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!

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Dear Valued Clients and Friends –

We have yet another special edition today with lots of really important things to say about markets, about investor behavior, about the Fed, and more.

There are a couple paragraphs in the Market Action section of today’s bulletin that I boldfaced because I believe them to be especially important for you to understand today.  If you read nothing else, read those sections.  But really, read all of it.

I was on Fox News after the market closed today speaking truth about energy markets.

Off we go …

Market Action

  • Futures opened last night up +150 points after the mild bounce of yesterday and stayed there or thereabouts into the evening.  But then very early this morning futures were pointing to a down -450 point market open, and European markets were down -1.5% or more.  Within an hour futures were down -600 points, and European markets were down more than -2%.
  • The market opened down nearly -700 points and worsened from there.   It bounced between down -600 and down -930 throughout the day.
  • The Dow closed down -741 points (-2.42%) with the S&P 500 down -3.25% and the Nasdaq down -4.08%.

*FactSet, DJIA, June 16, 2022

  • Why would markets have rallied yesterday on the news of a Fed rate hike, then sold off again a day later?  Were sellers today sleeping yesterday when the actual news came?  Of course not.  You had traders yesterday trying to buy the news, and you have traders today trying to sell the rally.  You had traders before yesterday who wanted out, and [rightly] assumed markets would rally on the news, so those traders become day-after sellers.  And so forth and so on.  The layers of short-term trading activity in each miniature phase of this are vast.  And, I might add, irrelevant.
  • The incredible difference that a period like this makes for cash-flow-oriented companies, dividend-growing companies, higher-yielding companies, and better-quality balance sheet companies, is staggering.  Note the performance of dividend payers relative to non-payers since early 2021, and especially in the turmoil of 2022.

*Strategas Research, Daily Macro Brief, June 15, 2022

  • I have been saying all year, and frankly for a long time before that, that the problem with overly accommodative monetary policy is getting off of overly accommodative monetary policy, and that benders are fun and hangovers are not.  The general paradigm of the economic cycle we have been living in for my entire adult life is a boom/bust cycle, and I believe an interventionist Fed exacerbates this.  And yet, I have maintained, and still do now, that the Fed is not as driven by reducing inflation as they say (for I believe they know they have very little control over that), and rather the restoration of their policy tools which lose efficacy at or near the zero-bound.  
  • If you asked me what I most expect the outcome to be out of this 75-basis point increase from the Fed yesterday, my answer really would not center around how much more it helps or hurts equities … The more I have reflected on the Fed guiding towards a 50-basis point hike for two months, then undermining their own forward guidance with a press leak (an absolutely unprecedented move that has me and most of my colleagues I respect on such things completely stunned), the more I believe they have ushered a new era of elevated volatility.  My friend Rene Aninao has referred to this as structural volatility in interest rates, currency, and equities.  I think he is exactly right.
  • The ten-year bond yield closed today at 3.22%, down 17 basis points on the day.  The two-year closed at 3.10%, so the 2/10 spread sits un-inverted at basis points.
  • Top-performing sector for the day: Consumer Staples (-0.66%)
  • Bottom-performing sector for the day: Energy (-5.58%) – sometimes people have to sell the only thing that is up in their portfolio as a market drop nears its end
  • A very important thing whenever someone tells you, “I saw all of this coming!”  First, they almost always saw it coming ten times before it did come, too.  Second, ask them, “now that you so brilliantly nailed the timing of a decline, please let me know the timing of the recovery?”  Write down the answer, the date it was given, and the 35 times they will change their mind between now and then as well.  Finally, there are two people who claim to have predicted bad things: (1) Charlatans who are selling something, and (2) People lying to themselves.  The first crowd may be more contemptible but the second crowd is doing something similar.  The difference is just in the motivation.
  • The number one leading indicator of when markets may improve?  I already said, a stabilization of bond yields.  And yet, what will stabilize bond yields?  I suspect oil prices that stop going higher.  That translates to headline inflation expectations, which translates to bond yields, which translates to Fed action (yes, the Fed responds to the bond market, not vice versa), and finally, into risk asset pricing.  Oil doesn’t need to be at $80 for things to calm down; it just needs to not be still going higher.

