Morning Note | Dec 2, 2022 | CEF Distribution Changes Were Benign This Month

Good Morning!

Markets are down after another hotter-than expected jobs report- good news for the economy is bad news for markets.  November jobs came in at +263K, a larger gain than the +20OK expected.   The unemployment rate held steady at 3.7%. In response, the markets are down since investors think that means the Fed will have to do more damage by raising rates further than expected to reign in inflation.

The next Fed meeting is on Dec 13-14 and the Fed Fund futures is still sitting around +50 bps for the next hike.  That would be a reduction in the pace as the fed had been raisin by 75 bps. 

In response, the bond market saw interest rates jump.  The 10-yr yield went back above 3.6% after falling below 3.5%. yesterday.

Investors were hoping for a number that was both low enough to signal the labor market was cooling in response to prior interest rate hikes and strong enough to indicate the U.S. could avoid a recession.  But this report showed that wages rose +0.6%, double the market estimate.   Wages were up 5.1% on a year-over-year basis, also well above the 4.6% expectation. 

The VIX is down below 20.  In the monthly letter, I put in the CNN Greed Index showing 'Extreme Greed.'  This is also indicated by credit spreads being in the mid-4s despite the potential for a looming recession but also due to the VIX being at 19.4. 

I love this chart by Charlie Bielello from Compound Advisors showing that if yo bought the S&P when the VIX ("Volatility") is above 30 and sold below 20, like it is now, you would be significant for the year.  And you would have decimated the buy-and-hold method.   

The VIX is a great tool for adding to or reducing risk.  

Yesterday was distribution announcement day for closed-end funds.  It was the most dormant first of the month in terms of the number of changes, positive or negative, in a long time.  Looking at MFS funds, they are starting to raise distributions again.  

They are kind of like the canary in the coalmine as they adjust each month based on where they see the market going in the month.  So its almost like a forecasting mechanism.  Now most changes are small but we look at the trend and the magnitude of those changes.