The Dividend Cafe - The Dividend Cafe Monday - June 3, 2024

Episode Date: June 3, 2024

Today's Post - https://bahnsen.co/3X5cdHS Market Movements and Consumer Behavior Insights - The Monday Dividend Cafe In this episode of the Dividend Cafe, David provides a detailed commentary on recent market activities, including significant volatility with a nearly 500-point swing in the Dow. Major sectors are discussed, with technology and healthcare leading gains while energy experiences a sharp decline. Insights into OPEC Plus decisions on production cuts and the impact on oil prices are covered. The narrative also dives into consumer spending habits, the influence of media on market perceptions, and considerations on housing affordability linked to mortgage rates. The episode concludes with highlights on economic indicators, including the performance of utilities, cell phone usage as a proxy for economic activity, and anticipated shifts in Federal Reserve policy on interest rates. 00:00 Introduction to Dividend Cafe 00:15 Market Recap: A Volatile Day 00:54 Sector Performance Highlights 01:20 Energy Sector and OPEC+ Update 08:43 Consumer Behavior Insights 11:55 Economic Indicators and Analysis 18:14 Against Doomsdayism: The Speed of Bad News 19:42 Conclusion and Upcoming Reports 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. Well, hello. Welcome to the Monday edition of Dividend Cafe. We had a pretty exciting day today in markets. It was exciting May, exciting April, everything so exciting. No, the market opened up about 50 points. I noticed the futures last night were up about 100 and then just almost instantly began going down. And at one point from the high of the day to the low of the day, you had almost a 500 point swing to the downside. ish. And then about halfway through the day, the market began coming back and closed the day only down 115 points on the Dow. And that's with the S&P up a few basis points and the Nasdaq up half a percent. So a very mixed bag. Whenever you get a day like this with the Dow's down and the Nasdaq's up and both are divergent by something meaningful, it probably means technology was the best performing sector. And that was the case today. Tech was up 1%, but healthcare was second best performing,

up three quarters of a percent. Most of the downside today was very concentrated within the energy sector where energy was down over two and a half percent on the day. And I'm going to just skip right ahead to get to some of that around what happened in energy today. Oil prices had closed over $77 a barrel Friday. OPEC Plus met over the weekend. Futures weren't moving a lot in the announcement, which I'm going to get to in a moment. But then today, as the day went on, oil ticked lower, got down about 4%. It closed at $74 a barrel. What was OPEC Plus's announcement? Well, that they were extending their production cuts. The aggregate targets across the cartel call for 39.7 million barrels per day next year.

39.7 million barrels per day next year. That's about a 2 million barrel per day reduction from where the production levels had been. Why didn't oil prices move higher on the news that they were going to be extending these cuts? Because the market already knew. That's why. What would have happened if they announced, no, we're not going to extend the cuts is oil would have dropped ten dollars a barrel. And I'm being very serious about that. So everything was asymmetrically priced in. If they didn't do it, if they didn't extend production cuts, then you were going to see, you know, the supply expectations rally and the prices collapse. Because they did do it, but it was already priced in. It didn't move a lot. And there was a reasonable moderation to what they announced

that was able to allow some pressure into the oil price. So the downside. Now, this is traders. These are people that have hedges. This is speculators. These commodity price things just simply don't allow for fundamental analysis in the way that a lot of cash-based assets do. But look, Saudi Aramco, which is one of the largest companies in the world, but the largest oil company in the world, both in terms of the amount of oil production and the market capitalization of the company, they are doing a secondary stock sale. It's $12 billion. That's a lot of money to

be raised for most companies. It's not a lot for them. But, you know, look at the amount of transactions in the U.S. oil patch alone, primarily Permian based, of course, because that's where the primary part of our production is now. But when you look at Exxon's purchase of Pioneer, Chevron's purchase of Hess, last week's announcement of Conoco buying Marathon, you know, you're talking about 65 publicly traded oil companies down to 40. That's a lot of consolidations taking place. And just those three transactions I just mentioned are $200 billion of activity. So there's still a lot happening in the U.S. oil space. Oil prices today, a little downside, but OPEC Plus still signaling we're not going to make it easy for you guys. And I have written about this time and time again. They remain

furious for what took place in 2022 around our strategic petroleum reserves. Now, I mentioned we were down 430 points at one point today, closed down only 115. But the Dow was up 575 points on Friday to end the month of May. That was its biggest daily increase on a percentage basis in the year. And was it in response to the PCE number that came Friday? Pretty benign. No big surprise on the inflation number. I would say that maybe it played in a little, but the Dow doubled the S&P on Friday. The Nasdaq was flat. So you would expect all three indices to go up if it was some sort of surprise response to an inflation report. Bonds rallied a bit on Friday and a lot today. I mean, a lot. The 10-year was down 12 basis points

today. It was down five basis points Friday. So you could argue that some of what's happening in the bond market indicates that some of the inflation data is encouraging asset prices. But I think that with Friday being the last day of the month, you likely had some technical factors think that with Friday being the last day of the month, you likely had some technical factors, rebalancing, other things that take place that are somewhat idiosyncratic. Okay, a few different themes I want to go through on markets, and then we'll get to the fun stuff. Last year, 2023, the worst performing sector in the market was utilities. This year, utilities have had a very nice move relative to the market. When you look at a sector's performance relative to the whole market, utilities show one of the stronger relative reversals.

