The Dividend Cafe - The Dividend Cafe Tuesday - September 3, 2024

Episode Date: September 3, 2024

Today's Post - https://bahnsen.co/4cXvPC2 https://www.cnbc.com/2024/09/03/nvidia-tumbles-leading-chip-stocks-lower.html Market Recap: Tech Sell-off and Economic Data Analysis In this edition of Dividend Cafe, David Bahnsen, Chief Investment Officer at the Bahnsen Group, provides an update on market performance for the Tuesday, September 3rd, following the Labor Day holiday. Bahnsen discusses the significant downturn in the major indexes with the S&P 500 down 2.1%, NASDAQ down 3.25%, and the Dow Jones down 1.5% due to a tech-driven sell-off led by semiconductor stocks like NVIDIA. He also covers the mixed economic data, including the fifth month of contraction in ISM manufacturing numbers and the upward revision of the Q2 real GDP. Additionally, Bahnsen touches on NVIDIA's financial metrics, the broader distribution trends in market sectors, and current geopolitical events. The episode concludes with a discussion on bond yields, midstream energy sector performance, and expected Federal Reserve rate hikes. 00:00 Introduction and Welcome 00:19 USC Game Recap 00:59 Market Summary and Tech Sell-Off 01:57 Economic Data and Market Highlights 04:27 NVIDIA Analysis 05:56 News Highlights 06:58 Economic and Market Updates 08:43 Energy Sector Insights 09:39 Conclusion and Upcoming Updates 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 brought to you on this Tuesday, September 3rd. I am David Bonson, Chief Investment Officer, Managing Partner at the Bonson Group. Yesterday was Labor Day, so we did not have a Monday edition. So I'm doing it for you here today. I recognize that a lot of you are probably only tuning in because you want to hear an update on how the USC game went on Sunday night.

And you may not know that USC won that game, but I also understand that there are some of you that watched it, digested it, have seen the highlights a number of times, and you're ready just to get straight into the market summary. So I'll leave the USC win over LSU alone and the final minute drive to score the winning touchdown with eight seconds to go. We're going to skip over that and go straight to today's market, which today's market was not a winning final drive type moment. The S&P was down over 2.1%. The NASDAQ was down a brutal 3.25%. The Dow was only down 1.5%, but that's 626 points. And the catalyst to today's sell-off, not only has

everything been up quite a bit as of late, but obviously with the NASDAQ down that much, you can guess it was largely a tech driven sell-off. The tech sector alone, which was the worst performing sector, was down 4.43%. Vidya was down 9.5% and it's down now 23% from its recent high. So you kind of had a big tech semiconductor driven sell off. It spread around a significant part of the market. There was a bit of concerning economic data. Just as late last week, the Q2 real GDP number was revised upwards. But then on the flip side of that, today, the ISM manufacturing number was worse than expected. It was the fifth month in a row of contraction in manufacturing. So this is an ongoing theme of ours, that there is a sort of mixed bag of economic data. And I pity anybody

who's trying to extract a certain strong narrative of either economic strength or economic weakness out of the data we have when the data continues to be so ambiguous. But going into today, you had 35% of stocks at 20 day highs. 80% of the companies in the S&P 500 were above their 200-day moving average. That's very high. I think all that's going to be adjusted after today. We'll get those recalibrated numbers tomorrow. In terms of other market highlights that we want to go through here, I think the fact that the consumer staples sector was not only up, but up 0.76%, three quarters of a percent. Wreaths were up as well. It's not very common you get a day of this type of violence with the Dow down over 600 points, the NASDAQ down over 3%, and you still have a couple sectors up at all. But nevertheless, some of those defensives

hung in there very well. The bond market was up very nicely. It had sold off at the end of last week as yields had increased. But today, the 10-year was down 6.7 basis points with the 10-year bond yield closing at 3.84%. I think the other piece you're going to want to continue to watch is this correlation between even-weighted index of the S&P and a cap-weighted where on a relative basis, even a day like today where everything's down, the even-weighted doing so much better than the cap-weighted, which is just what you expect when the concentration in big tech is so high. And that is, I think, the ongoing story is that even as markets have recovered over the last four weeks from what was a tough end of July and early August, there really has been quite a significant relative rally of even weighted to cap weighted, which is healthy for there to be a broader distribution. This is interesting on NVIDIA.

