Jason Jacobi, CFP® (00:00.978)
Good morning, everyone. Jason Jacoby here with the closing bell for
October 27th. Hopefully everyone’s having a good week. It has not been
a good week in the stock market to say the least. At the time of
recording on Friday morning, all major indices are down about 2% or
even a little bit more. The Dow and the Russell are both negative for
the year. The Dow is down about 2.28% again at time of recording on
Friday.
And the rest of 2000 is down about almost seven and a half percent,
which are your small cap companies, your small mom and pop shops, even
though they’re not mom and pop shops, because they are still
multimillion dollar companies. But anyway, we have some interesting
stuff for you this week. Big inflation report. We’ll talk a little bit
about oil and Chevron’s purchase Hess. We’ll talk about
GDP numbers for third quarter came out. So we’ll talk about that, what
this means. It’s been a rough few weeks to say the least, but let’s
dive right in to the closing bell. All right, so first thing we wanna
talk about here is 10-year treasury, okay? And the correlation to the
30-year treasury rate, which we monitor as well. Okay, so this week,
we actually had a deepening sell-off in the treasury note market,
okay?
10 year T note to above 5%. Now I did settle back at about 4.8%, which
is where it’s currently sitting. And that 5% kind of resistance level
is very key before we have a majority or a potential move even higher
than the 5% ceiling, which is really important to hold. So let’s talk
a little bit about that, like what that means. So basically,
You know, yields increase when bond prices decline. So you have
investors selling off again with rates where they’re at. They’re
selling their current bonds at discounts, increase yields. That way
they potentially maybe want to capitalize on a different asset class
or want to raise cash, or they want to go into the market and buy a
new 10 year treasury note at with higher interest rates, a higher
coupon payments. So again, there’s multiple reasons to.
Jason Jacobi, CFP® (02:22.082)
to seeing this, but what we wanna see is the 10-year treasury note. We
wanna see those, those bond yields stabilize because they go up really
quickly. I mean, if you look at last year or at the beginning of this
year, excuse me, was 3.8% rate for a 10-year, 3.8%. We’re up at almost
five. That’s a big, big jump, 120 basis point jump. All right. So.
At this point, in correlation to 30 years, so you look at the 30 year
treasury rate as well, which is again, 30 year treasuries, it’s at
about 5.01%, as you can see on the chart on the screen here, or if
you’re listening, it’s at 5% as well. It’s a little bit higher than
the 10, it’s not inverted anymore, but the 30 year is sitting at 5%.
So again, holding that 5% mark and seeing these long-term rates
stabilized a little bit is gonna be key, I think for the equity
markets as well.
to get people to come back in and buy as well because the risk premium
right now, the spread on the earnings yield on the S&P 500 and what
you’re getting in treasuries is this small as it’s been in quite a
long time, I believe since the early 2000s. So we really want to see
that 30 year hold tight because if it runs north of five towards six,
that could spell bad news for the equity market. So again, we’re
monitoring this.
Don’t think it could happen, especially with the data that came out,
which we’ll get into the PCEs today, a personal consumption
expenditure report, which is the Fed’s preferred inflation gauge
because it talks about income and spending. But again, we’re kind of
monitoring the treasury situation. All right. So let’s talk about oil,
drill, baby drill. No, I’m just kidding. But in all seriousness,
again.
Oil is a big part of the world. Okay. Um, it, and I don’t see that
changing, going anywhere. Um, especially with the amount of oil that’s
used to make electric car batteries as well, uh, and again, this isn’t
a political statement. This is just common sense. I have nothing
against people driving electric cars. If you, if you enjoy that or,
you know, you think you’re, you’re doing your part for the environment
and whatever you think, again, this isn’t a personal condemnation, uh,
this is just facts here.
Jason Jacobi, CFP® (04:42.494)
Okay, so Chevron’s making bets on oil. All right, so Chevron just
announced, which again, you can read this in our newsletter as well if
you wanna be added to it and you’re listening to our podcast here or
watching this on YouTube or on our website, you could be added to our
mailing list. If you go to boyyourfs.com and scroll to the footer, the
bottom of the homepage, you can actually subscribe to our newsletter
on there, which is released weekly. So we talk about this in our
newsletter, but Chevron actually acquired Hess.
corporation and an all stock deal valued at about 53 billion. Once you
tag in liabilities a little bit, it’s actually closer to $60 billion.
