Today podcast. We had kind of a up and down day throughout markets, all three indexes closed in positive territory. There was a bit of intraday volatility, though, not anything massive. But look, the Dow ended up closing up just 10 basis points. I think it was about 30 points or so. And yet it traded in a 400 point range up and down on the day. And so you had kind of an uncertainty, not a big surprise there. The NASDAQ was up 74 basis points and the S&P was up 34 basis points. So, you know,

you kind of stopped going down today, but there wasn't any meaningful bounce to note. I would point out, though, that energy was the top performing sector to the upside today, and it was pretty meaningful. It was up two and a half percent. And the worst performing sector was real estate, a bit more rate sensitive. I think it was down about 1.3. down about 1.3. The interesting thing that I want to comment on is that big tech, not just technology at large, NASDAQ, there's a lot of smaller cap and junkier names that did pretty well in that little recovery from late August up through yesterday. But like FANG and the big cap names, they really lagged even in the recovery.

And then in the huge sell-off of about 1,300 points yesterday and a down over 5% day for the NASDAQ, they were down more. So it's very uncommon that you would have something kind of lag on the upside and then lag again on the downside. I think it does speak to a shift that we've been seeing for some time play out in leadership in the market. And I just simply do not believe that leadership resides in big cap tech right now. And it'll be interesting to see how more of that plays out. So, you know, the average stock in the market right now is doing better than the overall market and it can happen the opposite as well. But what that basically means is because of the cap weighted nature of the market, where bigger size companies are weighted

a lot higher, that if you're doing real well in big tech, then the average stock is doing less well than the market and then vice versa. And it generally will speak as well to a tougher time for indexes, which are so heavily weighted in those names, and a bit better opportunity for some more concentrated or high conviction strategies or more active management. Economically today, the producer price index came in. So you had the consumer price index yesterday. They're expecting 8.1 annualized and it came in 8.3. Today, the producer price index came,

they're expecting flat and it actually dropped by 0.1%. Nothing meaningful, but you didn't have an upside surprise. You actually had a very small downside surprise on wholesale prices, producer prices. The average 30-year mortgage rate got above 6.25%. So now we are well past double where we were a year ago. We were close to doubling the lows of a year ago at the 30-year mortgage. We're now well past double that level in a one-year period of time. It's pretty remarkable. This is a high we haven't seen since well before the financial crisis. I think on the policy front, the biggest issue that is playing out that is going to tie into some economic issues is this railroad strike that is potentially coming with a couple of very large unions employing tens of thousands of conductors and engineers and whatnot.

And they were close to a sort of White House brokered or attempted White House brokered negotiation. And those fell apart. It was overwhelmingly voted down. So there's still ongoing talks. There's still ongoing flexing on both sides. And anyone who's ever been part of a labor union negotiation before knows that it isn't at all uncommon. It's very rare that someone just comes out with their best and final brass tax, gets down to it, they negotiate. Really a lot of posturing and flexing into the very last second is common, but it is entirely possible we get to a strike. And then there's the potential of political response that may try to outlaw some of these things. You could end up with a full blown strike. And I bring it up economically because there is a sense in which the last thing the supply chain needs is any downward pull on productivity, on labor, on activity, on capacity.

A lot of those things have been healing. And for someone like myself who believes a significant amount of pricing pressure, upward pricing pressure has been supply oriented, This could potentially be another issue to have to deal with. I don't know how significant, nor does anybody else. This was not on anyone's radar just four days ago. So to quantify what it could look like is premature, but we're keeping an eye on it. On the policy front, by the way, I think that there are a couple other issues politically I want to bring up. I've talked a lot about my projection, and I don't need my notes for this. I have talked an awful lot about my expectation for midterms. And some time ago, I kind of turned into the camp that I believe that the Republicans have a very, very small chance now of taking a majority position in the Senate. I think that the nature of some of those races and the candidates

