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 –

It is an honor for me, Trevor Cummings, to be your guest author today.  Feel free to check out my weekly commentary Thoughts On Money and subscribe if interested.

I look forward to walking you through what’s happening around markets today.  Additionally, I would encourage you – if you haven’t already – to watch David’s one-on-one with Scott Gamm where they discuss the current state of markets (Podcast here, Video here).  Also, if the man David Bahnsen didn’t already have enough on his plate, here is a sneak peek at Bahnsen Economics 101. What started as an in-person Econ course that David taught at the local high school (that he helped launch years ago) has now become an online curriculum.

Lastly, I am filling in for David today as he finds himself lecturing at the Acton Institute, once on the basic tenets of There’s No Free Lunch: 250 Economic Truths, and once on the moral and economic implications of excessive sovereign indebtedness.

Market Action

  • I went to bed last night and woke up this morning with the futures markets giving back some of the ground that was gained yesterday.  The opening tick was down some -260 points… but it would be assumed that this move was temporary as Jerome Powell was on the docket to speak this morning.  In a world of Fed superstardom, we’ve grown accustomed to Mr. Powell’s choice of words sending markets in one direction or the other… then at times, even in another direction after further digestion.
  • The Dow closed down -48 points (-0.15%) with the S&P 500 down -0.13% and the Nasdaq down -0.15%.

*Google DJIA, June 22, 2022

  • As the chart above reflects, the markets lost steam going into the close, whether this was a post-lunch coma or an unwillingness for traders to stay invested overnight, I couldn’t tell you.  Note, I highlighted for you the run-up intra-day, trough-to-peak, and then the dissent as well.
  • As David mentioned yesterday, the treasury market has been on a wild ride this year.  I’m reminded of those zoomed-in-picture-guessing games where you are shown a hyper-zoomed-in image and then asked to guess what the picture is.  You see the defined grains of individual yellow and black hairs oblivious to the fact that it is a bumble bee.  In the same vein, here you have the 10-year treasury over the last 12 months, followed by the 10-year treasury over the last 60 years.  Each graphic may lead you to a very different conclusion about what the future has in store (see the Ask Trevor section below)…
  • Here’s an interesting factoid… First some context, much of the basis for Modern Portfolio Theory (for which Harry Markowitz was awarded the Nobel Memorial Prize in Economic Sciences) leans on correlations between asset classes.  The inception/invention of the target-date fund relies heavily on MPT, and specifically how stocks and bonds correlate with one another – using the historical relationship as the base for future expectations and asset allocation design.  Correlations are measured on a scale of -1 to 1, with 0 representing no correlation.  Now for that factoid, here are the correlations between the stock market and the 10-year treasury over a few different time periods:

    1972-2022: 0.04
    2012 -2022: -0.23
    2022: 0.21

    The moral of the story, as those correlations have grown stronger (as of recently) it has been much to the chagrin of the target-date-fund investor.  One of the most commonly used target-date-fund companies currently has its 2020 target fund down -14.45% on the year and its 2025 target fund down by -16.27% on the year.  Ouch! (See Chapter Five – Withdrawal Mechanics Matter: Avoiding The Poison Of Negative Compounding As You Tap Your Nest Egg To Live Happily Ever After)

  • The ten-year bond yield closed today at 3.158%, down 1 basis points on the day
  • Top-performing sector for the day: Real Estate  (+1.55%)
  • Bottom-performing sector for the day: Energy (-4.19%)
  • Not that we would make internal wagers amongst colleagues around where the markets are going, but if we did, I think I would’ve placed my bets that the 2-year treasury doesn’t break that high watermark in 2022.  No crystal balls, no pride, all in good fun 🙂

Top News Stories

  • Our world saw yet another tragedy today, as Mother Nature claimed over 1,000 lives in a 6.1 magnitude earthquake.  The epicenter was in Paktika and Khost provinces in Afghanistan early this morning (local time).  The total damage and impact are still being determined.  Our thoughts and prayers are with the families impacted.

Public Policy

  • The US Government is, as of this writing, lobbying for a new national holiday (of sorts) … drum roll please … A Gas Tax Holiday.  That’s right, to ease some of the pressure at the pump, as prices hover around all-time highs.  The intent would be to suspend the 18.4 cent-per-gallon tax for some defined period of time.  I don’t believe Hallmark will be publishing any cards for this celebration, but who knows…

Housing & Mortgage

  • The popular narrative has been that a rise in rates would lead to a slow down in demand that would reflect in an increase in supply, resulting in a rise in the average-days-on-market, and then a softening in home prices.  At least this is what interested buyers are hoping for, and perhaps stubborn sellers will be fighting against.
  • The Mortgage Bankers Association (MBA) publication this morning showed:
    • Purchases rose 6% week-over-week, but 10% lighter than this same week last year
    • The 30-year mortgage rate jumped 33 basis points to 5.98%, the highest in nearly 14 years
    • Note, that the 30-year mortgage touched 2.65% in January of 2021
    • Refinances only made up 29.7% of the total mortgage applications (see Stat of the Day below)
  • What might this mean for current homeowners? I’d encourage you to read David Bahnsen’s Dividend Cafe from May 27th, Housing Comes Center Stage – this evergreen truth applies today as much as it did one month ago
  • What might this mean for buyers? As David often notes, people buy a monthly payment.  Buyers, as are all economic actors, will operate in their best interest and incentives will drive behavior.  So, how do you obtain yesterday’s monthly payments with today’s rates?  Economic creativity.  I would assume that the behavior changes that will reflect in the data will be a rise in points paid (paying upfront for a lower rate), an increase in the use of Adjustable Rate Mortgages (ARMs) as a proportion of total applications, and a rise in days on market for properties as buyers hold out to negotiate better terms and prices for themselves
    • This last assumption should be interesting to watch, as sellers have been in the driver’s seat for much of the last 3-4 years

