The Dividend Cafe - The DC Today - Wednesday, September 20, 2023

Episode Date: September 20, 2023

Today's Post - https://bahnsen.co/44YX2Am The Fed basically was explicit in tying their “we need to stay restrictive” posture to the resilient economy (which, unfortunately to them, has been “expanding at a solid pace”). The market was up +200 points before the announcement and press conference, it dropped -100, rallied back +100, then dropped -150 (so still up over +50 points) before closing down -77 points (but with the Nasdaq down -1.53%). Bond yields at first barely moved but then the short end moved up five basis points and the long end flattish. 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 DC Today, also known today as Fed Day. as Fed Day. The Federal Reserve did indeed announce their September meeting FOMC results, which of course, as expected, was to leave rates where they are again. And essentially, that is at a Fed funds rate of between five and a quarter and five and a half percent. That vote was unanimous. And they more or less said that they need to stay restrictive until the resilient economy changes. Unfortunately to them, the economy has been expanding at a solid pace and so that's forcing them to stay restrictive for longer but they are defining restrictive in that sense as a pause where they are not necessarily needing to go higher and the

philosophy has been well known for a while I happen to think it's dead wrong that their their price stability objective requires them to hurt the economy. But nevertheless, I've talked about that a lot, and none of this is new information. The market had been up 200 points before the announcement. It dropped about 100, so it was still up 100, but down 100 points after the announcement and initial release. But then it rallied back another 100. So now it was back up over 200. And then it dropped 150. So it was still up about 50 points all the way until the final few minutes. And then it dropped at the final stretch of the day and closed down just 77

points. So that was the Dow. So there was a lot of excitement of up and down this. I put a chart of the movement in the DCtoday.com. But that was the Dow. The NASDAQ was down over one and a half percent, which is pretty sizable. And the S&P was down close to one percent. So you had a little more there and that was largely again, technology was down one and three quarters percent and communication services, which is technology adjacent was down 1.9%. Interestingly, the consumer staples sector was the best performing group and it was only up 15 basis points. Real estate was right behind it at up 13 basis points. And then the other two sectors that were up are utilities and healthcare. They were barely up.

So consumer staples, real estate, utilities, and healthcare, that's what we call the defensives. There's four sectors that meet that category. All four of them were up. So you had a kind of good day on the defensive side and then a lot of the higher beta technology stuff not a good day and and a lot of that was in response to or it correlated to how the bond yields responded bond the short end of the curve bond yields went up about five basis points initially they were just kind of flat maybe up one one or two. And then that worsened as the day went on. The final, let's call it 45 minutes. And the 10-year as well had been, the yield had been down about one to two basis points. It ended up up one basis point or so.

The 30-year was kind of flat. So let's just update where we are in terms of ongoing Fed moves. The futures market closed the day, implying a probability of 72% that the Fed will not raise rates at the November meeting either, and a 53% chance of not raising rates in December. And so you can do the math with the inverses, a 28% chance of a quarter point rate hike at the next meeting and a 47% chance of a quarter point rate hike by the end of the year. And I think there's so much data and headlines that are going to come between now and then. I'm already on the record as to what my view is around the fact that an election is coming. And there is a big what we would call base effect. It's funny, a reporter in the press

conference of Powell, I was listening at Bloomberg, asked about, look, you're going to have a base effect impact in November that's likely to bring your year-over-year PCE down because there was a bit of a spike at it a year ago and Powell kind of skirted around the the question and so forth but it is entirely possible you get headlines that make it quite favorable for them to not hike at the end of December one of the good things about when we get past this idea where they're going to do another hike or not because I the market thinks it's much more likely than not that they won't in the short term. I don't think that they will. But, you know, it isn't overwhelming enough in terms of the clarity that they won't,

that we can get on to the next subject, which is really how long will they stay at this elevated and I would add tightening, posture as opposed to beginning some form of rate reductions. And you can't really talk about when they begin to cut until you have finalized when they are done hiking and we're not fully there, although I most certainly believe we should be. What else do I want to say about the Fed today? I think that generally covers it. I'm surprised there wasn't more on the QE side of things, but they focus primarily on rates today. Kind of separate subject, consumer debt. Why has the economy not slowed further from this? Why is the Fed frustrated about that? Why is the consumer state kind of resilient with the interest rates going up?

About 70% of consumer debt is mortgage debt. And about 88% of mortgage debt right now is primarily fixed. You know, back before financial crisis, it was up to like 50% that was variable, adjustable rate. But now that's been over the last 12 years, anywhere between 8% and 18%. And so you have a significant portion of consumer debt that is basically fixed. And I could argue that there's not a lot of incentive to take on new debt with rates this elevated, but it doesn't necessarily constrict investor behavior if the cost of higher interest rates isn't impacting that customer, that consumer, that individual.

Most debt being at a fixed rate, leaving them without impact is kind of the surprise for a lot of people. I also want to say, just separate issue issue about the financial sector. I got some charts this morning in one of my morning reading reports. Insurance sector is kind of up. The asset managers and capital markets are largely up. Some of them are up quite a bit. Our top performer on the year is itself an asset manager. And then you have the big banks that are mostly down, but not necessarily all of them. And you have the community banks that are pretty,

pretty much universally down. So I just think you've got to really recognize that there's a lot of subsectors in a sector like financials that make the idea of talking about a collective sector like financials obsolete. There's such a non-correlation and the financial world has become so non-monolithic that this is something to understand. Let me know if you have questions on that. All right, so that's the scoop on the day. The 10-year close to 4.39%. We talked about the S&P down 1%, NASDAQ 1.5%. Defenses were up, technology was hit. Crude oil was down 1.3%. They're hanging around there right near $90.

And that's pretty much it. So I'm going to be back with you again tomorrow for a day after Fed Day in the DC today. And of course, I'll be with you for Dividend Cafe Friday. But that's it for now. Have a good evening. Thanks for listening. Thanks for watching. Thanks for reading the D.C. today.

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