and some of the sentiment issues had really flipped. And it was not merely polling. It was some inside candidate polls, obviously public polling, my own assessment situation, talking to people in local markets that caused me to do the math on a state by state basis, public polling, my own assessment situation, talking to people in local markets that caused me to do the math on a state by state basis. National polling, national sentiment, national approval ratings. There's a pretty high correlation with how those things go, let's say, with the House. But with a Senate race, you just have to look at it case by case. And my view was those things had turned. Now, I'm really flexible on this because my opinion,

if my opinion, let's put it this way, if facts change, my opinion changes, okay? I think that's how it's supposed to work. I continue to believe that there are a couple of states that Republicans are needing to hold, and that includes Ohio, Pennsylvania, Wisconsin, and then a couple they're looking to flip, which includes Arizona, Nevada, and Georgia. And I suspect that they will hold two of the three that they need to hold, which then puts them negative one. And then of Arizona, Nevada, Georgia, my belief has been that they may flip one of those, which leads you back to a break even, a 50-50 Senate. If they flip two, or if they hold all three, then all of a sudden you're back to a plus one or plus two possibility for Republicans. So I think most sensible and objective political commentators could say, and this is hardly a bold prediction, that your most likely scenario is a plus two

Democrat or plus two Republican or somewhere in between, out of the United States, centered after the midterms, that it could literally be in any of those directions. And I still kind of stand by the fact that if I were putting money on it, I would say it's going to end up plus one Democrat in the end. Some people get upset me for saying that. They know I'm a conservative Republican, so I don't know why they would think I'm saying it for any other reason than it's sort of what my analysis indicates. But whatever. It isn't because I'm hoping for it. I'm just trying to call balls and strikes.

And anything can happen in six weeks. It's six, seven weeks. I mean, that's a long time in American politics. But I just thought this was interesting. The 25 major metropolitan markets in the United States, we get a lot of labor data, price data, real estate data on all of these markets individually. So there's national aggregates and then you get local. Now, I don't get to see specific economic data for Sheboygan, Wisconsin, but I get to see it for Los Angeles. I get to see it for Seattle. I can analyze it for big metropolitan areas. And I was just fascinated

to see that the two highest CPI numbers, metropolitan regions, were Phoenix and Atlanta, Arizona and Georgia being two of the hotly contested Senate seats. So I don't know if that plays into the politics of it or not. I'm just saying it for you guys to try to do with it what you will, connect dots if you think it's relevant. But I think there's sort of a public policy component and an inflation economic component that, again, this is kind of what the D.C. today is intending to do, is bring some of these things together. All in all, I don't have a whole lot to say that I didn't say yesterday about the market drop. I think it's fascinating that the market right now is up 50, 60, 70 points, something in that range from where it was last Tuesday. And so you have a sell-off is violent, breadth that

was 99%. You had 490 out of 500 companies drop yesterday. Carnage over 5% in a day in the NASDAQ. I mean, that's just brutal, brutal. It was the worst single day in a couple of years. So all those things there. And yet it brought us back to where we were a week ago. I said all this yesterday. I'm just repeating it to reiterate. Volatility is the issue. My belief is that we are in for a very choppy market for some time. And I actually don't see thousands of more points coming on the downside. And I don't see thousands of points coming to the upside. There are plenty of things that serve as headwinds along the way. But where I think if investors are going to be dealing with a sideways range bound choppy equity market for some period of time, and we've had so many of them in history, it's incredible.

I'm just telling you, dividend growth has traditionally been a very, very good place to be in a market like that. I'll leave that there. Okay, that's DC Today for today. I look forward to bringing you a little more update and market commentary tomorrow on Thursday. In the meantime, have a wonderful night. For those of you who are watching, I will be co-hosting for an hour with my friend Stuart Varney at Fox Business from 9 a.m. to 10 a.m. Eastern Time covering the open of the market. And we'll go from there. Thanks for listening to 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 advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk.

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