The Dividend Cafe - The Dividend Cafe Monday - November 18, 2024

Episode Date: November 18, 2024

Today's Post - https://bahnsen.co/4fUvrpK Monday Market Recap and Current Economic Updates In this Monday edition of Dividend Cafe, David Bahnsen delivers a comprehensive summary of the market's current state, noting that the Dow closed the day down by 55 points while the S&P and NASDAQ saw slight gains. The segment highlights the top-performing energy sector and provides details on bond yields, including the noteworthy un-inversion of the yield curve for the first time in two years. David touches on the financial influence of the 'Magnificent Seven' companies on the S&P 500, and discusses disparities within the semiconductor sector. Additionally, various political updates are given, including the Pennsylvania State Supreme Court's ruling on illegal ballots and President Biden's decision regarding Ukraine's use of long-range missiles. The episode also covers Trump transition team appointments, particularly in economic and energy sectors. Industrial production stats, retail sales data, and Fed rate expectations are reviewed, along with a resilience in midstream energy assets despite fluctuating oil prices. David concludes by pointing to further reading and engagement through Dividend Cafe and anticipates additional updates throughout the week. 00:00 Introduction and Market Summary 00:48 Market Performance and Sector Highlights 01:23 Bond Yields and Yield Curve Inversion 02:10 MAG 7 and Semiconductor Sector Analysis 03:42 Electoral News and Ukraine Update 04:38 Trump Transition and Key Appointments 07:41 Economic Indicators and Fed Expectations 09:59 Energy Sector and Midstream Performance 12:18 Conclusion and Final Thoughts 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 are back up and running and I wish I had some news for you about the future Treasury Secretary of the United States, the National Economic Council Director. There's been a lot of progress of naming different would-be appointees. I mean, everybody still has to get confirmed, of course, across various departments,

but the Treasury and the directly economic areas of government are the ones that the Trump transition team has not made any announcements in. Let me just start with the Monday summary of markets, give you kind of the rundown of where we are, and then I'll give an update as to some of the things that did take place in the transition over the weekend because it primarily impacts the energy sector. So in terms of the market today, it opened down about 100 points and then closed the day down just 55. So the Dow was pretty flattish down just 13 basis points on the day where the S&P was up 39 basis points and the NASDAQ was up 60. So a little bit of a up day in the broader markets, kind of flattish in the Dow. Energy was the top performing sector. And I'm going to get into that

a little bit more in a moment. It was up a little over 1%. Industrials were the only sector that were down. So 10 out of 11 sectors were positive and industrials were only down 17 basis points. The 10-year bond yield, by the way, was down one basis point on the day. So not much movement, but it closed at 4.41%. But I think the more interesting thing is that the 30-year bond yield has closed above the Fed funds rate for the first time in two years. So the yield inversion, the yield curve inversion has officially uninverted up and down across the yield curve, largely because of the Fed's recent 25 basis rate cut. It brought the effective Fed funds rate down into the 450s

and the 30-year is sitting near 460. So barely uninverted, but nevertheless, it's the first time in two years. It's noteworthy. The MAG-7, the so-called Magnificent Seven names that have been the large, very mega-cap companies that carried a lot of the market last year, most of which have done quite well this year too, right now make up 33% of the S&P 500. Seven companies are 33% of the index, which is 500 names. And those seven companies represent 23% of next year's projected earnings. And so that disparity, 23% of the earnings representing, and that's next year forward-looking, representing 33% of the index, I think represents a compelling overvaluation case

in terms of that disparity. The only two sectors, by the way, that have next year's earnings are higher than their composition of the index are financials and healthcare, for what it's worth. Semiconductors are interesting. You take out the two biggest companies. As a sector, are down well over 25% from their high earlier this summer. So that's fascinating to me that A, there's such a disparity within the semiconductor space and B, that the semiconductor space itself is such a laggard while the market itself has done so well. In terms of news, for those still following some of the electoral

stuff day by day, the Pennsylvania state Supreme Court did rule today that illegal ballots would be illegal. I don't know sometimes. A county commission, I believe it was Bucks County, had ruled last week they were going to count some illegal votes. And so there's a whole court battle back and forth, whatever. The state Supreme Court jumped in on that today, and we'll see if it goes to the U.S. Supreme Court. But Ukraine is back in the news. President Biden yesterday decided to give Ukraine permission to use some U.S.-made long-range missiles that could strike into Russia. And that is something they delayed or actually denied the right to do before. So we're kind of watching that to see where that changes Ukraine's capabilities going in to strike inside Russia. Obviously, the big part of news that a lot

of people are paying attention to, and I did devote a whole Dividend Cafe last Friday to a longer form summary of what I think is happening in this transition, what I'm expecting by way of policy as President Trump, who had been the 45th president, gets ready to become the 47th president and has named a lot of appointments, but still has a lot to go. And their expectation of Scott Besson being named treasury is largely taking a big hit as internal fighting with him and Howard Lutnick, who is the chairman of the Trump transition. Lutnick, the CEO of Cancer Fitzgerald, a Wall Street firm here in New York City, has been pushing for himself to be named the Treasury Secretary. The indications I'm getting, some of this is in media reports and some are from sources of mine, is that Trump is likely to pass on both of them now. And I do hear that Besant is still a front

