The Dividend Cafe - The DC Today - Wednesday September 21, 2022

Episode Date: September 21, 2022

I’d love to say “Fed comments caused the market to drop today” but it would be untrue. Within seconds of the Fed release the market went from +200 to -200, but then the market went back to +250, and that was all AFTER the Fed announcement, the release, and the Powell press conference. THEN, after all that, the market unraveled into the final thirty minutes of trading. Dow: -522 points (-1.70%) S&P: (-1.71%) Nasdaq: (-1.79%) 10-Year Treasury Yield: 3.53% (-4 basis points) Top-performing sector: Consumer Staples (-0.34%) Bottom-performing sector: Consumer Discretionary (-2.37%) WTI Crude Oil: $83.04/barrel (+0.12%) Key Economic Point of the Day: Existing home sales dropped -0.4% in August and are down -19.9% from a year ago Links mentioned in this episode: 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 and welcome to the Wednesday edition of the DC Today, also known today as Fed Day. We got quite a roller coaster of markets. I'll walk you guys through everything that took place today. Quick summary items first, and then I'm going to unpack with some commentary. The market was down the Dow 522 points. It's 1.7%. The S&P was down essentially the exact same, 1.71%. The NASDAQ, real close as well, 1.79%. So very similar downside on all three of the major market indices. The 10-year treasury yield closed at 3.53%. That was down four basis points.

Consumer staples were the best performing sector. They were down only 34 basis points. So in a really violent down day, consumer staples were down 0.3%. But then the worst performing sector was consumer discretionary, which was down almost two and a half percent. Oil was up a tiny bit at $83.04 a barrel. So effectively what happened today is that the Dow had been up barely 100 points, 150 points most of the day. Then at 11 o'clock Pacific, 2 o'clock Eastern, the Fed came out and announced, as we all knew was coming, a 0.75% increase in the Fed funds rate. And their release that came with it had a few other choices of language and kind of restatements or updating of past releases. And almost immediately, the Dow went from plus 200 to negative 200. And so he had a 400 point swing in about 25 seconds.

hundred point swing in about twenty five seconds. And I'm not exaggerating. That's how quickly it moved. So it was with no new news, no unexpected news. And in that kind of quickness, obviously the very quick unraveling of some quick trades around either hedges or or forward looking calls or something that was more computerized and more technical and somewhat irrelevant to the real world. But then this is the interesting part I want to unpack for you guys. It then came all the way back and was back up 250 points. So you're at plus 200, minus 200, plus 250. So you have a 400- point swing down and a 450 swing up. It got even a little higher from there. And by this point, the release is out, the announcement is made, and the PAL presser is effectively done. You're a good 25 minutes into that. And then in the final

minutes into that. And then in the final 48 minutes of trading, the Dow was down over 800 points, basically from almost plus 300 to down 522 where it closed. So this is very easy to unpack in terms of what took place as very non-fundamental actors and trading around the trading that I talk about all the time. I'm pretty much right about this all the time I bring it up. But a day like today helps just shine a light on the kind of silliness. No one can say, oh my gosh, the market got the news of what the Fed was doing and then went down 500 points. The market got the news. The very news that was known was coming all day that caused it to be up 200. It did go down 400 and then it was up 450 as all of it was fully revealed and then dropped 800 to a negative 500 net on the day. In the meantime, the 10-year yield came down three

basis points, and the two-year yield had gone up 10 basis points, came down five. It went from 4.1% to 4.05%. And so there essentially was, I want to make sure I'm not missing any of the data points I wanted to share here. The 800 point swing, not any real big surprises and a lot of technical unraveling and so forth. It's a classic day. excuse me, the Dow futures for tomorrow have not yet opened. I've got about another 30 minutes till that comes. And so I'm not going to get that into today's. But I expect you'll get a bit more normalcy in Thursday and Friday. And it could be bad. It could be good. But it will at least be directional as opposed to algorithmic. Now, with that said, the Fed did project by year end a 4.4% rate. And the Fed dot plots are notoriously wrong. Where they're projecting they're going to be is not a policy decision. It's a projection that has one of the worst track records in financial markets. The Fed's own predictions of Fed behavior are very rarely aligned with reality. But that would imply from where they got us up today to now a 300 to 325 basis point Fed funds rate.

If you believe they're going to end the year closer to 440, then they would have 125 basis points more to go. Do they do another 50 and then another 50 and stop? Do they do another 75 than 50? Now there's a little time here because they're not going to meet again until November and then they'll have a November and December meeting. And so we will see where that ends up. And then they'll have a November and December meeting. And so we will see where that ends up. There was some movement then in that expectation for the terminal rate around the dot plot of the Fed, their own projections of their own activity moving on the year end rate expectation. But then for 2023, their dot plots are reflecting a 4.6% rate.

