The Dividend Cafe - A Short Market Week But Not a Boring One!

Episode Date: February 21, 2020

We have the whole week unpacked in this week’s Dividend Cafe, and ample commentary on the Fed, earnings, politics and more. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend move of our New York office. So thank you for bearing with me if you're watching, and hopefully the sound quality is great for the podcast. I hope it is. Listen, I am recording a little over halfway through the market day on Thursday, and it's been a kind of reasonably volatile week. We were closed on Monday. And it's been a kind of reasonably volatile week. We were closed on Monday.

We were down 180 or so on Tuesday and then up 150 or so on Wednesday. And then now, as I'm talking, we're down 160. So the market is set to close down between 150 and 200 if it were right now. But, of course, we still have more Thursday and all Friday. Although the market was down over 300 earlier today, so it's had quite a bit of a comeback but there's no real catalyst there's no real news there's nothing i could speak to as to why this is happening and whenever there is stuff like that i love it because it gives me the chance first of all to remember that markets never need a reason to do anything and also the fact also the fact that there are big players in the market that sometimes when they have to unwind positions or reallocate, they have the ability to move

markets. But in terms of where things stand on the week, I guess most people would still say that the predominant story in markets would be the uncertainty that's going to come out of coronavirus. And you have more and more companies talking about how they don't know exactly how it will affect their projections for the next quarter. Nobody that I've seen has yet been so bold as to say, oh, yeah, not always. It's going to throw off our next few weeks of expectations or sales or earnings or revenue. But in fact, the whole year. And so, you know, at this point, the markets have continued to kind of view it in that shorter term quarterly transitory environment. And that's what I suspect is the wise thing to do.

The stories that I would kind of highlight this week, though, as being most significant, we're going to talk about politics here in a moment. The debate last night, I'm looking at my screen. The 10 year is sitting here at one point five two percent, the 10 year Treasury. So you're back to those lows we had had last August. And you only have a little slight inversion of the curve from the the two year up to the five year. from the two-year up to the five-year, but the 90-day to 10-year is still uninverted,

unlike last August. It may as well be inverted because it's right there flat, like dead at the same level. So the point being there's something that represents an anomaly in fixed income markets. Makes it difficult as an asset allocator because there's a lot of vulnerability for the pricing of these bonds with rates this low. And equity markets are not cheap either. Not cheap either. And yet with the very highly accommodative monetary backdrop, that makes an argument for bidding up equities, risk assets. So I don't know. I kind of desire a more normalized market environment. I don't think I'm going to get one for quite some time. There's so much Fed intervention. There's so much uncertainty around the election that just allowing the market to kind of function as a byproduct of the profit generating machines that come out of our best and brightest companies and rewarding the investors who take the risk of

buying their future earnings stream. You know, it's rare that that's always what markets are, but it's rare that that's how markets markets are, but it's rare that that's how markets behave or that's how investors treat markets. And right now, I think that you're just going to have a lot of distractions and noise. And yet the overall backdrop is not entirely great, but it's investable. It's pretty good. You have low interest rates, very poor expected returns from competing asset classes, and you have a lot of accommodation and monetary policy that help to bid up the risk assets. And yet it isn't like all that's happening while there's declining or difficult earnings. The earnings environment is reasonably good, has outperformed expectations for a while, even when those expectations have not been good, and then they're expected to get much better later into the year.

So I think it behooves people to follow their asset allocation, to be very honest with themselves and the persons who manage their money about what their real appetite for risk volatility may be, and of course, within an asset allocation, be adequately diversified, that not everything would be going down, beating you up at once. There are plenty of alternative investments that I think right now are very potent in providing that diversification by not correlating directly to what equity markets are doing or interest rate markets. So there's a few things we're excited about, but even more things that we just are kind of neutral about. You know, we're not overly excited yet.

I do believe that you'll get more clarity in terms of the next earnings season and obviously throughout the year around the election. Speaking of the election, I think most people that saw the debate or read the aftermath are probably the same mindset. It was just an utterly brutal night, brutal for Mayor Bloomberg. And I don't know if it was fatal or not to his campaign. I actually could see a scenario where it might be, and I don't usually say dramatic things like that, but it was pretty brutal. So the lack of a queer candidate to be the not Bernie Sanders candidate continues to make the Bernie Sanders candidacy the favorite to win the nomination. It is questionable to me if they'll have the delegates to get that done before the convention. And then it's questionable if they would go into a convention and not give it to him, not see those delegates if he's unable to win at first ballot. He, of course, said at the end of

the debate that that is what should happen. They should just give it to him. Every other candidate said, no, we should follow the rules and the rules allow a second ballot vote where people could vote for who they want. So I just don't know where they're headed. It's not a great scenario they find themselves in. And yet, you know, there's still uncertainty about where this could go. Can Bernie Sanders get the nomination and can Bernie Sanders win? The answer is yes.

Is he likely to? I would say on the nomination side, it's 50% or higher right now, probably not a ton higher than 50 because of this convention issue, but it's, it's, it's, it's up there. And then as far as the general election, I know I'm with the consensus view that he would be the least likely of

these candidates to perform to, to get the victory, but that doesn't mean it's a 0% chance. And so there's a lot that we'll have to see play out around there. I do think that I'm a little mystified, to be honest with you, why the market is pricing in such a high likelihood of another Fed rate cut this year. It's something in the range of 30 to 40 percent that believe there will be one more cut by December and 30 percent or so think there will

be two cuts. So you're getting there, you know, around the 80 percent-ish range that it would be, you know, 50 basis points or 25 basis points lower than it is now in the Fed funds rate. And I personally think it could happen, but think it would be a greater than 50% chance that it won't. So we'll let's see how the futures market plays out. So yeah, we got to watch the Fed, but there's no headline worthy things coming out from them right now. And of course, the political side's all focused on the Democrats. but there's no headline-worthy things coming out from them right now.

And, of course, the political side is all focused on the Democrats. And because the earnings season essentially has ended, I'm kind of waiting for that to come back around. So we're deploying capital. We're looking for dips and down days and things to put money to work, take advantage of market drops. The things that we're buying we don't believe are overpriced. There are things that we're buying, we don't believe are overpriced. There are things that we're buying that we think are very underpriced, particularly in the energy sector. I've never quite felt that emerging markets have re-rated to a point of full valuation.

So there are things that are beneath fair value in my mind. But as far as the overall state of both bonds and stocks, prices are high, valuations are high. Everyone knows that. And right now, you know, the coronavirus thing produces enough uncertainty to hold things in check. That volatility has continued up a couple hundred one day, down a couple hundred the next. I think that could change for quite some time.

So that is my Dividend Cafe commentary for the week. I really ask you to check out DividendCafe.com where the written commentary is and we unpack a few more things that are easier to do in written word than on my podcast and would love for you to offer us any feedback or questions you may have. I'm going to get back to work here, but I really do appreciate you listening. Dividend Cafe, reach out anytime. Take care. Thank you for listening to the Dividend Cafe. Financial food for thought. sell securities no investment process is free of risk and there's no guarantee that the investment process or the investment opportunities reference herein will be profitable past performance is not

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