Public Policy

  • With the Fed’s intent now telegraphed to the world that interest rates will continue going up whether or not it causes a recession until headline inflation shows a couple months of ticking down, it seems to me that various foreign adversaries (Putin/Russia and Xi/China) have an awfully strong incentive to help drive headline inflation higher.  They are limited in what economic pain they can create for America directly (Russia more so than China), but they are really happy to take advantage of the opportunity to see America inflict economic pain on itself.

Economic Front

  • Initial jobless claims came in at 229,000 (down a pinch from the 232,000 of last week).  The four-week average sits at 219,000.  Continuing claims remain very near an all-time low.  
  • Still, I do believe labor data is going to worsen and I certainly believe the Fed knows this.  How much unemployment pain they will be willing to tolerate remains the question.

Housing & Mortgage

  • The NAHB Homebuilder Survey yesterday dropped two points to the lowest level since June 2020.  Prospective Buyer’s traffic was down -5% and both present conditions and future outlook were down, as well.
  • Despite the drop in lumber prices, year-over-year cost increase are running +19% per NAHB.
  • Housing Starts for the week were 1.549 million, a substantial 140,000 less than expected.  Single-family permits declined by 61,000.

Federal Reserve

  • The Fed’s dot plot now shows the fed funds rate ending this year around 3.375%, which would imply another 150-175 basis points to go this year in rate increases.
  • I mentioned the June 28 date as to when we will next see M2 money supply figures.  I should have mentioned that M2 declined in the month of April.
  • The Fed still plans to begin reducing its balance sheet by $47.5 billion per month until September when they plan to increase the amount to $95 billion.
  • The Swiss National Bank surprised with a 0.5% rate hike this morning.
  • The Bank of England also raised rates – but only a quarter-point, and not at all a surprise.  This is five straight increases of 25 basis points per meeting.

Oil and Energy

  • WTI Crude closed at $117.08, up +1.55% (energy did not sell off today on account of commodity prices; my explanation was provided above)
  • Russia has slashed natural gas exports to Europe, solidifying its desire to weaponize energy markets in this crusade.

Ask David

“When we think about markets pricing things in ahead of time, is there a general rule as to how far ahead markets may be looking?”

~ Scott L.

It’s actually a very fair question,  but unfortunately, as you referenced in another part of your question I edited, it is a bit complicated.  “Mr. Market” is a euphemism for many, many millions of market actors making many, many millions of market decisions, sometimes in nano-seconds.  A decent “rule of thumb” answer is that, “markets price as far out as they can, based on what they can know with certainty, and then price beyond that relative to the imperfect knowledge markets can have.”  So, something with a 99% likelihood in a year is more priced in than something with an 80% likelihood in a week.  The time and the certainty are co-axial variables that both impact market pricing.  Because, generally speaking, certainty declines linear to the evolution of time, market expectations are firmer around short-term events.  But the magnitude of conviction gets priced in as well.  So let’s say markets expect with an 80% likelihood a positive thing to happen in 60 days – one could argue 80% of that impact is priced in 60 days out.  And if that conviction or likelihood doesn’t change at all for sixty days (unlikely scenario), but then the event comes to fruition, one can assume there is the impact of 20% more of that event to be priced in.  Rinse and repeat.

I hope this helps.

For T.F., who asked what it means that markets are “discounting mechanisms,” it is simply a comment on how markets are pricing in today what they believe about tomorrow.  Discounting brings a future expectation into a present value.

On deck

  • Dividend Cafe addressing vulnerabilities in financial markets
  • There will be no DC Today Monday as both banking and financial markets are closed
  • I will be writing from the Acton Institute in Michigan next week where I will be Monday through Thursday.

Reach out to me, to your advisor, or to anyone on our team, any time.  I have said this so many times but will never be uttered enough.  It is true that intellectually I know these market drops to be very good things for long-term investors, for those accumulating capital through compounded reinvestment of dividends, and for those in a position to add new money to markets.  But it is also true that I fully know how emotionally challenging it can be at times for investors, and that sometimes the intellect of the matter does not help with the psychology of it.  So with that said, I offer my unrelenting empathy and care – because I mean it.  And so does everyone inside TBG – it is who we are, and who we will always be.  

We will not let a client do something dumb to their own portfolio, and yet we also will not act as if this all is easy.  To these ends, we work.

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.

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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).