The Dividend Cafe - Tuesday - February 3, 2026

Episode Date: February 3, 2026

In this episode of Dividend Cafe, Brian Szytel discusses the recent market downturn and major economic indexes, focusing on the impact of positive PMI and ISM manufacturing numbers. Szytel explores the rotation in various market sectors, including software, IT services, asset managers, energy, cyclicals, defensives, and staples. He delves into the implications of AI on software companies and the credit market. Additionally, he covers the effects of Federal Reserve policies and quantitative easing on asset prices and the economy, comparing the U.S. central bank's balance sheet to other major economies. Szytel also addresses future inflation expectations by analyzing the 10-year yield, offering insights on long-term financial trends and upcoming changes in Federal Reserve leadership. The episode closes with Szytel's thoughts on capital market efficiency and future economic growth. 00:00 Introduction and Market Overview 00:41 Economic Indicators and Sector Rotation 00:59 Impact of AI on Software and Asset Management 01:49 Discussion on the Dollar and Monetary Policy 03:19 Global Central Bank Balance Sheets 04:18 Fed's Role and Future Expectations 05:14 Understanding the 10-Year Yield and Inflation Expectations 06:58 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. Welcome to Dividend Cafe. This is Tuesday. February the 3rd, Brian Sightel with you here from our West Palm Beach office here in Florida, Chile, Florida, 40 degrees today in the morning. So a bit of a cold streak here, but also a bit of a cold streak in markets. We had a down day, although we closed quite a bit off of the lows for the session. The Dow closed down 166 points on the day. The S&P was down about eight-tenths, and then the NASDAQ was down about one and a half percent. So it's just this big further rotation. We've talked about many times. We wrote about it yesterday and Monday's Dividend Cafe also.

So I won't go into it in more detail now. But you just had this big dispersion. The last couple of days, remember last week we got a big PMI number, and then we got an ISM manufacturing number yesterday. Both those were wildly stronger than expected, which is a very good thing for economic productivity and gains and growth. Those things are good. And then you're getting this follow-through in different sectors and different rotations.

For example, you had software and IT services companies sell off really big over concerns that AI competitiveness will take a lot of their business market share away. And then you had all the asset managers that service the financing for all of that sector, the software sector, which has been so hot for so many years, which has just been so volatile recently, all those asset managers themselves, from a credit standpoint, we're selling off as well. If the revenue model is threatened because AI can do the work that these other big services firms that used to get hired to do, then that's an issue. And then you had other sectors like energy, all the cyclicals, most of the defensives and some of the staples, it's kind of an odd

thing when you have energy and cyclicals rally at the same time as defensives and staples. But nonetheless, that's what we're talking about in a broadening overall equity market in that rotation. I wrote a bit today about the dollar. It's a topic that continues to come up. We talk about the monetary side of things and what I've called the experiment now since the great financial crisis with the expansion of quantitative easing and being able to buy assets from the market and being that not just buyer of last resort, but that sort of arbiter of risk in the market, it distorts asset prices. I don't believe that it's very healthy and I don't believe for a long-term competitiveness and U.S. assertion on the world stage, it's ideal. That's my feeling in my opinion,

but I think a lot of economists would agree with me. And you now have a new Fed share that's coming on board. Kevin Warsh has talked a lot about shrinking the balance sheet and bringing back the Fed's responsibility and duty to just full employment and stable prices without being this buyer of risk if the world gets unhappy, that Fed put that we've talked about. And what I've talked about in that Fed put environment is what we used to call the bond vigilantes that would decimate the long end of the interest rate curve all got shrunk because there's this big buyer out there. And his goal and his idea is to turn the time clock back to the way it used to be, call it green span era, or even before that, really. And in that process, I wanted to just touch on the

currency because it's not directly related, but it's adjacent. And then also just where the U.S. lies as far as central bank and monetary policy in the size of its balance sheet as compared to its GDP. And if you look at the United States and you compare it to all the other big central banks and economies around the world, it's actually counterintuitive to what you might think. So let's take a look. So Japan has a balance sheet that's 104% of GDP. ECB has a balance sheet that's 40% of GDP. China, PBOC, has a balance sheet that's 34% of its GDP. India is at 34%. England's at 23% and the U.S. is only at 21%. So even with, call it a six and change trillion dollar balance sheet, just remember this is a big economy or a $30 trillion economy. That's only about 21%. I'm not saying

that's good. I'm just saying as a relative comparison to other central banks when you talk about the dollar not being reserved currency or the U.S. status falling out or all these different things. You've got to keep things in relative comparison terms. You have to have another place that looks better. And I still think the U.S. smells like the cleanest dirty shirt in the pile of laundry that you would want to wear for the day. But what I want to say is if Warsh, what is plan is to lower short-term interest rates and then also shrink the balance sheet.

Those two things are technically at odds with one another. One is loosening financial conditions and one would be tight-term. them a little bit. But what you could see is a steepening of the yield curve because you've got lower short-term rates and then if you're going to sell assets that are a little longer term in the balance sheet that would put yields going up and a steeper yield curve often denotes higher growth environment. But my point, though, is that bringing the Fed's role back to more reasonable terms should make capital markets more efficient. Yes, there'll be some volatility that happens, but there's going to be volatility anyways, whether you have the Fed put or not. It just might

be a little bit clearer and a little more organic and a little more natural without the distortion of that big buying balance sheet. Question in there today, which I thought was a good one after the kind words, which is comments about dividend cafe and appreciation, was really about the 10-year yield and does it mean, does it denote future inflation expectations? So if it's 4% does that mean markets think that's where inflation will be? Short answer is yes and no, or both end. The 10-year yield is a combination of growth, perceived growth over the next decade, and also inflation combined. So it's both of those things together. If you wanted to just separate and see what the market or world thinks inflation will average over the next 10 years, you could subtract the real break-even

tips yield from it to get the break-even rate. So if you take a look at 10-year yields at, say, 428, you take the inflation-protected treasury yield of 1.93. Then you'd get a break-even yield. If you subtracted those two of 2.35. So that break-even rate is saying that inflation is looked at to average about 2.35% over the next 10 years. Do I think that is running hot? Not really. It's a little bit more than it used to be the last, call it post-GFC era, where it was right at 2% average. What I did is I included a longer-term chart in there, so you can just see it in perspective. Inflation expectations have oscillated around two, but during recessions, they went to zero or negative, and then during high growth or inflationary periods, they popped up.

My point is just that we're just back to where we were in this range of somewhere between two and two and a half, which is what we saw in the early 2000s leading up to the 2008 GFC. Still long-term trend is intact, as my point there. There was some different Fed speakers out talking about where interest rates might go. We've got this sort of quasi-lame duck session now in federal bank leadership with Powell until a couple of months when Warsh, assuming his nomination gets sworn in. But that's what I have for you today. Thank you for listening to the Dividend Cafe. Enjoy your evening and I'll be back with you tomorrow. Thank you for listening to the Dividendon Cafe. The Bonson Group is a group of investment

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