Dear Valued Clients and Friends –
The first thing I want to say is that I did call an audible and decide not to publish a DC Today tomorrow, Thursday the 13th. As mentioned earlier in the week, every member of the TBG family from around the country has come into Southern California for some intense team meetings tomorrow and Friday. It is just too much for me to tackle this tomorrow so I am being realistic today and saying no to tomorrow.
But lots on the Fed today and all kinds of fun stuff!
Off we go …
- Futures opened last night dead flat, and as the Nikkei reached +500 points last night (+2%) and Hong Kong even more than that (+2.8%), Dow futures reflected a +60 point move by my bed time. Early this morning they were right around the +50 level pre-market.
- The market opened up +100 points and kind of bounced around in a tight 0-100 point range throughout the day.
- The Dow closed up +38 points (+0.11%) with the S&P 500 +0.28% and the Nasdaq +0.23%.
*FactSet, DJIA, Jan. 12, 2022
- Are markets in distress? Coming into today, the S&P was -2.6% off its highs, the Nasdaq was -6% off its highs, and the Russell 2000 (small cap) was -11% off its highs. There is nothing actionable in those numbers – they say nothing about those market indices getting better or worse. Energy, Financials, and Dividend Growth are all up on the year quite nicely, so it is not a broad “risk-off” – it is primarily focused in tech and small-cap (at this point).
- The ten-year bond yield closed today at 1.75%, unchanged on the day
- Top-performing sector for the day: Materials (+0.95%)
- Bottom-performing sector for the day: Health Care (-0.26%) – only sector down on the day
- Something that truly grabbed me this morning: “$1.2 trillion of private equity deals done in 2021.”
- As expected, the CPI index for December was up +0.5% versus the month prior and reflected a +7% over the year prior. Energy prices actually dropped a tad and food prices moved higher.
- Used cars were up +37% on the year, the largest contributor to the aggregate increase. New cars were up +12% year-over-year. The yellow line below shows car sales (volume) and the white line shows prices. It’s sort of like a visual illustration of the argument for normalization.
*Bloomberg, Jan. 12, 2022
- How did markets respond? Dow futures went up +100 points when the news came out and BOND YIELDS FELL. I know what that means, but I do fear sounding like a broken record as to what it does not mean. Mean reversion is disinflationary, and the bond market sees it coming at 60 miles per hour (see what I did there?)
- Deaths in the UK from COVID were 1,242 per day on average throughout December and January one year ago. They have been below 200 per day this year despite the omicron surge, down over 81%. And now, cases are dropping as well.
*Marsh, COVID-19 Insights, Jan. 12, 2022
Housing & Mortgage
- Something to think about – will the Fed’s actions with rates (obviously focused on the very short end of the curve, since that is all they control), really work to cool down housing? Didn’t the Fed begin raising rates in 2004 and 2005, yet those two years served as the “blowout top” for the insane housing bubble that didn’t burst until 2007? I think it is legitimate to recognize the lag that may exist between FED RATE ACTION and housing prices. Of course, that doesn’t argue for inaction but rather action.
- The average 30-year mortgage rate reached 3.52% this week.
*Bloomberg, Jan. 12, 2022
- Chairman Powell’s take on the supply chain issues exacerbating price escalations – they will largely subside later this year. My take? True. What he didn’t say – that when such disinflation is seen in the data the Fed will pivot from planned rate hikes. Do I believe that will happen? Yes.
- Fed governor, James Bullard, on other hand, said today he believes the Fed may hike rates four times this year. David Beckworth, international economist formerly at the Treasury Department and now at the Mercatus Center, told me today he will be shocked if they even get to three hikes this year.
- When we think about what the Fed may do with interest rates, it is interesting to see how uninteresting it is thus far to small business owners:
- I will elaborate on this later, but I am particularly intrigued by the talk around the Fed’s “run-off” (i.e. allowing bonds on their balance sheet to mature and not be reinvested) being far more substantial than in the 2017-18 period (as the term structure of the debt is far more ultra-short, meaning there are more bonds to mature in short order, allowing for greater balance sheet reduction without the Fed ever selling a bond). This is a topic I need to explore further and certainly write about further.
Oil and Energy
- WTI Crude closed at $82.80, up +2% on the day and to the highest level in two months.
|Three. And I think it will be three.|
- NO DC TODAY TOMORROW
- December Producer Price Index comes Friday
- Dividend Cafe Friday
Have a wonderful night and reach out with any questions, any time.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.