So they basically, they’re trying to combat the purchase by Exxon of
pioneer natural resources. Um, so basically they’re just trying to be
strategic at this point and keep up with, with Exxon. Now what’s
interesting. So.
You know, oil and gas companies are robust, right? They’re financially
robust right now, huge earnings. Again, supply and demand, oil price
per barrel has been a lot higher recently with supply cuts by OPEC.
What’s interesting about this deal, so again, what this chart kind of
puts into perspective. So the forecast and even historical comparisons
since early 2021, you can see here, OPEC does about 30, 35 billion,
million, excuse me, million with an M.
million barrels per day. Non-OPEC, liquid refineries or gas companies,
they actually do close to 70, and they’re projected to do close to 70
million barrels per day, over double what OPEC can do. And why this
Chevron purchase of Hess doubles down on this is because there’s three
partners. So off the coast of Guyana, there’s an estimated 11 billion,
that’s with a B,
barrels of oil and gas reserves. Okay, they’re located off the coast
of Guyana. I hope I’m pronouncing that right. I apologize if I’m not.
There’s three partners in the rights to that oil and gas reserves,
okay? It’s Exxon, it’s now Chevron, because Hess had a third share of
that. So now it’s Chevrons. So the two largest oil companies, gas
companies in America.
Jason Jacobi, CFP® (07:05.102)
And the third is China’s CNOOC. So those three, again, I have a third
share, 33% approximately of that 11 billion barrels of oil that’s
sitting off the coast of Guyana. So with that being said, again, we
can be energy independent if we utilize our refineries, if we have
them open, if we’re actually drilling, which is gonna take pressure
off of inflation as well.
And again, this is just based off of facts and numbers. Okay, people,
this isn’t political whatsoever. But it’s going to relieve a lot on
the economy and we can actually be a net exporter of energy as well,
help out Europe who’s tied really closely to Russia, which obviously
last winter, if you remember their energy and their, their prices to
heat their homes in the winter went up three, 400%. Okay. So just want
to talk about that. That’s some big news in the oil field, in the oil
industry.
And just to see where that goes will be quite interesting, but big
purchase, almost $60 billion by Chevron of Hess. All right. So let’s
talk about GDP, third quarter GDP growth. All right. So forecasters
estimate that the third quarter GDP was 4.9%. Okay. This is the first
read. Okay. Then they kind of go through it. They do an audit of the
numbers multiple times. So this is the first reading and it came in at
4.9%. That’s insane people. Okay.
But not so insane when you take into account that consumer spending in
the third quarter was skyrocketing, right? I like to call it
funflation is because you got the COVID hangover, you have people that
saved in excess of 37% increase in household savings during COVID,
during the pandemic, which now that has run out and people are
starting to spend on credit, delinquencies are going up. You’re seeing
the trend reverse in a not so good way. But
consumer spending was still strong this summer, which is the third
quarter. People were flying, going to concerts, Taylor Swift tickets
were out insane, which I don’t get personally, but people love her
music and her productions. So people were paying almost a thousand
bucks a ticket. Maybe some of you did or bought it for your sons or
daughters, which is crazy. But I know you love your kids, or maybe you
just love her that much yourself. But anyway, so Funflation was here.
Jason Jacobi, CFP® (09:30.602)
you know, consumer spending accounted for over half of that third
quarter GDP number. What’s really interesting though. So I was
actually at a luncheon the other day with one of the top asset
managers in the world. And they, again, so what they do is they go,
you know, around the world, they’re the ones at the company’s doorstep
or in their conference room, their board room, talking to CEOs, CTOs,
CIOs, CFOs, the C-suite executives about the companies, innovation,
what they’re working on. They look at their books and records, audit
them.
to see if it’s a good investment opportunity for their investors like
you and I. So what was interesting is that one of the bond managers
that we were talking to, she said, well, if you look at the third
quarter GDP, which came out at 4.9%, what’s interesting about that is
if you remove the government stimulus, so all the stimulus government
was
Jason Jacobi, CFP® (10:27.61)
Ukraine, the fund staying open to pay off their debts with that
stimulus that they received, the money they received for issuing that
debt, again, at higher interest rates, people were clamoring for it.