And yet, I can't say it's taking place with all the defensive sectors. We tend to think of utilities, healthcare, consumer staples, and real estate as kind of more defensive-oriented sectors, less cyclical, if you will. But consumer staples in healthcare are not showing that same kind of relative move to the market. So I don't think this is across the board with all defensives. I think it's unique with utilities. And that divergence is candidly a little confusing, but certainly something I have my eye on for a number of reasons. confusing, but certainly something I have my eye on for a number of reasons. Massive rally in bonds today. Stocks down. I love to think that the correlation with stocks and bonds is falling

apart. It hasn't yet. I need more confirmation, but it's been such a tight positive correlation for so long. It's going to take a little while. But do I think that high correlation normalizing to something much lower than it's been would be healthy for asset allocators? I most certainly do. So tech was the best performing sector for the day at 1% healthcare, three quarters of point, and I mentioned energy down 2.5%. One thing I did at the Dividend Cafe today, if you want to look at this little illustration we put up on the website

that I absolutely love, is essentially right now, you're getting a headline from financial media one day, something to the effect of markets are rallying as rate fears subside. And then the very next day, it could say markets sell off as rate worries grow. They allow not only what's happening in the market to zig and zag, but the reason for it to zig and zag is if you can have both high and low and night and day and cold and warm at the same time. And that's what the media will do in order to get the clickbait they need. And what I did was come up with an example. And there's an analyst I follow. And I got to read a report last week of him doing this exact same thing back when Omicron

came out. You remember our old friend Omicron was that kind of final variant of the COVID virus that when it first came out, they said, oh, my gosh, there's going to be terrible markets. And then it was markets were going higher and then this and then that. And bottom line is that you can just see day by day a report from Reuters, a report from CBS, a report from Reuters again, from Wall Street Journal, seven or eight little headlines of just the up and down, back and forth of what the narrative is. And I just want you to see it to get an illustration of what I'm referring to when it comes to media credibility. All right. So on the economic front, how is the consumer doing? I mean, I have a very consistently held view that the answer is the consumer is doing fine. Thank you very much. If the consumer has room on their credit card in

America, they're going to spend. We have this idea that, oh, my gosh, what are we going to do if a consumer retrenches? It's a very common Keynesian way of thinking. It is driven in this belief that consumer drives economic activity. That itself is flawed economically. But even if it weren't, just descriptively, this idea that we have to worry about how gung-ho the consumer is about spending money, their appetites for consumption, is to me one of the silliest things I've ever heard in my life. They are, the consumer is nothing if not consistent. And what they're consistent in is liking the spending of money. Now, with that theory undergirding the way I kind of approach this topic all the time, I just want to be clear that there's nothing that says the consumer

doesn't pivot their preferences, rotate what they're spending money on. My general belief that the consumer is pretty heavily inclined to enjoy spending money is different than the fact that their patterns and behaviors can alter at times. article this weekend from Josh Brown who was talking about there's apparently a big craze where teenagers are filming the person at Chipotle serving the food because they were giving so little meat in the burritos and tacos they were making and this whole thing's gone viral and there's been a lot of talk online about a significant amount of concert dates and the Jennifer Lopez tour getting canceled. Cruise operators are starting to offer bigger discounts. All of these things are anecdotal. Some are even kind of humorous.

They're very specific. But what they speak to is not, oh, the consumer is spending less money. Like last year, they went big on Taylor Swift. And this year, they're not going big on J-Lo. Taylor and J-Lo are different artists. I mean, that part isn't complicated for anybody. a different artist. I mean, that part isn't complicated for anybody. You know, what the point is, is that nobody who believes the consumer loves to spend is saying that always and forever the consumer will act crazy. There will be points of greater discernment and greater specificity.

You know, McDonald's brought back their $5 value meal. There's things like that that don't speak to the consumer saying, I don't want to spend money, but the consumer just becoming a bit more discerning. It's an alteration around selection. It's perfectly positive reality in the flow of an economy. But I just want to remind people one of the key economic principles that I believe in that is rooted in the Austrian school of thought that I think is important for all of our clients to understand such an incredibly complicated notion. Humans act. And this is all we're talking about when it comes to the alterations and changes in selection from consumers is that humans are exercising

their reason and rationality in consumption action, and it should be no surprise. All right, I want to move on to a few other economic indicators. I'm not sure, to be honest, what I think about how magnificent of an indicator it is, what cell phone usage is in a given city during working hours of a day. But I am sure, you know, we can look at what cell phone usage is compared to what it was pre-COVID. And those numbers could have different things that cause it to not necessarily be as powerful or tight a correlation or indication as we think. But relative to one another, you know, how one city is doing relative to another, even if it's within some form of flawed methodology, the relative relationship, you would think, would still have some kind of substance to it. And that's what I see right now is that Las Vegas being at 97% of the cell phone activity level

