The Dividend Cafe - A Bull and Bear Fight, and I Feel Fine

Episode Date: June 12, 2020

1,800 points came off the Dow in one day, the fourth worst day of the year by the way, and while I spent significant time unpacking it, studying it, and understanding it, I did not spend any time "sweating" it.  As you will see in the content of this week's Dividend Cafe, I believe there is very little evidence of health-related issues at this time to drive markets lower (i.e. so-called "second wave" rhetoric) Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe. This is David Bonson. I'm the Managing Partner and Chief Investment Officer here at the Bonson Group. Bonson Group. And for those of you watching on video, you can tell that I am at a different location than normal, not recording in the Newport studio, not in the quarantine at the Newport house, but actually out at my desert house here in beautiful Rancho Mirage, California, where I have, I'm guessing, a thousand pages of research to get read here in the next couple of days and Have spent a good portion of today Friday. I just came out very late last night Watching a seesaw of a market roller coaster here today and That follows what was yesterday a

total market swoon. And so I'm going to kind of walk through all the things that happened in the market this week and then try to cover as much of the fun stuff and bigger picture things that I want to cover, which are all things I wrote about at DividendCafe.com this week. And so the reason for the excessive amount of reading I have in front of me, the reason why I'd want to do it here in the desert is because this is one of my favorite places to read. The reason why there's so much to read is you had a Fed meeting this week. There is all sorts of additional data and reports and things going on in the whole COVID world.

data and reports and things going on in the whole COVID world. More importantly to me, I think there's an awful lot of macroeconomic stuff that I need to get caught up on. And I've added some research boutiques to my kind of toolbox in the last couple months. I already probably was reading too much, and I've added more. And I'm just sort of right now in a kick where I'd prefer to have information overload versus information apathy. And so I need to kind of go through and deal with it.

But it translates into this ongoing process of trying to stay fresh, stay abreast of what's going on, on the monetary policy front, on the public policy front, the fiscal endeavors that may or may not come out of D.C. And speaking of D.C., I believe that we're now facing the election cycle as a more market-sensitive event. And, of course, there's just an awful lot of economic uncertainty around the whole process coming out of COVID.

I will say as far as the 1800 point drop in markets on Thursday, that it was really kind of remarkable how little it affected me personally. I generally on these really big down days, it adds a lot of stress, anxiety, you get more clients that, you know, call or whatnot. I had none. I had no such communications. And that doesn't mean maybe some clients weren't out there concerned about it or whatnot, but I really do believe that we've worked extremely hard over these last few months to articulate the messages that matter to our clients and even those of you that aren't our clients hopefully have benefited to some degree from the message of the reality of markets of the nature of what we're dealing with right now the skittishness that's what bound

to be there for a bit but also even apart from the fact that that clients made this week a bit easier and keep in mind by the way markets are down 1800 points on thursday they were up 2500 points in the nine days you know before we got into this so a lot of i think the fact that people weren't overly distressed in the drop this week is because so much of it was just excessive froth that had kind of come back into markets in recent days. So easy come, easy go type of thing. But also, you know, I think a lot of the short term day traders got blown out this week. It's a good thing. Much more than that, because that's a very small constituency in the marketplace. But what we would call CTAs, commodity trading advisors that trade heavily on momentum signals

in the futures markets, I think there was quite a bit of repositioning there. And that I can actually establish with data. And so that probably enhanced some of the equity volatility. But here's the thing I kind of want to bring you back to. When you look at the just awful, awful weeks of March and the peak levels of the COVID hysteria and uncertainty around where coronavirus and governmental response to it were going to be going, you had completely frozen bond markets, completely frozen mortgage markets, just exploding credit spreads. You know, really, even with a kitchen sink of policy activity from the Fed, you really had broken financial markets. Didn't last long, but it was severe.

And it was every single signal you could make up was indicating risk off. And not just risk off, that's putting it mildly but panic on you know it was a full-blown uh nail anything you can down to the floor and and all that type of stuff well in the same exact day market dropped 1800 points this week you saw credit spreads tighten. You saw mortgages get bid up, non-agency mortgages get bid up. The Nikkei last night, I was watching markets as I was driving out here. And in Japan, they ended up 400 or 500 points higher than their low point in the trading session, their day trading session. It was night for us, obviously. The futures market was up dramatically.

