The Dividend Cafe - A Rollercoaster is Better Than A Slide

Episode Date: March 6, 2020

It's FRIDAY, MARCH 6 - The markets were down over 800 points early but right at this moment are down 650 points.  I have no doubt markets will move from here, and I have no idea which direction.  Big moves, in either direction, are the daily expectation right now. This week’s Dividend Cafe offers as much information, guidance, and reality as we are able to muster.  Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. that has just come out here at the end of the week. A roller coaster is better than a slide because I thought it was kind of clever, but maybe no one's in the mood for my cleverness right now. Last week, it was just a pure slide down. Every day was negative. Every day was horrifically negative besides one. And so we kind of addressed that last week, and we entered that market swoon mode where all rationality goes out the window and full-blown equity market panic comes in.

And the fear, of course, was that if you try to time our way around it, you could miss just violent rallies back to the upside. And then on Monday, we got it. Yeah, the biggest point move up in the history of the Dow. It was percentage-wise very high up there as well, 5% in a day. 1,300 to 1,400 points on Monday. And we did not give all of it back Tuesday. It was not quite a 1,000-point drop, but it was 700 to 800 points on Tuesday. And then Wednesday, we had another day that was near the all-time high for points, over 1,000 points.

And then as I'm sitting here talking, the market has closed on Thursday, and we were down not quite 1,000 but very close. At one point, we were down over 1,100 points. We closed down 960. So if I wanted to round up and down, we were basically up 1,000, down 1,000, up 1,000, down 1,000 in the first four days of this week. But that isn't technically true. Actually, the down days were down a little less than the up days were up. actually the down days were down a little less than the up days were up. So believe it or not, as we sit here right now, well, as I sit right now, by the time you're reading it, we have Friday action and God knows what that will be. But we're up somewhere in the range of 500 points or so on

the week. And that's with two days that we're up 2,500 points. I mean, I guess I could keep going, but you get the idea. It's insanity. Okay. It's just unpredictable insanity. And that's why I said a roller coaster is pretty gut turning. And yet, I suppose, preferable to a pure slide down. I did decide to record the video and podcast after the market closed Thursday, because we've got to get it out Friday. And I can't wait till the Friday close and still have the time necessary, you know, to be able to get it out Friday and I can't wait till the Friday close and still have the time necessary, you know, to be able to get it out into your inboxes when you want it. And yet I didn't want to record Thursday morning because these days I go record and I walk back to my computer and get back to work.

And in the time I walked back to the computer, the market moved down 500 or up 500 or whatever. the market moved down 500 or up 500 or whatever. So the point I'm making is that I'm doing my very best to give as updated information as I possibly can for podcast listeners and for clients and those of you watching the video. And we did our whole entire investment committee on Monday. We wrote a midweek dividend cafe, both. I wrote a midweek dividend cafe both of the last two weeks. I intend to keep doing that. And a lot of it is because I read so much research and there's so many things I want to be able to communicate to you from the research that then if I kind of write it into my draft commentary for the week on a Monday or Tuesday, by the time I'm ready to go publish it for you all on Friday, it's obsolete.

Doing the way things are moving right now, doing two a week keeps things more current. So if you're listening to the podcast right now, and I say it every week in a different context, normally just because I'm encouraging you to look at charts and things like that. But right now, I would encourage you to go to dividendcafe.com for the Friday written commentary. And the reason being that what I'm doing there is completely different topic than what I'm about to talk to you guys about right now on the podcast. The information that is written is not only going to have charts and other illustrations and things that I think are useful, but I'm also unpacking more specifics around the Fed, around global

response, around economic impact. There is a bit kind of variance from just the down the middle, hey, how does an investor deal with this stuff? The how does an investor deal with this stuff is the more behavioral, practical, and of course, primary considerations that I want to focus on right now. So dividendcafe.com, I think you'll find the information useful there. We're going to keep that going and hopefully you'll get out of it what you need. There is a sense, okay, in which if there's a client out there who says, I don't want to listen to podcasts a week and read two new commentaries a week, Because the fundamental thing that matters is what you said last week,

which is that we don't expect market sanity return anytime soon, and yet it's going to return. And I stand by both of those things as fervently as anything I've ever said to a human being in my life. I don't know when. I do not want anyone operating as if we saw the bottom do I think that the bottom was put in on that final Friday of February which if memory serves was the 28th the day before the leap year day on Saturday and we were down 1200 points or no, I'm sorry. We're down about, I think, 1,100 and we closed down 350.