runner for potential NEC director, the National Economic Council. The name is being floated right now for the Treasury Secretary, Kevin Warsh, former Fed governor in the Bush administration, former Morgan Stanley guy, and someone I think very highly of. And Mark Rowan is reportedly meeting with President Trump, President-elect Trump, in Mar-a-Lago tomorrow. I do not know if that's true or not. Mark Rowan is the CEO of Apollo, a major, major private equity, private credit, alternative asset manager here in New York as well. So we will see where exactly this is going. I don't know that anybody knows at this time, and I will be keeping you posted. What was named over the weekend is Chris Wright as the new energy secretary, CEO of Liberty Energy, a major what they call fracking company.

And Doug Burgum, the governor of North Dakota, was named secretary of interior and asked to chair a newly created National Energy Council, which Chris Wright will also be on, that will be assigned to integrate various government agencies and departments around national energy policy. I believe that Chris Wright is a huge proponent of the U.S. energy story of U.S. energy independence, obviously is very, very familiar with and successful in managing energy infrastructure assets. And he has been a real outspoken advocate for the sector and is a quite capable and articulate defender of the U.S. energy story. Brendan Carr, who's on the Federal Communications Commission now, is an FCC governor, was appointed by President-elect Trump to be the new chairman of the FCC.

I don't know where things stand with these other people that were appointed last week. Pete Hegseth at Defense Department and Matt Gaetz at AG. Everyone's pretty aware that there's a lot of controversy on the picks and where the politics of it goes as far as Senate confirmation remains to be seen. On the economic front, industrial production declined in October 0.3%. Utilities were down, excuse me, utilities expanded 0.7%, but mining manufacturing contracted quite a bit. Retail sales were up 0.4% in October and are up 2.8% versus a year ago, but auto sales were the big story, up 1.6% just in the month of October alone. And I think they're up over 6% year over year, but up over 1.5% month over month. The NHB HomeBuilder Index, so it's kind of a sentiment index for homebuilders,

picked up a bit from last month, still below 50. So it's still negative overall sentiment, but it was higher than expected and higher than it had been. Present situations are still not good. That's holding the index down, but expectations came up quite a bit and expectations in the explanations for why there were higher expectations largely alluded to belief that regulatory relief was coming and causing improved optimism. The Fed right now is sitting at an expectation of a quarter point rate cut, but that's down to 58% implied odds. And so it had been about 80%. So basically there's a 42% chance of no rate move next month. One thing I thought I would do is put it out a little bit. There is a 19% chance, pretty low, that there would be a rate cut in December and a rate cut in January. So there's a pretty high

expectation that the rate is somewhere around a quarter point lower in January and lower odds of a whole half point. But if you go out to a year from now, basically the end of 2025, there are right now pricing in the Fed funds futures market, somewhere between Fed funds rate of three and a quarter or four and a quarter, depending on what the different odds are. So that is basically over 1% less than now, but you know, from the range at the lower end, but that's a good 1% higher than, than where things had been about four months ago. So where we were expecting potentially 150 to 200 base points to come out right now,

the expectation is somewhere closer to 100, 125. Oil up 3.4% today, but it's still sitting down below 70 at 69.22. Midstream rallied today. And this is what I was referring to about energy sector. I don't know who thought that the president wasn't going to appoint someone friendly to U.S. midstream energy, but apparently the announcement of the new energy secretary did put a bid under midstream assets. But last week, the S&P was down over 2%.

Oil was down over 5%, and midstream was again up over 1.5%. So there's been a lot of resilience in the space, and a lot of this is around the confidence and optimism in various elements of the midstream story with the new administration. But of course, midstream has done very well all year, up over 50% year to date. I would just point out that midstream's performance year to date has not been because of strong commodity price performance. Neither oil or gas has boosted midstream. But when I start talking

about this low correlation between commodity prices and energy assets like midstream, like pipelines, et cetera, over time, the correlation is only about 23%. But I do think many of you remember, I know I remember it quite well, that when oil prices drop significantly, midstream assets do generally drop because there's a whole sentiment around the sector. Nevertheless, the low correlation that I've always talked about, which is fundamentally embedded, it should be fundamentally true that there's low correlation, that has not always played out. And so it's there now, it's been playing out in 2024, but there's other periods where that correlation can spike

a great deal. The against doomsdayism is a chart this week. You'll have to go to divincafe.com to look at. It's absolutely not to be missed unless you do not get cheered up by less people starving to death. And then finally, there's a question in the Ask TBG about the Trump administration's drill baby drill policy and where the supply and demand of oil prices comes in. And I would encourage you to read that answer at DividendCafe.com as well.

I'm going to leave it there. There should be a few different things happening this week. I will keep you posted. But in the meantime, have a wonderful Monday night. Reach out with any questions, any time, questions at thebonsongroup.com. In the meantime, thank you for reading. Thank you for listening. Thank you. and does not constitute investment advice. The Bonson Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced.

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