DC Today is a daily missive from the Dividend Cafe of The Bahnsen Group. While the Dividend Cafe’s weekly market commentary is meant to be long-form, macroeconomic, and principle-driven, the DC Today’s purpose is to provide a daily synopsis of markets, politics, and current events. It will be short, sweet, and hopefully, informative. Our goal is to bring you the latest and most relevant market information and insights, written only by us. Please feel free to share The DC Today with your friends and family. And of course, we always welcome your feedback as to how we can make it more relevant and practical for you!

Subscribe

Dear Valued Clients and Friends –

Greetings from New York City, where an action-packed week lies ahead.

Dividend Cafe on Friday unpacked the state of residential real estate, complete with a package of charts and a sequential argument aimed at explaining what is happening and why.  The video (with charts) is here, and the podcast is here.

I was on set with Charles Payne/Fox Business today, talking about earnings season, revenue guidance, value rotation, and more …

Off we go …

Market Action

  • Futures opened last night pretty close to flat (down -20 points) and stayed right there into the evening.  This morning futures pointed to a dead flat open pre-market when I first woke up.
  • The market opened flat but moved up from there and stayed up with a few zigs and zags along the way (see chart below)
  • The Dow closed up +254 points (+0.76%), with the S&P 500 up +1.19% and the Nasdaq up +2%

*CNBC, DJIA, Jan. 23, 2023

  • The worst performers of 2022 are so far the best performers into 2023, partially as tax loss selling leads to re-buying post-wash sale rules.
  • The “dividend payers” outperformed the “non-payers” in the S&P 500 by 23% last year.
  • Dividends paid in the S&P 500 last year were $563 billion, the highest amount in history.
  • Dividends were 26% of the return of the market in the 2010s and the 1990s but 100% of the return in the 2000s (when the market had a negative price return).  Prior to that, dividends had averaged between 40% and 70% of the market return every decade for fifty years.
  • The current dividend payout ratio of the S&P 500 is 33%; it has averaged 48% for nearly a hundred years but has not gotten back to that average since the financial crisis.  Selectivity is crucial.
  • The ten-year bond yield closed today at 3.52%, up 3.7 basis points on the day.
  • Top-performing sector for the day: Technology (+2.28%)
  • Bottom-performing sector for the day: Energy (-0.20%)
  • TIP spreads show implied inflation for ten years at 2.1% now, down from over 3% less than a year ago.  Shorter term inflation expectations (5-year) evidenced in the TIPS market (treasury inflation-protected securities) has gone from 3.6%  at the high to 2.1% now.  Whether 10-year or 5-year, the bond market has seen a collapse in inflation expectations in recent months.

*St. Louis Fed, FRED Economic Data, Jan. 20, 2023

Top News Stories

  • White House Chief-of-Staff, Ron Klain, is set to leave his post within the next two weeks.  Jeff Zients is set to be named the replacement (having formerly served as White House COVID policy implementer).

Public Policy

  • Here is what I will say on the debt-ceiling drama:
    • I imagine it is six months until there is a resolution.
    • I imagine a lot of people say stupid things along the way, and a lot of people do stupid things along the way.
    • It is President Biden’s opinion that waiting until the last minute puts more pressure on Republicans than him, and there is little incentive to talk or negotiate.  I suspect that he is politically correct about this.
    • For the political leverage to change, the Republicans would first have to pass a budget that does raise the debt ceiling (daring the Democrats to turn down their budget even though it raises the debt ceiling).  I don’t know if the Republicans can or will do this.  If they do, the political leverage changes (see: 2011)
    • A clean debt ceiling increase will not be passed by the House any time soon, but a debt increase with some budgetary reforms might (see my point above).  But THAT bill (if the House can pass such a thing) strikes me as having no chance of getting through the Senate.  The difference is – it changes the political narrative as to who is blocking what
    • I expect a cap on discretionary spending increases in the future and eventual bills, and I expect the appointment of a commission on entitlement spending.

Economic Front

  • The NABE (National Association of Business Economics, of which I am a member) released its 2023 Business Conditions Survey.  There are more companies that expect net layoffs than companies that expect net hiring (not good), but there was a significant improvement in sentiment about inflation, with nearly all companies reporting declining material costs.
  • Weekly bankruptcies have hardly gotten “high,” – but they certainly are higher in recent months and nearing the non-recession average of the last 15 years or so.

*Apollo, Bloomberg, Jan. 21, 2023

  • 18% of those between the ages 20 and 34 lived with their parents in the UK in 1998.  That number is 28% today (a new record high).