So you had about a 700, 800 point rally back. And then we were up 1,300 plus change on Monday. Okay. So in that, from that middle of that Friday to the end of the day Monday, we had a 2,000 point rally. Then of course we gave 800 back. I'm just doing the math right now in my own head as I'm sharing it with you. So then we're 1,200 up from the intrad Friday

low. Then we go up over another 1,000, 2,200. We're down 900 today. So we're up right now, let's call it 1,200 to 1,300 points in the Dow from where we were last Friday at the middle of the day. And do I think that's significant? The answer is I do not. Do I think we can go lower than where we were last Friday? Yes, I do. Do I think we will? I have absolutely no idea.

Do I think that the right number for where the Dow will be in several months is higher than it is right now? I do. Do I know it will be? I do not. Now, why am I saying all this? I think everyone listening, I hope, knows. They may not like hearing it because it isn't, you know, I think people want to know when's it going to go higher, how much, all those things. But I am never going to do that. I want you to have the unadulterated truth. And the unadulterated truth is not one of these, hey, I'm sorry I'm giving you all bad news, but I got to be a realist. This is good news. This is not

bad news. The good news is that investors who are accumulating for a better future are going to be accumulating more shares as dividends reinvest at lower prices during this period. All three of those things I stand behind. That the dividend accumulation is intact and working as it's supposed to. That the dividend use for withdrawal needs and cash flow needs represents the greatest device I've encountered as an investment professional for monetizing people's economic needs. And that the overall net worth or market value of one's portfolio in due time will be restored to where it was in the extremely important time of four weeks ago or whatever, three weeks ago. Psychological levels matter to the extent that they matter emotionally and psychologically. I don't believe that it's particularly important right now economically.

If it were, I don't know what anyone could do because no one could price in. We don't even know how to predict what worst case and best case scenarios are and timelines, geographic exposure. predict what worst case and best case scenarios are and timelines, geographic exposure. My own feeling, when I see the unbelievable and exponential increase in our capacity for testing kits in our own country, and the relaxation that CDC has put on for diagnostic allowances, I think that we're headed in a really good direction towards prevention and cure. When you look at the mortality numbers of people who have been affected with this god-awful virus, it is so much lower than various flu epidemics that the world has seen in recent years.

When you look at the biotech advancements around therapeutic treatments, as well as, of course, preventative vaccines, some of which will take longer than others. But you see a significant amount of hope and promise for where it's going. I don't have anything to say about what policymakers should have done here, should have done there, and why don't we test this guy, and how did this guy get in the country, all that stuff. It's media noise. Now, does that mean that everything's been done right, or everything's been done wrong, or that there aren't valid opinions out there? No, it just means I don't have them. It's beyond my interest as it pertains to the financial well-being of

clients. Thank God no one's relying on me for the policy response to this, or the medical response to people that actually know what they're doing in that regard. And if you think they don't know what they're doing, that's a problem, I guess, but I can't address that either. What I want to address is how people feel about this from a vantage point of their portfolio. I want people to feel better if you're invested in the stock market, but I do want to continue pointing out the thing I really tried to hit home last week, that the overall market level of the portfolio, first of all, this doesn't even rank anywhere near, like I could name off top of my head, 10 events that the high level to low level have been more significant than this in modern times. This, it was violent and quick. And this has at this point in time, an uncertain ending, but every other past hiccup in markets had an uncertain ending during the present tense. And then once you got to the future, and at that point, the former present became the past. once you got to the future, and at that point, the former president became the past, I'm saying this right, even if it sounds funny, then all of a sudden people could feel better. We can't feel better until we get to that future point, and that future point is uncertain right

now. But let's talk about this economically. The Fed came out on Tuesday and announced they were cutting rates, 50 basis points, two quarter point cuts. That brought the federal funds rate down to 100 to 125 basis point range, one to one and a quarter percent. The market had been down 300 when they made that announcement, and then it immediately up 200, and then it closed the day down 700 or 800. So let's call it a thousand point drop from whatever level it was to where it went so why did markets respond so negatively to the fed the markets didn't respond negatively the fed the markets had just already priced in the

