The Dividend Cafe - The Dividend Cafe Monday - May 6, 2024

Episode Date: May 6, 2024

Today's Post - https://bahnsen.co/44ut20E The jobs report Friday was the talk of the town, with 175,000 new jobs being created in April, well below the 240,000 estimate. It was the government sector that most missed expectations, with the private sector representing 167,000 of the new jobs. The unemployment rate ticked up to 3.9%. Wages were only up +0.1% on the month and are now up +3.9% year-over-year. There is a real irony in how this gets digested, because some say, “oh no, wage growth lower than we want is bad” and others say “yay, too much wage growth creates a wage-price inflation spiral so this is good to see as a disinflationary sign. I think both camps have it wrong. 29 million of the roughly 158 million people employed in the United States works for a S&P 500 company (18% or so). Some I have shared this with expressed surprise it wasn’t higher, and some were shocked it was so high. Data is in the eye of the beholder, I guess. The bottom 50% of health care spenders account for a grand total of 3% of total health care costs (less than $390 per year). The top 5%, on the other hand, account for 51% of all health care spending. 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 and welcome to the Monday edition of Dividend Cafe. We're recording a little later than normal Monday because I am actually in Greenbrier, West Virginia at a corporate executive summit. And they had a massive storm over the last hour that took out Wi Fi and things like that. So we're pretty sure that we're able to record right now and that I'm not just speaking into a black box for no reason. Hopefully, you're getting this video and everything has come together. Okay, but check out dividend cafe.com for all the things that went into today's dividend cafeend Cafe. The markets were up for the fourth day in a row. The Dow was up 176 points. Do I believe that they announced a quantitative tapering slowdown, them slowing

down the pace at which they're removing liquidity out of financial markets, and that it's a coincidence that the market went up four days in a row after doing so. I don't think it's a coincidence. I also don't know that I think it's the entirety of the explanation. And it was a question somebody had asked me as far as what I thought the impact on debt and equity markets would be, real estate as well, for that matter, both commercial and residential. And I'll say to you all the same thing I said in Dividend Cafe today and said to this gentleman. I think that largely markets will respond when it is a surprise, when it was not fully expected or baked in. And clearly them going from $60 billion

a month of tapering or tightening their balance sheet down to $25 billion a month was not fully expected. Is it a needle mover? We'll see. There's other factors that go into this besides just financial liquidity. And my thought might be that the Fed may be working overtime to not surprise markets with it. And in this case, it would be an upside or positive surprise. But either way, it has been a theme of ours for a while, that they were unlikely to get away with continuing the extraction of liquidity from the financial system and this downward pressure on bank reserves that we were seeing. And perhaps that is one of the factors playing into what's going on with the market. S&P was up over 1%, NASDAQ was up almost 1.2%. And this comes after being down 4% to 5% in the month of April, but it started off

the month of May pretty strong so far. It's obviously very early. Still have a little bit to go to earnings season wraps, but it's worth paying attention to. The big asset class that has benefited tremendously in recent days and weeks is emerging markets, which is essentially at a two-year high as of today. And in the month of April, when U.S. equity markets were hurting, emerging markets were doing quite well. Credit did pretty well also. And I would point out that within U.S. stocks, consumer staples as a sector did pretty well. But in terms of risk off and volatility and fear, let's put it this way. Two weeks ago, the VIX was at 21. Today, it was at 13. That's a dramatic drop in the fear index. And my joke in Dividend Cafe that I strongly suspect many people

will not get the joke was that the most volatile thing right now is volatility. I think that's a very, very funny joke. Very clever. I don't think that my family will find it funny. Moving on, top sector for today was technology up almost one and a half points. Real estate kept us from it being 11 for 11 positive sector day, but it was only down two basis points. So basically flat 10 out of 11 S&P sectors were positive on the day. The 10 year bond yield was down about 1.3 basis points. So a little bit of rally continuing in bonds. The 10 year now at 4.48%. It had been at 4.7 percent just 10 days ago so almost a quarter of a point lower in the yield meaning a pretty big rally in the in the long bonds

on the news front today which is interesting is oil didn't move a lot it was up like three quarters of a percentage point but it's still down around $78, $79. It was at $87, $88 a month ago. And yet there was talk of a ceasefire being rejected by Hamas. This is like the 10th deal Israel had offered. Then there was talk that Hamas was accepting it, but then there were conditions put on it. And then Israel rejected their qualified acceptance. And then Israel said they were launching a targeted strike in the Rafah region, which President Biden's asked them not to do. So you would think all this kind of back and forth, will they, won't they cease fire, additional escalation would escalate oil prices, and it hasn't. I mentioned President Biden. Let's do a little public policy talk. I found this