Federal Reserve

  • All attention was on Mr. Powell today, and here it is from the horse’s mouth, “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so… we have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”
  • The question in most readers’ minds is, does this mean recession?  Powell’s response, “It’s certainly a possibility. It’s not our intended outcome at all, but it’s certainly a possibility, and frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market.”
  • Nothing new for most of us I am sure, and now we all await how this will play out… Will the dot plot be followed according to plan? Probably not.  Will Powell be the Volker of our generation? I will leave that up to the history books.
  • Most importantly, here is how markets reacted – with a large serving of apathy, as markets ended the day basically where they started

Oil and Energy

  • WTI Crude closed at 104.36, down -4.70% on the day
  • The Energy Sector continued to give back some of its gains on the year, but for context, I will remind you of the 2022 snapshot – as they say on Sesame Street, “One of these things is not like the other” (to help, the green line represents YTD energy performance relative to the other sectors)

Stat of the Day

  • For the fellow sports junkies out there, you will be familiar with this header, as I borrowed it from the Dan Patrick Show.  Dan Patrick and his infamous, Danettes, are known to share a daily “stat of the day” (accompanied by a memorable theme song) to highlight some obscure, surprising, or just overall interesting sports statistic.
  • So, here is my stat of the day for you:

    The Refinance Index decreased 3 percent from the previous week and was 77 percent lower than the same week one year ago.
    Mortgage Bankers Association Weekly Survey, June 22nd

  • The mortgage market is known to be a feast-or-famine industry, but perhaps not a bad idea to treat your local loan officer to a cup of coffee and some encouraging words this week

Ask Trevor

“Wasn’t it safe to assume that everyone at the end of last year knew that interest rates were going up in 2022?”

~ Greg C.

As they say, hindsight is 20/20.  I do understand how this assumption, and how this narrative can easily be crafted.  The simple answer is, “No, not only did people not know the direction of interest rates, but they also did not know how violent they would swing in the direction they did.”  All of this resulted in one of the worst quarters for the bond market in over 50 years (a reminder that bond prices and interest rates have an inverse relationship – rising rates have a negative impact on bond prices).

If we ever do know the direction of interest rates with any sort of certainty we should keep this truth to ourselves, as it can be a very profitable endeavor to bet big on this foreknowledge.  Unfortunately, markets are uncertain and any feeling of certainty or expression of such is usually punished in a very unforgiving fashion (e.g. Long Term Capital Management circa 1998).  As the famous boom-bust trader, Jesse Livermore once said, “The stock market is never obvious. It is designed to fool most of the people, most of the time.”  Mr. Livermore is famous for some of the greatest (most profitable) and worst trades of market history.  A man well versed in this reality of surprises and who sadly took his own life in 1940, weathered by the unrelenting wounds of the markets.

I’ll conclude with this memory that comes to mind.  I remember being new to the business and studying a collateral piece from Davis Funds.  This particular page was highlighted with a quote from John Kenneth Galbraith, “The function of economic forecasting is to make astrology look respectable.” The chart on the page showed the 6-month average forecasted direction of interest rates versus the actual direction of interest rates.  The data was pulled from The Wall Street Journal Survey of Economists.  Essentially the professionals of their craft, making their educated guesses as to whether interest rates would be up or down over the next 6 months.  With only two options to choose from – up or down – one would assume the hit rate (accuracy) would be greater than 50% (a coin flip), yet the aggregate results showed they were right less than 37% of the time.  Essentially, your guess is as good as theirs – whether you want to make this guess with some deep and lengthy research, a coin flip, or throwing a dart.

On Deck

  • The most important piece of information you will read today, David Bahnsen will be back at the helm of DC Today tomorrow 🙂
  • Tomorrow you will also get employment data (jobless claims, etc.), manufacturing and services PMI data, and Fed Chair Jerome Powell testifying on monetary policy at House Financial Services Committee

And that’s it.  Thank you for welcoming me as your guest today.  I hope you enjoyed the content and commentary.  Again, I will encourage you to check out my weekly publication Thoughts On Money, and please do subscribe if you feel so inclined.  I look forward to joining you next Thursday as I will fill in again to close out the month of June here on DC Today.

With regards,

Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com

The Bahnsen Group
www.thebahnsengroup.com

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About the Author

Trevor Cummings

PWA GROUP DIRECTOR, PARTNER

Trevor is a Partner and Director of our Private Wealth Advisor Group.

As the author of TOM [Thoughts On Money], Trevor endeavors to write and speak about financial concepts and principles in a kind of “straight” talk demeanor and posture.

He received his Bachelor’s degree in Organizational Leadership from Biola University and his MBA from California State University, Fullerton.