markets are up 13 or 1400 points on monday and there wasn't a man woman or child left that didn't know the fed was going to be cutting. The Fed futures market was already pricing in, and I shared this last week, a 100% chance. Now, maybe some thought they were going to do a special announcement on Wednesday instead of Tuesday, and maybe even some actually thought they were going to wait all the way until March 17th for their next regularly scheduled meeting. But the point was it was fully priced in that that monetary accommodation was coming. So when the news came, it wasn't news. My own prediction and forecast is that they're going to be cutting again. The futures market is pricing in about a 30% chance of one more cut in March at their next meeting and a 70% chance of two more cuts. And then once you get down to 75 or 50 basis points,

it does beg the question, why aren't you just at zero? And that's very much where I believe they're going to go. And then this brings up the issue as to why the 10-year has gone so low, because the Fed's only controlling the short end of the curve, the overnight rate. And this is one of the most important economic lessons I can ever explain. All that the 10-year is, is what people believe about the future. And I believe that it is very likely that the Fed is going to be between zero and 1%. And I don't really even believe one. I think maybe someone could talk me into the idea that they'll stay at 50 basis points, but I don't really believe that either. But the Fed's going to go lower than one, and I suspect they'll go to zero. And last time they

did it, they stayed there for eight years. And you can argue, well, there's not going to be a reason to stay there for eight years this next time. But see, there's not a reason to be there now either. There is not an economic reason other than psychological impact in financial markets for the economy to require right now low cost of money. Money supply is not a problem. Liquidity is not a problem. What do I think happens next if If the economy is weakening, if there's more market turmoil, things of that nature, then I think they go to a more explicit form of QE4, not merely the non-QE4 QE4 that they were doing before around the repo problem, which by the way, repo spreads have skyrocketed up this week um so more or less

i believe that the fed serving as a provider of liquidity and an accommodator of risk assets is going to be there and the reason the markets have you know taken it but not fully you know loved it is that they want more i think they're going to get more. And then the question becomes where, when we start getting the good news that there's more containment, that a lot of the hysteria is not played out. And so you say, okay, what are we, where are we left with? Well, you're not going to be left with a multiple in the S&P 500 in a more, in a post-coronavirus hysteria phase, in a more normalized phase, you're not going to be left with a PE of 14 or 15 if the 10-year is at 1% and if the Fed funds rate is at zero.

So that multiple expansion and higher equity risk premium becomes almost inevitable. So this could take three weeks, three months, a year. But I think you end up seeing a distortion to the upside in risk assets as a result of the way the Fed's treating this. Am I happy about it? No. Will clients be happy about it? Probably. Probably. Then I have to deal not with the present hysteria of coronavirus, but I have to deal at that point with monetary implications and such distortions in our financial system. No one really wants to talk about that right now. I don't even really want to talk about it right now. But I do think that thatP, there's no question earnings are now going to be somewhat distorted and we don't know how much.

There's going to be some impact to GDP. Obviously, we know that globally. We know that there's a lot of speculation about how reliable the numbers coming out of China are. of speculation about how reliable the numbers coming out of China are. So we're going to have to see. The impact in the financial sector this week to the low interest rates has been brutal. So what you get is a benefit that everyone wants to borrow more money, okay, because rates are low, as stimulative as people go out and do various consumer activities. But then you have a financial system less incented to give out more money because they're not making anything.

There's no spread. So you get a push-pull factor. And they have not been understanding this in Japan for 30 years. And the vast majority of people who talk on television don't understand it now. But I earnestly hope that listeners to the Dividend Cafe podcast will understand this. There's no such thing as a free lunch. So low rates come at a cost, and the cost is a financial system that doesn't have profit, a financial system not earning profit on spread, therefore tightens credit. Everyone got that. And it suppresses growth. So I don't want that to happen.

So that's why I am skeptical about the efficacy of monetary policy to treat a health hysteria event. In the meantime, fundamental earnings growth is what we're looking to. And I expect there will be some companies that grow earnings year over year but do so less than they otherwise would have. There's still really pretty positive things happening. A lot of the drug sector, obviously, to the extent certain consumer staples and healthcare are directly benefiting from a lot of the activity around this present state of affairs, where the most damage is being done is in financial and energy. And of course, those are two sectors we're invested in. And then areas we're not as invested in would be travel, entertainment, airline, those types of sectors getting killed. So what's the best advice right now?

