The Dividend Cafe - The Dividend Cafe Monday - October 21, 2024

Episode Date: October 21, 2024

Today's Post -https://bahnsen.co/4hfQk0k Dividend Cafe: Market Movements, Economic Indicators & Financial Insights In this episode of Dividend Cafe, David provides an in-depth analysis of current market dynamics, including stock market movements, bond yields, and economic indicators as the election approaches. Detailed discussions cover shifts in global GDP from major economies such as the U.S., China, and Japan, as well as updates on the housing market with a focus on housing starts and mortgage applications. The episode also reviews the recent performance of energy markets, particularly oil and natural gas pipeline companies, and explores the concept of a neutral interest rate's impact on economic stability. The episode concludes with a preview of upcoming content, including a special Q&A session. 00:00 Welcome to the Monday Edition of Dividend Cafe 01:06 Market Recap: Dow, S&P, and NASDAQ Performance 03:49 Historical Economic Insights: US, China, and Japan 06:11 India's Economic Growth and Future Projections 06:46 Bitcoin and NASDAQ Correlation 07:19 Election Insights and Market Implications 08:22 Economic Overview: Retail Sales and Unemployment 09:01 Housing Market Insights: Declining Starts and Sentiment 10:27 Federal Reserve and Interest Rate Predictions 10:55 Energy Sector Update: Oil and Natural Gas 11:42 Addressing Doomsdayism and Modern Farming 12:08 Interest Rates: Finding the Sweet Spot 15:06 Concluding Thoughts and Upcoming Content 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 the Dividend Cafe. Exciting weekend, exciting week ahead, and it created an exciting day today. and it created an exciting day today. So we're going to get into it, market, housing, Fed, the election, just all the different topics I like to cover on Monday. We are 15 days away from the election, so we're finally almost there. We'll have a few things to say here today and then Friday. I mentioned in the Dividend Cafe a couple of days ago that this coming Friday's Dividend Cafe will be devoted to answering all the questions that we've gotten related to the election and its expected impact in markets and the economy and allowing people to get as granular and specific about questions they may have around this whole topic. That'll be what we do in Div

Cafe. And you're welcome to even send questions all the way through this week i'll probably wrap up the writing by thursday but up until then if you add more we'll cover more so questions at the bonson group.com if you're interested okay so today's dow opened down a little bit but then it just got worse throughout the day. Closed down 344 points, which is 80 basis points. The S&P was down 18 basis points. And the NASDAQ was up a quarter point. The only sector today in positive territory was technology, which was up over 90 basis points. 10 of 11 other sectors were down. Primarily real estate, which was down over 90 basis points, 10 of 11 other sectors were down, primarily real estate,

which was down over 2%. And anything down today, it was related to bond yields skyrocketing higher. And so you just had a situation where the 10-year moved up almost 12 basis points. So you had a big sell-off in bonds and the majority of the stock market, especially rate sensitive, small cap, real estate, et cetera, dropped with bonds. Now put today aside for a second, coming into today, we had closed another all-time high on Friday. We had had six weeks in a row of positive performance in markets. And there was significant breadth. And this is the thing I want to say about a big difference between where we are now, when I look at the elevated valuations and where we were going into 2022, which of course ended up

being a big sell-off year with the NASDAQ down 30 and the S&P down 20 and all of that stuff, a big difference was that in the months leading up to what became that 2022 sell-off, the breadth was already weakening. Breadth has been quite strong in the market here the last couple of months as this rally since early August has gathered steam. Now, there is an exception, and it's an ironic one. It's semiconductors, where actually the top part of the semiconductor space has gotten stronger in recent days and weeks, and the breadth of the semiconductor space has

gotten much weaker. So I throw it out there as a rhetorical question because I think the answer is obvious, but just in case it isn't, I may answer it. What is more likely? The weak space bringing down the strong names at the top or the strong names at the top bringing up the weak space? First of all, the answer is not entirely clear because there's even third, fourth, fifth options that could fit in there. But as the general rule goes, the breadth of the space matters and it matters for the companies at the top of it as well. Okay, so I mentioned bonds selling off.

