The Dividend Cafe The Bahnsen Group

Today's Post - https://bahnsen.co/4abzegh

The market opened up a handful of points this morning and slowly built on gains for most of the day. After a big move lower across the curve in yields this week we took a bit of a breather today with a flat 10YR up two basis points at 4.14%. Stay tuned for a three handle on 10’s.

We are starting to see this market rally broaden out with the equal weight version of the SP500 breaking away from the market cap weighted index. This is showing the average stock starting to participate more in this rally outside of technology names, which I find constructive. Both large cap and regional banks by the way are back to where they were pre SVB failure earlier in the year. Part as a normalization of stress in the financials and part for a 2024 line up that could favor the banks if we get better net interest margins as the yield curve potentially normalizes with the short end moving down. This is something we have seen before; late cycle rally in financials as the Fed pauses and ultimately cuts the following year (95’/96′ comes to mind).

Monthly financial obligations for consumers like auto payments and home payments, as a percentage of household cash, are on the rise and now at 16%. Interesting however that even with such a rise in rates these are still actually below pre-pandemic levels which was closer to 18%. Higher rates just haven’t bit as hard as years past with such a prolonged low rate refinancing period the years preceding it.

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com

Today's Post - https://bahnsen.co/486oKwS

If you’re surprised by how much expectations have turned down for U.S. interest rates and Fed policy in 2024, you should see what those crazy cats in Europe have going. Markets are now fully pricing in SIX rate cuts next year – 1.5% reduction in their lending rate.

Bank CEOs testified before the Senate finance committee today, making the case that the planned increase in capital requirements would be detrimental. They specifically pointed to where the cost of such increased capital would come from – customers. A not-unexpected talk.

Former House Speaker Kevin McCarthy (Bakersfield, CA) announced his resignation from Congress today. I hereby predict he will make more money in 2024 than he did in 2023.

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com

Today's Post - https://bahnsen.co/4a8TMWG

As we get ready for a busy week of jobs data a few things stick out:

(1) The weekly jobless claims remain very low which seems to indicate a continued healthy employment market

(2) The “quits” rate (people voluntarily leaving their job) has been very high, and even as it has come down from early 2022 highs, it remains very elevated historically

(3) The number of job openings remains very high (though it fell to 8.7 million this month, still 1.5-2 million higher than pre-COVID average, but well off 2021 highs)

(4) The average work week has steadily declined on the margin (from 35 hours, which was above the 15-year average, to 34.25 hours, which is below the average).

(5) Several data points have softened in recent months, but not softened to what can be called “weak” conditions – just “less strong” than had been the case previously

A few other market tidbits and things that caught my eye today …

It is interesting to me that small cap value has outperformed growth since the turn in the middle of the year, but large cap growth has modestly outperformed large cap value. The two are normally correlated.

Some of the “big seven” names that have driven a lot of the market this year have not moved at all in six months (well, they have moved up and down, but I mean they currently sit flat from where they were this summer). The broader market has begun playing a little catch-up.

2024 earnings expectations are now up to $246/share in the S&P 500. We are likely going to end at $221 for 2023 so this would mean earnings growth of +11.3% in 2024, rather amazing if it happened. Of course, at that earnings level, the S&P is still trading at an 18.6x multiple (forward projected), and is trading currently at 20.7x.

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3uFMLMZ

Ask David

“If you are an investor in a passive index fund, exactly what happens to your equity when that fund/index removes a poor performer, and replaces it with a stock that has recently performed much better? While I suspect that your equity may stay the same upon replacement, it seems intuitively like an example of buying high while selling low. Is there any documented study of index fund performance over time due to the survival bias? Do you have any thoughts on the topic?”
~ Dom

I think I understand what you are saying but actually in this case the survival bias of the index methodology helps its performance over time, not hurts. What you are suggesting makes sense prima facie – that they are adding companies at high prices and removing others at low prices – but the fact of the matter is that the companies removed from the index is very rare, and almost always only happens after the company is broken. A significant amount of companies that have been removed from market indices over the years no longer exist at all, meaning that path from “a low price” to “zero” was never experienced by the index investor. Of course, there are cases when a company is removed from an index and subsequently rallies from a low valuation, but that is much less frequent than the opposite. And all of it is very rare and inconsequential …

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com

Today's Post - https://bahnsen.co/3GnL8pE

Rarely have I hyped up a Dividend Cafe so much and set you all up for such disappointment. The topic I write about today is one that has been on my mind and in my research orbit for a long time, and on a couple occasions I actually teased up that it was coming, only to pull the plug and defer publication to a later date. Well, that later date is today.

We know the huge hype around Artificial Intelligence in 2023 – not merely in stock prices, but throughout society. On a daily basis we hear of some reference to how AI may change education or business or politics or, my favorite, farming. And as is always the case, this “hype” has a foundation to it – there is a profoundly interesting evolution in technology playing out that will change the way a lot of things are done. It will involve policy adaptations, cultural pushback, misallocations, great advancements, and, yes, certain negatives. All of these things are par for the course in a world that grows – that is, a world that was created to see human beings innovate around the raw materials they were given. Someone should write a book! But fundamentally, artificial intelligence is a big deal, even if the early years of its introduction will be filled with misunderstanding and wrongly directed reactions.

But people do not read Dividend Cafe for my assessment on the technological or even cultural context of new innovations. Rather, our job here is to assess a whole host of subjects for their economic and market impact – particularly for investors (and to be more particular than that, for our investors, that is, clients of our firm – or those of you who will be clients of our firm). The Artificial Intelligence story is an investor story, too, and that requires a sober reflection on a lot of things. Today’s Dividend Cafe is that sober reflection.

Let’s jump into the Dividend Cafe …

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com

Today's Post - https://bahnsen.co/4115jTU

A BIG divergence today between the more value oriented DOW which jumped 520 points today, and the more technology heavy Nasdaq down .23% as interest rates broke the trend and rose today. Coincidently, I wrote yesterday about the sensitivity in the part to the market that has had the most multiple expansion tethered to falling rates as having potential for disappointment. Both PCE inflation data coming out in-line with expectations and a stronger growth print in the Chicago PMI’s moved rates up today as much as yesterdays decline in continued bond market volatility.

Links mentioned in this episode:
TheDCToday.com
DividendCafe.com
TheBahnsenGroup.com