You just didn't have anything that felt systemic. And so I think you have some equity market hiccups right now, and I just think we're going to have a lot more of them, and there's no point in being stressed about this one when you're going to be going through more. And yet the broader environment right now speaks to there being a lot of pockets of opportunity, a lot of good value for good or for bad. And it's actually a little bit of both Federal Reserve that is really indicating that people ought to be putting

on risk. The base level of the floor, if you will, of a stock market multiple, I think, is generationally higher now as a result of the monetary policy we're living in and the Fed put that protects risk assets. It's not an endorsement of any particular policy at any particular time. It's a description of it. It's a statement of fact. particular time. It's a description of it. It's a statement of fact. This week, the Fed met and essentially gave no indication at all that they're remotely worried about any inflationary pressures. They said that they will keep the zero bound till the end of 2022. And then when you looked at everyone's projections of where we'll be in 2022, they still had inflation at 1.7% and unemployment at 5.5%. So what they're basically telling you is they're not even projecting that their numbers are going to be at a place that would allow them to get off the zero bound then because they're targeting 2% inflation and they're targeting something much lower than 5.5% inflation and they're targeting something much

lower than 5.5% unemployment. We're at 3.5% before COVID started. So you'd assume they'd at least want to get back down to 4%. So yeah, I think that they're telling the truth that it will be two and a half years till they cut rates, but that doesn't mean they will, excuse me, raise rates. But I think it could very well be much, much longer than that as well. They will, excuse me, raise rates, but I think it could very well be much, much longer than that as well. So the Fed didn't really do anything to disrupt markets this week. They didn't give information on yield curve control other than to say that they're meeting about it, thinking about it and so forth. But they weren't expected to do much more than that. I'm of the opinion that they are going forward with some form of yield pegging,

likely later in the summer, early fall. There are analysts I respect a lot who think it'll be after the election, later in the year. But either way, I believe it's going to happen. But I think right now they're debating how far out the yield curve they want to play in. How much do they want to actually peg certain maturities in treasuries, three years, five years, what have you. So I don't want to get in the weeds on this stuff. It does matter, though. It is important. And if you didn't understand what I said, ask me,

because I'll explain it better. But I want people to understand the central bank is kind of encouraging people to put on risk. Oil prices are essentially up 100% in the last four, five, six weeks. If you ever need an excuse to pretend you're afraid about inflation, that's a pretty good one, oil going up 100% in a month, and they didn't even mention it. It never came up. There was no talk about rising energy prices. even mention it. Never came up. There was no talk about rising energy prices. So I think that their thesis that we are in a period that they're afraid of disinflation is honest. I think that

they're not pretending anything different. And they committed to $80 billion a month of purchases in treasuries, $40 billion a month of purchases in mortgage-backed securities. So another year at $120 billion a month, we're going to be adding a trillion, trillion and a half dollars to the Fed's balance sheet. And so that liquidity backdrop is there. And I expect that that will continue to at least provide some sort of floor level for risk assets. The hard work is obviously going to be the economy getting up and running and that's the part we're going to have to continue monitoring. I have a chart at Dividend Cafe this week regarding the unemployment issue

where I think that the tables have turned a little bit. At first people were so afraid of the violent number of increase of job losses. And the reality is that a lot of those jobs are coming back. There'll be a high number that creates a downward trajectory in that aspect. But the question then becomes, do we possibly face a different category of job losses, not because of COVID, not because of a restaurant or bar or hotel being closed, but something more white-collar that maybe certain positions, because of recessionary conditions, genuine layoffs, actually lose their jobs for a longer period of time.

We don't really know that. That may not show up in the data for a little bit, so it's something that's worth watching. You know, I talk a lot in Dividend Cafe this week about what I don't believe was behind the sell-off this week, and what I mean by that is the whole talk about a second wave with COVID. Of course, I don't have any idea what's gonna end up happening with certain

outbreaks of coronavirus. I'm very much of the opinion that the economy is reopening and will continue on that track and needs to continue on that track. And that there are lessons that have been learned over the last few months that hopefully will be helpful at protecting human life, few months that hopefully will be helpful at protecting human life, protecting a spread of this virus, and in the meantime allow some degree of economic life and activity to take place. But along the way, I certainly understand that some people may end up getting sick. My hope would be that we would protect the vulnerable, quarantine the vulnerable and exposed in that sense. But as far as the talk this week,

there's been some movement in certain parts of Texas, Arizona, Florida. I don't want to be one of those people that sits here just complaining about the media. First of all, if you're listening to this, you probably already know how I feel about the media, so I don't need to beat the dead horse. But also, it's kind of immaterial to the market side of it, because my whole point is the markets are able to see through things

and do so quite quickly that they consider to be sensationalistic or not sensationalistic and and price in those realities and accordingly there is a significant increase in testing that's taking place that increase in testing has a lot to do with the increase of some positive cases there are some places where the positive cases are at a faster pace even than the testing increases. But the deaths and hospitalizations remain either declining or flatlined. And also just the whole underlying issue