A couple of just sort of random things that were part of my weekend research that I wanted to share. 45 years ago, so I say 1980 because it was back when President Reagan ran against Jimmy Carter. I was out of kindergarten and this was the launch of a new decade. So even though 44, 45 years may seem a bit random, 1980 is a nice good line in the sand. And the U.S. was 25% of global GDP. And you fast forward today, it's basically 25% of global GDP. And so even as other countries have moved up significantly, the U.S. has held its percentage. But when you have a lot of emerging markets that went from zero, one and two percent to much higher, for the U.S. to hold its position could only have happened out of a lot of relative strength, obviously, because of

math. Now, China was 3% of global GDP, and it is today 17%. That's not a bad increase on the world stage. But if we were flat and China grew that much, what from a percentage basis largely accounts for that? Who shrunk? And it is Japan. That 45 years ago was 10 percent. But by the end of that decade, let's put it this way, because I'm a big fan of cultural markers. 1980, Japan was 10 percent of global GDP. When Die Hard came out, it was 18% of global GDP. And some of you will know I picked that movie as the marker with the peak GDP representation that Japan had on the world stage. It is now, are you ready, 3%. So basically, China and Japan swapped from 3 to 18 and 18 to 3, and China from 3 to 17.

So economic empires come, economic empires go. It can take centuries, but sometimes it can take just decades. I'll add to this, by the way, I wanted to mention India was barely 1% of global GDP 30 years ago, starting into the 1990s. It's over 4% today. It's more than quadrupled in a few decades. They are headed by IMF forecasts and other fallible but reasonable estimations to be double 4%, somewhere around 789 in less than a decade. So massive relative and absolute economic growth out of India. There's a chart at Divin Cafe you're going to have to go to to look at that shows a correlation between Bitcoin and the NASDAQ going back to January of 2020. It's a nearly perfect correlation. Do with it what you want, but it's worth looking at. I got to write a div cafe about crypto one

of these days if I get the energy to do it. But the point here is a rather obvious one. It's very highly correlated with the risk asset that is an Aztec. So I mentioned the election is 15 days away. I don't want to get into the polling, the momentum, the models. Some of the things I can share will do bode well for the Trump candidacy. Some of the things I can share bode well for the Harris candidacy. I would like to just be an objective messenger. But first of all, I think everyone has other sources besides my investment commentary that they can go to for that purpose. And so it's sort of an asymmetrical risk reward for me because I don't think it really produces a lot of benefit for you all with me

regurgitating polls that are available in plenty of other online sources. And then I think there is a tendency to want to blame the messenger for the message. So it's a very, very, very tight election. And we have 15 days till we're going to hopefully know a lot more. So why are bond yields up? Why are they around the 4% range instead of 3.6% or 3.7% where they were? Look, it's really quite simple. Retail sales were strong. Unemployment has been low. Atlanta Fed GDP estimates are strong, over 3%. The soft landing camp or even a strong landing camp is winning. There's been solid data there. That changes when it changes, but that's the reason bond yields have come up. when it changes, but that's the reason bond yields have come up. Higher expectations for nominal GDP growth and of the nominal GDP, primarily the big changes come in real GDP expectations.

All right. And then a few data points around housing. We're going to spend some time here in housing real quick. Housing starts declined half a percentage point in September. They're down over half a percentage point from a year ago. A year ago, housing starts were pitifully low, and they're down from there. So that's pitifully lower. Two years ago, it was pitiful. Each year, they've gone lower, not higher. So you have bad data that you're not getting enough starts, and then you're getting less starts. How does this happen?