If you strip that out, if you remove the stimulus, GDP would have been
negative the last two quarters. Quite interesting. So again, we
measure recession. And again, this chart says no, 2022 is not a
recession because consumer spending
and non residual investment was still growing. Again, it’s up for
debate, but technical definition, and I know a lot of things factor
into that. But if you have two contractions, two contractionary
periods in GDP growth, in GDP, two contractions in GDP, say that
right? Not growth, contraction. In two consecutive quarters, that’s
technically a recession. So again, I don’t want to beat this.
you know, like a dead horse here. I really don’t, whether you believe
it was or was not two quarters usually means technically, at least
when we were starting to be financial advisor on the test was two
quarters of negative GDP. So with that being said, we would have
actually had that this last two quarters, which I mean, again, if
you’re looking at our economy, a labor market was strong. People were
still spending in, which again, I think is due to a lot of that
stimulus and savings.
and people buying on credit, which could be artificial, which we
should start seeing that slow down. We should start seeing that slow
down, which will lead us into our next topic. But again, contributed a
lot to this GDP was consumer spending. So again, to be seen, again, I
think we’re gonna see the consumer starting to hurt a little bit more.
I think we’re gonna see the economy slowing down, at least on the
consumer side. Manufacturing actually went to expansionary territory
above.
50 on the ISM manufacturing index this past month, which is good.
Right? So again, they’ve been contractionary for quite a long time,
which equals recessionary, but it’s actually been quite positive this
past month. So that’s kind of that lagging industry has started to
pick up a little bit. We should see services, which has been kind of
the prop, the strong leg of the economy. We should start seeing that
cool down as summer.
Jason Jacobi, CFP® (12:47.266)
Kind of has subsided here. We’re in fall. It should slow down. Markets
have kind of priced in higher for longer interest rates. The feds are
going to be cutting rates anytime soon. And then you’re seeing the
consumer start to get a little more worried because leading into this
next topic, personal income actually lagged spending this past month
for September. Okay. So people are spending more than they’re making,
which isn’t good. Again, and they’ve run through
A majority of America has living paycheck to paycheck has run through
their savings, which is sad to say. But again, it’s not like we’re the
US government where, hey, we’re just going to keep raising the debt
ceiling and spending more than we’re bringing in. That’s not how the
real world works. That’s just not, and all of us consumers know that.
So while you might be saying, oh, inflation seems like it’s coming
down, which it showed in this latest PCE report.
Um, if you look at the bottom right of the chart there, which we’d
like to measure year over year, compare where we are, um, from a
month, one year ago, it actually came down. Um, so PC came in at 3.4%
for September from last September. Um, and then core PC, which
includes, which excludes volatile food and energy costs came in at
3.7, which was down from 3.8. So again, this might be a misprint.
August, um, PC was actually.
I believe 3.9, unless they just audited that and lowered it, but I
believe it was 3.9 for August down to 3.4 for September. So again,
inflation is slowly trending in the right direction. And you’re
saying, well, why am I still in my pocket? And when I go to the
grocery store, why am I still paying 20% more for groceries? My mom
just told me the other day, she went to grocery shopping and she
doesn’t eat very much. She’ll tell you that herself. Hey, mom, I’m out
there if you’re listening. But yeah.
But basically everyone’s still spending more across the board on a lot
of different things from food to gas, especially if you’re in
California, um, to services again, fund inflation. So again, we should
start seeing that moderate again over the next year as people stop
spending, um, and supply hopefully increases, which is house, the
economy works, supply and demand. Every lot of services.
Jason Jacobi, CFP® (15:09.702)
not goods, but services have been in demand for quite a long time. Now
we should start to see that change a little bit and start to see some
prices come down hopefully as people get a little bit more worried
about, uh, about their, their incomes and their spending and their
budgets. So, uh, that’s the last thing I wanted to touch on again, not
as long as our usual we’re missing a mark on this week’s closing bell.
He’s off, uh, saving the world, but, um, but, uh, we’ll see him again
next week. And if you have any questions again, always an honor to
serve you.
If you’re listening, your first time listener, thanks so much for
listening. If you’re continued listener or watch watcher of our
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all seriousness, let us know if you need anything. Okay. Y’all have a
great weekend. That’s this edition of the closing bell. Jason Jacoby.
We’ll see you next week.