So almost no movement next year. The Fed is not projecting any cuts next year and not projecting any further increases. So you can interpret that how you want. As I said, though, it's important to remember that this is notoriously wrong, but nevertheless provides a little glimpse into how the Fed is projecting things on their own activity. I want to point something out real quick that I was a little interested in this morning. The S&P rally since the June bottom, which of course gave up 1.7% today. So it's still 3.3% above its June low, but it was quite a bit, about 10% higher and has given up over half of that rally. But at 5%, which was where it was this morning, if the June bottom held and you did not breach a new low, off of a major low, a 5% move 90 days later,

which is where we were 90 days, 91st today doesn't count, it would have been the lowest rally off of a market bottom ever, I mean, since 1950. Now, that doesn't mean that this wouldn't hold because something has got to be the worst rally or the lowest bounce off of what ends up being a low. Some number is going to be that. But does this mean that there is some reason to question if that June number was a bottom? I think it's very fair to say that the momentum argument is not very compelling. Now, all that to say, it's been dramatically tested over the last month. From late August here into now becoming the later part of September, you have significant market distress. And if it does not breach a new low, I think

that's probably a real sign of some kind of strength being able to form on the low end. Regardless, I don't want to paint an overly bullish picture here because I still think the most likely scenario, regardless of where the bottom proves to be, is multiple years of a range bound market. I think you're going to have a very choppy market. The question is just what the lower end and what the higher end, what the floor and the ceiling of that choppiness ends up proving to be. And I don't particularly care if the market were to go through its June bottom or not. It's pretty immaterial to the reality of what we're investing for into the future. But for those that are looking to get some semblance of what that bottom may end up being, just know that as of 90 days after that bottom, it would be the lowest rally we had ever seen

coming off of a market low. We don't even know if that will prove to be the low. That's the point I'm trying to make. The other issue, and I want to make sure I get these numbers right, existing home sales came out today. They had dropped 0.4% in August. So you had a decline in volume month over month of less than half a percent. A little better than expected, not much, but on a year over year basis, sales are down as volume. The volume of transactions is down 20% from a year ago. That's very significant. This quote to me was quite intriguing from the NAR, National Association of Realtors.

Some homeowners are unwilling to trade up or trade down after locking in historically low mortgage rates in recent years, increasing the need for new home construction to boost supply. Increasing the need for new home construction to boost supply. This is a very important point. You almost always, for most of the cycles that people that have owned homes for 25 years or less have seen, is people making decisions based on their capacity to buy a better home. I'm making more money and my value of my home has gone up. I have more money. I want a bigger home. Keep up with the Joneses, improve quality of life, more space, whatever the case may be, better location. There's all the reasons people can afford it would want a better

home than the one they have. What they're pointing out is that there is now a significant handcuff on the decision because the home they're in has a 2.5% mortgage and to go to a new home would require a 6% mortgage or 5% if they're doing a lower adjustable rate. That's a huge factor it decreases people who otherwise from an income down payment financial capacity standpoint would be trading up and if you miss a lot of trade ups in this market environment that has an impact on supply that can only be off offset with new home construction which as we talked about yesterday home home builder sentiment is very low. And we're seeing a lot of supply constraints on single family for all the reasons we've talked about. And so this rate issue has a lot of trickle down impact. You're seeing it in volumes now. I suspect you'll begin to see it much more clearly in prices in the months to come.

begin to see it much more clearly in prices in the months to come. Finally, oil and natural gas had rallied. But I want to point out that in Europe, natural gas rallied 13% yesterday. It was up about 5%. Let me see where it ended up closing here in the States. I did not grab that data point before I recorded today. So oil, as I mentioned, came in pretty darn flat. You know what, I got to pull it somewhere else. I want to give you this number, so bear with me. But yeah, the fact of the matter is that we need to remember sometimes when we look at these oil and gas numbers, that there is a difference, an arbitrage between what it may be trading at in the spot market in the U.S. versus in Europe. But natural gas today did stay about flat. So it's up near around $8. It had spiked. It's been quite volatile. And I think that that European move yesterday speaks to the

ongoing sensitivity of what is or is not going on in Russia. That's prompting me to want to dig deeper, not on the energy side, which I talked about last week in Dividend Cafe, but I think some of these things with Russia and China and a geopolitical unfolding, we see it most profoundly in how it's impacting energy markets in Europe. But there is some geopolitics stuff globally I want to cover, and that's very likely going to be the subject of Dividend Cafe on Friday. So forgive me for a bit of the rambling today, but there's kind of a lot to cover. I guess I'm going to leave you with this, though, because it's worth stating. I stated it a lot, and I want to never stop stating it. I want to reiterate faithfully that this idea of investment policy around the Fed is not right. It is not a good idea. Now, I'm not

referring even here to market timing on the Fed, which is utterly insane and ridiculous. That doesn't just get proven in weeks at a time or even days at a time, but in a day like today in minutes at a time. But fundamentally, there are significant questions. You have companies, a major consumer staples company, for example, that we monitor quite a bit called General Mills ended up being up big this morning, guiding upwards, optimistic projections. And then we remember like last week, a company like Federal Express came with big downward pressure. This is what I think should be moving markets. Companies with good news and good expectations, companies with bad news, bad expectations, these bottom up fundamental

realities of profit earning enterprises. And when all the noise turns to the Fed as if the machinations of monetary policy and the cycle of tightening are the only thing that matter, it's just simply unhealthy and silly. And I don't know how long markets stay distressed. I do know that this is a great opportunity for some of the names that we believe are totally immune from some of the factors playing out out of monetary policy to be able to be purchased at lower prices. And we're planning to take advantage of that wherever we can. So that's our point of view here on today. I'll have more of an update for you tomorrow and Thursday's DC Today. Thanks for listening and do reach out. Questions at thebonsongroup.com if you have any further questions we can address. Thanks for listening to and watching the DC Today. Thank you. does not constitute investment advice. The Bonson Group and Hightower shall not in any way be liable for claims and make no express

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