I mentioned it was down 9% today, but the profit margin on NVIDIA is so high. I love these data points here. 76% gross profit margin. So if you look at their trading price to sales, they're currently trading at 25 times revenue. Okay, forget earnings, where the multiple at 60 to 65, 70 times earnings sounds really bad, but 25 times sales sounds worse. But it's also trading at 18 times next

year's expected revenue. And that is really a multiple that is assuming profit margins hold, those sales expectations hold. And that's based on, obviously, if you're going from 25 times sales to 18 times sales, that's based on a significant amount of expectation for revenue growth. The revenue growth may come, the margins may hold, I don't think so. But if all those things do hold together, you're still talking about a company at 18 times gross revenue, just can't be called cheap by any stretch of the imagination. Now, all these NVIDIA points, the article you can see in the show notes, cnbc.com,

there were plenty of other media references over the weekend as well. I read a report from Peter Buchvar. I read his book report every day. I think it's quite good. And the data points in the video all tell a similar story. On the news front, the story over the weekend, the tragic tragedy of six hostages in Gaza found deceased, killed by Hamas, one of them being an American citizen. Very awful story and speaks to the seeming futility of trying to negotiate a ceasefire while hostages are being killed in the middle of the negotiations. Vice President Harris joined President Biden and former President Trump advocating to block the Nippon Steel acquisition of U.S. Steel.

Our ally, Japan, wanted to put $2.7 billion into the U.S. steelmaker. This, I believe, is not really a surprise that Vice President Harris came out on this issue. And nevertheless, I consider it unfortunate, and I considered it unfortunate when President Trump came on this same side of the issue as well. On the economic front, I mentioned ISM. I mentioned that real GDP growth had come in, better expected. One just quick tidbit that's kind of off the subject of U.S. economic data, but I just reviewed a series of demographic considerations in a commentary that Torsten Slock, the chief economist at Apollo, had sent out on Monday, Labor Day.

And China is at a 1.0 fertility rate. So not only is their population growth now gone officially negative, but you're talking about a significant expectation for population growth for decades to come when you're essentially below half of what you need to be for replacement rate in terms of demographics. July home sales were down five and a half percent. They were expected to be up a little bit. So affordability continuing to weigh on the ability to move home product whatsoever, especially existing homes. The Fed update is not very different from last week. We're now looking at a 67% chance of a quarter point hike in September, a 33% chance of a half point hike, but then a very high percentage in November of an additional quarter point, a hundred percent chance of another quarter point. But really the current yield curve

in the futures market doesn't care whether or not it happens September or November. The point being that they're predicting we're going to get 75 basis points out of the yield curve by November and then a full percent out by December. So lots of rate cuts expected between September, November, December, regardless of the magnitude and so forth. Crude is down to $70.41. Crude oil down over four and a25% today. I believe that's the low of the year. At the very beginning of 2024, it was right around there, but really hasn't retouched that $70 mark since the beginning of the year. Midstream energy, by the way, was up 1.5% last week, even with oil down, but natty gas was up. The S&P was up a little. There's all these different metrics, but the midstream energy sector

has proven to have just a very low correlation to all of them. 10 years ago, MLPs were over 60% of the total midstream universe. And now they're only 35%. Been a lot of mergers, acquisitions, MLPs that converted into corporations. So that limited partnership sense of the midstream space has come way down and corporations and Canadians have come up. All right. I'm going to leave it there for the week. There's a few more tidbits we want to check at Dividend Cafe. Brian will be with you Wednesday and Thursday for just the daily recap that we try to do every day. And then on Friday, I'll have the Dividend Cafe as always. Reach out with any questions at all that you may have. And thank you

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