Housing & Mortgage

  • Existing home sales declined -1.5% in December, bringing total sales down -34% year-over-year.  The level of sales activity has fallen to the lowest level of activity seen in over a decade.

Federal Reserve

  • The Fed seems to be telegraphing a quarter-point rate hike at the next meeting and a quarter-point hike at the next, followed by a pause.  Could those who have been screaming that they will go well over 5% be right?  I suppose so.  But I don’t see why the Fed would be seemingly telegraphing a different action if its intent were to surprise markets.
  • The vice-chair of the Fed, Lael Brainard, made comments late last week at the University of Chicago indicating a desire to slow the pace of rate hikes and allow time to evaluate the impact.  New York Fed head, John Williams, made similar comments.
  • I believe the Fed will be slowing down its Quantitative Tightening efforts if the Treasury Department is shrinking cash in its current efforts to prolong borrowing capacity.

Oil and Energy

  • WTI Crude closed at $81.60, flat today but up $1 from the Thursday close of last week
  • Saudi Arabia made noise at Davos about being willing to settle oil sales in non-dollar currencies.  The most likely scenario would be a Saudi-China agreement to settle oil sales to China in Yuan.  This is unfolding slowly but with massive global relevance.

Against Doomsdayism

  • Economist, Tyler Cowen, suggests a thought experiment I read about over the weekend that stuck with me.  Take out a sheet of paper and make a list of all the things you think are going wrong in the country – whether it be social unrest, climate issues, political tribalism, economic distress, or anything else (each person’s list will reflect their own values and concerns, and my list would look very different from yours).  Then, in a second column, write these words, “America has more talent than ever before.”  Cowen’s point is that Column B trumps whatever you have in Column A.  Now, I am not sure it is quite that simple, yet I have extraordinary regard for the real point Cowen is making.  We underestimate our solutions and overestimate our problems constantly.  Creative energy trumps disruption at any time.

Ask David

“Can you help me understand your comment on institutional investors not distorting the market?  It seems to me that institutions have enough capital to deploy all at once in a local market to cause a spike in demand.  Would this not exacerbate the bidding wars?  Is there not a similar FOMO phenomenon at play here as with stock prices?  Would things like Zillow’s failed flipping business not distort markets?  Or other, institutional investors wanting to get in on rising house and rental prices? This is purely anecdotal, but I received multiple letters in the mail at a house I was renting in 2021 from out-of-state institutions wanting to buy the house sight unseen for cash.  All this just seems unnatural and distortive to me.”

~ James

I believe it is really important we establish some credible economic vocabulary.  Institutional investors wanting to capture high rental prices are not “unnatural” or “distortive” to a market – it IS a market.  If one person wants to buy something (for right or for wrong), or one institution wants to buy a lot of something, their own calculation of risk and reward is what makes a market.  They can participate in a good investment or a bad investment, but it is not unnatural, and it is not distortive, and their ability to deploy a lot of capital is irrelevant – prices reflect those realities (for example, you can say they inherently raise prices by buying at scale; and I would say that inherently lowers their expected rate of return; rinse and repeat).

If what you are describing has a distortive element to it, then it would be where an artificially low cost of capital distorted decision-making (whether for Mr. Jones or for the Jones Big Company LLC).  But that is a by-product of monetary distortions and immaterial to the size of the buyer.  In both individual and institutional acquisitions, there is some economic calculation of risk and reward going on (for good or for bad), with the actor receiving the risk and the reward of their own decision and calculation.  I simply can’t label that “distortion” – it is the definition of a market.

On Deck

  • The Personal Consumption Expenditures Index (PCE) is released this week for the month of December (the inflation measurement the Fed likes more than the CPI).
  • Brian Szytel will bring you the DC Today tomorrow as my meeting schedule in the afternoon will make post-market recording impossible.

Long one today, I know.  Give me New York mornings every day, and I’ll give you more reading and writing.  Have a great night!

With regards,

David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com

The Bahnsen Group
www.thebahnsengroup.com

The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. 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, and there is no guarantee that the investment process or the 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 reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team 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. Such data and information are subject to change without notice.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

Subscribe

About the Author

DAVID L. BAHNSEN

Founder, Managing Partner,
and Chief Investment Officer

David is a frequent guest on CNBC, Bloomberg, and Fox Business and is a regular contributor to National Review and Forbes. David serves on the Board of Directors for the National Review Institute and is a founding Trustee for Pacifica Christian High School of Orange County.

He is the author of the books, Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (Post Hill Press), The Case for Dividend Growth: Investing in a Post-Crisis World (Post Hill Press) and his latest, Elizabeth Warren: How Her Presidency Would Destroy the Middle Class and the American Dream (2020).