It's a decision. It is a choice. It's not just an anecdote or a circumstance. And although the September report was primarily due to a multifamily decline, which is a category of housing starts that has seen a lot more supply, but only recently slowed down because of cyclical realities. The single family starts have just simply lagged and will continue to do so for the foreseeable future. Mortgage applications for new purchases are down well over 50% from where they were just two plus years ago. And then the very recent NAHB Home Builder Sentiment Index came in at 43, well below 50. Expectations are doing slightly better. Present situation,

prospective buyers are really low. Home Builder Sentiment. Federal Reserve, 91% chance of a quarter point cut next month. 77% chance of a quarter point cut in December. 0% chance in the futures market of anything higher than a quarter point cut at both of the meetings. And there's some chance, even though it's a slam of no cut at one or both. 90 and 77 being the odds for a quarter per meeting. WTI crude closed just a hair below $70. It's up 1.7% today, but still a little bit below 70. Energy stocks were down last week. Oil itself was down 6.5%. Canadian midstream was a bright spot, did well. Natural gas pipeline companies, when they weren't focused on natural gas liquids, the processing side of the business, but the transportation around NGL had a very good week.

Not a surprise as U.S. oil field production is at an all-time high, 13.5 million barrels per day. at an all-time high, 13.5 million barrels per day. I am sure you will see commercials from Vice President Harris bragging about that in the 15 days to come. I just read against doomsdayism in Dividend Cafe today. Pre-industrial farming, let's just say when you look at modern farming, farming. Let's just say when you look at modern farming, the treatment of animals, the results, the economic productivity, the ease, the living conditions. Let's just say I'm staying light on details on purpose. The evolution of farming does not allow for a doomsdayism. Okay, I'll put it that way. Somebody asked in Ask TVG, and I'm going to close out with this point. What is the right interest rate level short term?

This person is a saver and they weren't getting any interest income for so long. And now they've been getting really good interest income for the last couple of years. But what's the sweet spot? What's the right amount? And I answer the question by saying, in a perfect world, lenders and borrowers determine the amount. You make a market. And of course, it doesn't end up just being one person with one bank. It ends up being gazillions with gazillions. And the need for a central bank to control what the cost of capital will be via the setting of the Fed funds rate that is the rate

banks will pay for short-term lending, that need for manipulation or alteration goes away if there were pure price discovery from lenders and borrowers. I freely recognize we don't have that system and I'm very skeptical we're going to have it again in my lifetime. But the reason why I say this caveat is I don't want to answer what I think the short-term interest rate would be. And I don't want the smart folks at the Federal Reserve to answer either. But to the extent that it is not going to be set by markets and it will involve human fallible decision making, what I would say is that if the question is meant for what's the neutral rate, what's a natural rate at which there would not be contraction because it's too tight or accommodation and stimulus because it's too loose? And I would say that number is roughly

around 3%, that our current roughly around 5% is still contractionary. If they were to go back down to the zero bound, it would be extremely loose and probably recklessly so. So I have the general feeling that the number is somewhere into the threes and that they're going to work their way down there. But again, I think that that is assuming one wants to get to neutral. And I'm not sure that that is the policy objective. And that's based on my own belief that the nominal GDP right now, at least with a little bit of better economic growth expectations out there, if you can get 2% real GDP growth and 2% inflation for 10 years, that should leave you about a 4% 10 year. And if you have about 1% for term premium, that should mean that the short end of the curve would be around 3%. You can alter some of those numbers a bit, but that's the back of napkin.

And again, we have a central bank that is setting that short term rate, but we have a market that's setting the 10 year. So there you go. I'm going to leave it there for the week. I love the Monday Diven Cafe. I hope you've gotten a lot out of this. More fun things if you want to check it out online and feel free to share it, forward it. And in the meantime, we'll be with each day this week. I already have some content I'm working on for tomorrow's daily recap. Brian will be with you in the podcast each of these next couple of days.

And then Friday, a special election Q&A Dend Cafe. Thanks for watching. Thanks for listening. Thank you for reading the Dividend Cafe. Through Hightower Securities LLC, advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices,

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