was in 2019, when then you have Minneapolis at 44%. That's very hard to not believe it has something about what's going on in downtown Minneapolis and something else going on in Las Vegas. Now, again, anyone who happens to have been in Vegas last few years knows it isn't the same city. The new sports venues and concert venues have opened. I mean, it was already growing like crazy, but the convention center scene and the entertainment scene is like at another level there just in the last several years. And Minneapolis is at another level, too, in terms of how dormant a lot of its downtown activity is. Interestingly, the second lowest city in percentage of cell phone activity relative to pre-COVID is Seattle, which is at 47

percent. Minneapolis at 44 percent. So, you%. So people can speculate if they want why that may be. I don't really think it's very necessary. San Francisco had been in the 30s for much of last year. It's come up to 57%. So it's still not gotten high, but it's far off of how low it had been for quite a while. So just take it for what it's worth, various activity barometers in some of our, this particular report looked, I believe, at 55, excuse me, 56 different cities. So I mentioned the PCE report, it's personal consumption expenditures. It's inflation data that comes from the Bureau of Economic Analysis, which is put out by the Commerce Department. The Fed relies on it heavily, believes, and I think rightly, that it's a better indicator than CPI.

Housing has a much lower of a weighting than it does in CPI, where it's a massive weighting. And in the PCE, it came at year over year inflation at 2.7%. Core inflation for the month of April was at 0.2%. And food prices were down 0.2% on the month. Personal income was up 0.3% in April, which was basically in line with expectations. And then the data point that came today was ISM manufacturing at 48.7. Anything below 50 is contraction. Anything above 50 is expansion. That's below expectations and largely led by new orders that fell 3.7% on the month. We know from Thursday, by the way, that home sales fell 7.7% in the month of April. They're now down to basically

the lowest level since 2000, which is really the lowest level we have on record. One of the dumbest things going on right now is when people will talk about the mortgage rates at 7% and they go, well, you know, it's really not that bad because in my day we paid 12% or 15%, which is all true, by the way. And I think I've even written a dividend cafe before where I remember my first condo I bought, I think I was paying eight and a quarter and it felt like a good deal. And I, and that was in 1979, you know, that was in 2000 or no 1990, that was 1997. no, 1990. That was 1997. So whether you're a really young person like me or a much older person who is saying these 12, 15% mortgage things, either way, it is not the point. Because whether it's the 2% to 4% mortgage regime that we've mostly lived in the last 20 years or not. It's up against a price

that is dramatically higher. That back then people were paying a higher mortgage rate against an asset that was much cheaper in cost. And I'm not just talking about the absolute cost because of inflation over time. I'm referring to adjusted for income, that the percentage of what one was spending in their monthly income on their house payment back then was well south of 30%, and often somewhere around 20%. And it's now often near 50%, and consistently up in the high 30s. So that's the real relevant economic data point. Not the cost of the borrowing, but the cost of what you're buying with what you're borrowing. That's the issue of affordability. No one is claiming we have an affordability problem because

the interest rates are 7%. We have an affordability problem because of the sticker prices of the homes for what it's worth. 55% chance right now in the futures market of a rate cut in September. I continue to not believe it. If they had started cutting in March and May, even in June, maybe. But why go do a first rate cut six weeks, eight weeks before the election? I just don't believe it. It wouldn't move the needle.

It's not a big deal if they did a quarter point rate cut, but the optics are bad and it doesn't, if it's meaningless one way, it's meaningless the other. In other words, there's not much of a benefit to it either. I just simply don't believe that the federal end up cutting before the election at this point. But you do have a 70% chance in the futures market of a cut at the November meeting and 86% chance of a cut at the November meeting, an 86 percent chance of a cut in the December meeting that seems far more logical. We already talked about oil today. Against doomsdayism, the second law of pessimism, I'm going through the seven laws of pessimism in our Monday Against Doomsdayism section here in the Dividend Cafe, borrowing from a piece by Martin Baudry. And I want to say that the law

of velocity of bad news is very important. Nothing travels faster than bad news. And you remember before we had phones that sometimes you didn't get news till the end of the night before we had smartphones. But imagine 500 years ago, you could have a tsunami, an earthquake, a war, and another part of the world might not know about it at all. Or they'd hear some traveling journeyman coming through town. They would talk rumors of things. But news didn't impact people at scale. And it certainly didn't do it real time where now what travels the fastest bad news sensational news and that adds to an emotional flare it's a speed of bad news and i think that the depth of the impact it ends up having is very distortive relative to what

the bad news actually it is. It leaves a stronger impression that then builds on itself. This is just a simple reality of pessimism that I think those of us who live against doomsdayism would be wise to remember and guard against. So I'm going to leave it there. There is an Ask TBG question that'll be on our homepage of the website. It's in today's Dividend Cafe entry. We do have the May jobs report coming at the end of the week from BLS, and we do have the JOLTS data coming tomorrow, which is the monthly job openings. And in the meantime, I think that should cover us for now. Thanks for bearing with, reach out with any questions at thebonstongroup.com. Thanks for listening.

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