Dear Valued Clients and Friends –
I flew from Southern California to Miami today and had a chance to really go around the horn in today’s Monday Dividend Cafe. Enjoy the read …
Dividend Cafe on Friday asked what it means that U.S. national debt-to-GDP has surpassed 100%. It unpacked how we got to this level of indebtedness, considered paths forward, and offered some specific suggestions for investors. The written version is here (my favorite), the video is here, and the podcast is here.
Off we go …
| Subscribe on |
Market Action
- Markets opened down -60 points this morning and moved up and down throughout the day before solidifying in the final hour.
- The Dow closed up +160 points (+0.32%) with the S&P 500 down -0.07% and the Nasdaq -0.51%
*CNBC, DJIA, May 18, 2026
- The story of Friday’s sell-off (extended into today) was that of bond yields jumping higher. A 4.6% ten-year bond yield (when it was 4.29% one month ago and 4% at the beginning of the war) not only represents the highest it has been in a year but also an inevitable downward weight on risk-asset valuations.
- I do not mean to be the one to pour water on the recent melt-up in markets, but only half of the companies in the S&P 500 are in an uptrend even as the market index has so rapidly made new highs. This represents one of the lowest breadths in a market melt-up I have ever seen. But it does not represent the lowest I have ever seen … (beginning of 2000)
- A $67 billion utility mega-merger was announced this morning (Dominion and NextEra), creating the world’s largest electric utility company. From battery storage to renewable energy to data center power to electricity demand, this story has it all.
- The ten-year bond yield closed today at 4.59%, basically flat on the day
- Top-performing sector for the day: Energy (+1.81%) and Consumer Staples (+1.34%)
- Bottom-performing sector for the day: Technology (-0.97%)
- Torsten Slok of Apollo’s daily report showed that 38% of new high-yield debt issuance is AI-related, 49% of new investment-grade debt issuance is AI-related (this one shocked me), and 87% of new venture equity investment is AI-related (this one did not shock me).
- The broad emerging markets index now has three semiconductor companies – three – that make up over 25% of the index. I talk a lot about tech, AI, and semi-concentration in the S&P 500, but the EM index is taking it to new levels, and for index investors who own both indices, the diversification is less pronounced than ever (which is the inverse way of saying “the concentration risk is greater than ever”).
- And as for momentum like that …
- Lest anyone think I was exaggerating about the gamification of markets, there’s this. I mean, what could go wrong?
Top News Stories
- The President’s two days with President Xi of China have concluded. It has been difficult to get details of what changes, if any, were agreed to (as it pertains to trade, etc.), but what we are told (by U.S. Trade Representative Jamieson Greer) is that China agreed to buy $10 billion of U.S. agricultural products (i.e., soybeans) and 200 Boeing airplanes. It was also announced that the two countries would appoint a Board of Trade to oversee a tariff reduction on $30 billion of goods. But various particulars about Iran, rare-earth minerals, and AI were not forthcoming.
- The Pakistani mediation of the U.S.-Iran conflict does not appear to be going well. But my view that making a prediction (of it getting better or of it not getting better) is ill-advised remains the same.
Public Policy
- Sen. Bill Cassidy of Louisiana lost his primary this weekend, so an incumbent Republican Senator will not be on the ballot in November (though the Republican primary challenger is still heavily expected to win the general election).
Economic Front
- Industrial Production increased +0.7% in April as Utilities Output jumped +1.9% on the month. The manufacturing increase was above expectations (+0.6%), and the auto sector enjoyed a nice rebound.
Housing & Mortgage
- The May NAHB Builder Sentiment Index was up a tad but still way, way into the negative. Prospective Buyers Traffic is really, really negative. And as for activity that is happening, the use of sales incentives continues to rise.
Federal Reserve
- The fed funds futures market has moved to a 50% chance of a rate hike by the end of the year (and 50% chance of no change at all). I simply do not believe there will be a hike before the end of the year, but I also recognize that the futures market has been a very good indicator of where policy has gone over the years.
- That said, the basis for higher long-end bond yields and higher expectations for the fed funds rate is the oil supply shock, and I simply do not believe that is primarily monetary, and I do not believe markets can know that that will last all year.
Oil and Energy
- WTI Crude closed at $106.43, up +1%
- It has been a while since the rig count data has mattered, and I would argue it still doesn’t matter a lot (better productivity from rigs vastly changed the relevance of the raw quantity of rigs). That said, many have expressed surprise that rig count has not picked up much even as oil prices have skyrocketed in recent months. I have tried to communicate that the major issue there has been the longer end of the oil futures curve – that with oil prices still in the $70’s nine months out, there just is not the incentive for producers to substantially lift production. That said, 5 new rigs went online last week, bringing the number to 415. This is the highest it has been in six months, but well below the number of a year ago (465) and two years ago (497).
- Midstream rallied +6% last week as oil rallied over +10%, and the ongoing reality of greater infrastructure and transportation needs took hold. I also believe that rising bond yields boost the midstream sector (sometimes) as the inherent inflation protection of midstream contracts generates more appreciation from investors. We are not far from +30% YTD gains in the midstream space.
Ask TBG
| “What differentiates the Materials and Industrial sectors and why do they diverge? Both seem to be heavy manufacturing and I would think would be very overlapped.” ~ Cameron C. |
| They actually are quite different from one another, but it is a fair question. Companies in the Materials sector extract, gather, process, and prepare raw materials, whereas the Industrials sector uses raw resources in the building of their products. It essentially deals with the phases of the supply chain: Materials being at the very beginning of the process, and Industrials being near the end. The raw commodities of the supply chain (whether it be copper, iron ore, steel, lumber, etc.) are vital to the Materials sector. Commercialization is vital in the Industrials sector. It is much more complicated than this, but the more expensive materials are, after being extracted, the better the profits may be in that space; whereas the more expensive materials are (input costs), the less profitable many Industrials may be. |
On Deck
- Clients will receive their Weekly Portfolio Holdings Report this Wednesday, per usual.
- I am in Miami for a conference until Thursday night and then back to NYC.
- The Eastern Conference Finals kick off tomorrow night with the New York Knicks going head-to-head against the Cleveland Cavaliers. It is going to be a good one. Let’s go, Knicks!
Reach out as always.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