kind of interesting, and we're getting into the season where I'm going to have to start talking about politics a little more, whether I want to or not. But the approval rating of a president, I just want to give you an idea of how unreliable this indicator can be as far as a final election result goes. There have been a dozen incumbent presidents who ran for re-election since World War II. Four of those received less as a percentage of the vote than their approval rating, and eight of them received higher as a percentage than their approval rating. And you also have to remember, this is a little unique because you have two incumbent presidents running in the sense that one was president just

before. And generally, when an incumbent president is running, they're running against a first-time challenger, not one who has actually been in the office before. So obviously, this is a unique situation. And yet both of them have very low approval ratings. So that calls into question some of the reliability about it. But all that said, the average delta between a vote percentage and approval rating has been about 3.4%. So that if the approval rating was at 46 and outperformed, the average would be 49.4, or was it 41, 44.4.

So when you're talking about approval rating right now around 39%, and the average delta, if it surprises to the upside, as it has eight out of 12 times, four out of 12, it's surprised to the downside. If it were to surprise the upside at 39, you're still only talking about an average of about 42, 43%. So there's some wood to chop there if you believe the approval ratings in this situation, but there were plenty of other caveats I gave. What else do I want to go through here? Interesting that Secretary of the Treasury Janet Yellen, last week, talking to the House Ways and Means Committee, called out former Treasury Secretary Larry Summers, who had been the National Economic Council chair under President Obama,

was the Treasury Secretary under Bill Clinton, is a very well-known center-left Democrat economic mind. And Janet Yellen criticized him when confronted with things that he had said critical of her. So sometimes for those of us on the center-right that are exhausted by the inter-party squabbles and dysfunction in our own party that we see. It's interesting to note that it can be a bipartisan affair, some of these internal or intramural divides. What else do we want to go through? The jobs report Friday, 175,000 new jobs created.

About 240,000 were expected. Almost all the new jobs created by 98% were private sector. The unemployment rate ticked up 3.9. The number was a little underwhelming. So it was the first kind of, I wouldn't say super weak, but moderately weak and below expectation jobs report we've had in a little while. Bond yields dropped in response to that. Wages were only up 0.1% on the month. They're now only up 3.9% on the year. So one other data point I just want to share because I came across some of the research, I think I read Friday, maybe over the weekend, 29 million people out of the 158 million people that are employed in the United States work

for an S&P 500 company. So that's 18% or so of the working population. And then what's really interesting to me is that some said, oh, wow, it's pretty high. Some said, geez, I would have thought it was way higher. You look at all of these companies, some of which have 300,000, 250,000 employees, only 18% of people work for an S&P company. So, yeah, there's a subjective component to how you interpret the data, but do with it what you will. And then this I don't think should be taken subjectively, but I'll share it anyways. Well, I don't know.

Will people naturally draw the conclusions that they ought to from this? We'll see. The bottom 50% of healthcare spenders account for a grand total of 3% of total healthcare cost. per year that the bottom 50% of healthcare spenders represent. The top 5%, so obviously those that end up with some significant illness, sickness, surgery, need for care, they are accounting for 51% of all healthcare spending. Top 5%, 51% of spending, bottom 50 percent account for 3 percent of the spending. So what we have here is a situation where health care costs are largely with more catastrophic and significant things, and routine care is a very minimal part of the cost. And you would like to see policy approach it that way. I'll leave it there. Almost 0% chance of a Fed rate cut in June or any move at all. Right now, futures priced in a 0% chance of any rate increase for the rest of the year.

But a very low chance of an increase in June. A 29% chance, excuse me, of a decrease, 29% chance of a decrease in July. Let's assume that doesn't happen, but then there's a 63% chance of a cut by the September FOMC meeting. And I've already kind of answered my view as to how I think quantitative tightening will affect things from here. CPI comes out next week. We're wrapping up most of earnings season this week. And I will leave it there. We've covered a lot of ground here in this week's Monday edition of Dividend Cafe. Look forward to more to say throughout the week from both me and Brian. And reach out at questions at thebonsongroup.com anytime.

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