is economically, why would it be that reopening is an ipso facto disaster that therefore will require some kind of bad economic thing if it hasn't been such for so many countries in Europe so far and for the vast majority of the United States? It's a difficult argument to say, see, reopening must have been bad because Arizona has some new cases in a particular county

and yet ignore where Georgia or Wisconsin or Colorado have had reasonably benign data. You know, it's sauce for the goose, it's sauce for the gander. I don't get to use that expression much. I like it when I can kind of just use it on the fly like that. But I guess here's the point I'd make. I don't know exactly where the health data will go, but I don't believe for a second that's what the market was responding to. If so, it had a funny way of showing it because it didn't show it in credit markets or mortgages

or syndicated loans or any other very economically sensitive subjects of capital markets. It just looked and felt and smelled a lot like an equity froth coming off a little bit. Now, you know, I think that the odds of a Democratic sweep in November have gone up quite a bit, just in terms of what the polling and the betting odds are indicating. Both those numbers moving in the Democrats' favor on the Senate races as well as in the presidential race. I don't know if markets will be responding to that yet. It is only the early part of June. And so, you know, almost five months is a long, long time. I don't think things look good for the Republicans right now, but I also think that there's an eternity that could change that.

So I wouldn't put it, I wouldn't take it off the list of market factors this week, but it wouldn't be at the top of the list. So anyways, I think that that kind of covers the issues that were behind this week in the markets. The Fed, there's more at dividendcafe.com to digest, and hopefully some of those comments have been helpful. What are some of the other things we talk about? I do a little historical issue about bull and bear markets at dividendcafe.com this week that I wrote a few days ago I'm kind of proud of because I think it's so much semantics and so much silliness and and you know we talk about there I think some of it's just interesting data points that when you

talk about the market averaging 10 percent a year like the S&P 500 it's fascinating how much it pretty much never does that I mean even anything as low as eight percent as high as twelve percent two points plus or minus from an average 10 return it's done it like six times in the last hundred years the market gets to its average nine ten percent from a lot of minus 20 years and a lot of plus 30 years and things like that. And I think that having an understanding of where the math comes from to formulate a compounded annual growth rate is important because there is a very big difference between an investment that averages 8% each year and then therefore you get a net average of 8 by getting literally 8 every year or maybe 7 one year and 9 another

versus something that averages 8 a year but does so with plus 30s and minus 20s and other things like that. That's pertinent to an equity investor because it speaks to the volatility that they have to be subject to to get that return or their need to diversify their portfolio with other volatility reducing instruments where a lot of our use of alternatives comes in and where formerly a lot of use of bonds for us has come in. And when I say formerly, it's really in the present tense as well. We're heavy owners of fixed income, but we have a challenge in front of us to figure out what the risk reward trade-offs are in the fixed income world. Because what we can't do is just say, well, we used to

have a diversifier in bonds and now we don't. So people are just going to have to take the full drawdowns of the equity market. Some clients are totally fine with that. Some investors have no problem with that level of volatility. Others maybe could be taught to not have a problem with it, but they first deserve the right to know what it entails, how frequently various equity drops can and will happen, and what that looks like in the end.

So anyways, it's an interesting subject. I unpacked a bit of it more at Dividend Cafe. I guess the final thing I'll leave you with is that right now, when you look at the uncertainty in the marketplace, and then you see a week like this where, look, the equity markets were up 2,500 points in the first part of June. Then they give back 1,800 a day. And then on Friday, we were up 800 points. We gave all of that back, went negative, but then came back 500. It may very well be tempting to just say, oh, this market can't go anywhere for a while.

I don't disagree at all. I think it's very possible the market won't go anywhere for a while. I also think it could. I also think that when you're compounding your dividends through this period, that you have left yourself in a position where you can benefit from this sort of volatility. Straight down lines are very difficult because even if you're benefiting, it has to stay down and it's still psychologically sometimes very horrifying. A kind of flattish, choppy market like this could become very lucrative for accumulators of dividends. And I make that as both a mathematical and an economic statement. So I encourage you to think about that.

And if it weren't for the fact that I have covered so many different categories of things with so many charts, where we go with CapEx from here, an update on US-China relations, all the good things, otherwise I would say don't worry about DivenCafe.com this week. But I do want you to read it. And I do want you to reach out if you're just a podcast listener, a video watcher. But you have other questions, please do reach out.

We want to answer your questions, have that conversation with you. And I really hope you will go enjoy your weekend. I've already told you I'm going to do it mine, but don't worry, I will be enjoying it. Thank you so much, as always, for listening to and viewing the Dividend Cafe. We appreciate any reviews and ratings and fun things like that you can offer us

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