We deployed cash. We are grateful we had cash. We do not want to be holding it now. You can't justify at this point for your investment capital, for that capital you're seeking a return on, after the violence of the drop we had and the valuation levels we hit, and most importantly, where the risk-free rate is gone when you see a 10-year treasury bond trading at 90 basis points, which I consider an embarrassment for our country. Our government will pay somebody less than 1% to loan them money for 10 years. But I will tell you this, to the extent that people can ignore what's happening in equity markets, I do not think that they will feel impaired by what has happened on the other side. And in fact, even though it's sometimes tough to see the reinvestment dividends, it's tough to see

the impact of us marginally adding cash at opportunistic prices. There are really some significant bargains that have come on that we're really excited about. There are other stocks I'm not so convinced are in a bargain. Just with the sell-off, it's been bad, but they're not as beaten up as they can be. And so that can continue to affect markets as well, particularly with the heavy ownership of index funds. Credit spreads have widened. They have not widened dramatically.

They're nowhere near where they were even four years ago at one of the last market hiccups. So you have various zigs and zags in the marketplace, and we're zigging and zagging with the market in the sense that some of the things that are working, we're heavily invested in, and alternatives and fixed income. And some of the things that are not working, obviously, we're invested in too, and that's okay because we have two things that we're going to talk about over and over again. And when this whole thing goes away, they're going to be the same two things we talk about over and over again because they're the same two things that have been driving me through my whole career managing money. And that is that if one is trying to accumulate capital for a future cash need, the reinvestment of dividends through periods of market distress

is uninhibited and actually opportunistic. That's what's happening right now. And number two, to the extent someone needs cash from their portfolio now, the dividends that come from their portfolio are unaffected by what's happening and, in fact, will continue to grow through it. Those two statements are the reinforcement I want to offer you around dividend growth oriented equity investing, even as stock prices drop. And then a portfolio that includes dividend growth equity that is diversified with alternatives

and fixed income performs even better neutering that drama of the volatility. If it's a broken record for some of you, I apologize, but that's the right broken record to be listening to right now. I'm going to keep saying it. I do hope all of you have a wonderful weekend. By the time you're listening to this, we'll of course know more of what took place in the market on Friday. My expectation is it will be up a lot or down a lot.

And my expectation next week is that markets day by day will be up a lot, down a lot, a lot of volatility. We'll see what happens, but we're going to continue communicating with you. We're going to continue taking your calls, your notes, your emails. I appreciate you guys so much. Some of the very, very kindest things I've ever heard coming from clients over the last week. It means a lot.

But of course, what we want to do is maintain our posture of communication. I feel incredibly confident that there's a time coming in short order where people are going to be very pleased with the results of having stuck through this difficult time. I just wish I could define short order better for you, but I can't, so I won't. And in the meantime, it looks like Joe Biden will be the nominee. That's not a sure thing either, but it got a lot more likely this week. And so there's interesting events happening in the market. I think you could argue that the kind of socialist outlier tail risk took a big hit this week, which is good.

I also think you could argue that President Trump's likelihood of being reelected took a little bit of a hit, just in the sense that it would be a more difficult race. Plenty of people politically may disagree with me there, certainly the market assessment. So we're watching the political aspect, the coronavirus, the impact to earnings, global economic growth, domestic economic growth, credit spreads, Federal Reserve activity, and interest rates, impact to consumer. There's a lot of things on our radar right now. We're doing the very best we can on behalf of our clients whom we love.

And I say all these things to you, those of you that are non-clients, because we really do hope that you find the truth and sincerity in the Dividend Cafe to be beneficial to your life. Thank you for listening to and watching the Dividend Cafe to be beneficial to your life. Thank you for listening to and watching the Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of the SEC. Securities are offered through Hightower Securities LLC.

Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance. This is not a guarantee. The investment opportunities referenced herein

may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does not constitute investment advice. The team at Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information reference herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of

Hightower Advisors LLC or any of its affiliates.