The Dividend Cafe - A Wicked Week It Was

Episode Date: February 28, 2020

The market ended the month of February with a level of pain in the markets not seen since December of 2018 (fourteen months ago). As of press time Friday morning we have experienced sell-offs every day this week, creating the worst week for markets since the financial crisis. The details are unpacked in the Dividend Cafe … The level of sell-off in the market is discussed but so are a variety of circumstances around it that very much warrant additional analysis. I made the decision this Friday morning to ditch literally pages of commentary and analysis I wrote over the last few days and just write afresh straight from the heart on all that is going on. Please click through and read. This is not a Dividend Cafe to miss. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. well, there's more of a kind of long letter for me, a sort of just, you know, walk through very similar to what I'm about to do for you now with this recording of what's gone on this week and where we are and what we believe has to be done and what has to not be done in these circumstances. And I want to kind of just give a sort of big picture around everything. these circumstances. And I want to kind of just give a sort of big picture around everything. And then at DividendCafe.com, I do go on to unpack a little around the Fed and their expected response. And there's sort of some charts and things around coronavirus, around global GDP. And I may, at the end of this, go into some of that for you all as well. But the focus right now

is primarily on that first part, which is just kind of absorbing what exactly has happened here in the last week, which is certainly a week for the history books. The market dropping into correction territory is not an event for the history books. It's happened a lot, dozens and dozens of times. But this quickly is most certainly something that is extraordinary. And so there's just a lot that has to kind of be said. And I'm in that mode right now of working completely around the clock to kind of get this right, talk to clients,

talk to my traders and investment committee, allocate capital, adjust capital as we see fit. But let me just back up and kind of walk through where we were. The market was down 400 points last week. It was a shortened week because of President's Day. And yet it was still up on the month. That's where we were just like a second ago, you know, is how it feels like to me. And from Monday of this week through where we sit right now, and I'm recording purposely, I had our communications team move up our deadlines and recording and everything this week to the Friday instead of the normal Thursday because of obviously the extraordinary market circumstances. We wanted to get something as real time as possible.

It's not just possible, but it's actually likely that by the time you're getting this, things are even worse or maybe better than where they are right now. But it's Friday morning, the market's open. We were down a thousand points here on Friday morning. The market's open. We were down 1,000 points here on Friday morning. And right now, when I started recording, we're down like 800. So it's moving up and down a couple hundred points like minute by minute, okay? So I do expect we close down here on Friday. There's still five hours to go. It's hard for me to believe that the point of capitulation and V-shaped bounce back, which I do think is is very much coming but

it's hard for me to believe that happens on a friday going into the weekend with traders propensity for generally wanting to have more risk off with going into weekend and awaiting what other coronavirus news announcements and things may come in over the weekend so i don't expect that we hit that capitulation moment today. I think it is more likely to be next week, even then. But the reality is that the violence and suddenness and speed at which this sell-off has happened does make the likelihood of a snapback rally significantly higher because the market just immediately priced in

so much of the potential negativity around everything going on, and then some. It's completely indiscriminate. So 1,000 points down on Monday, and then a little less than 1,000 points down on Tuesday. Down only 130 on Wednesday, but we had been up a few hundred points. And so it was still about a 400 or 500 intraday swing. Then the worst point drop in market history, not even close to the worst percentage drop, obviously, but the worst point drop in market history on Thursday.

And then another right now, roughly, I'll give you the update exactly. But, um, you know, something near a thousand points, 900, as I'm sitting here talking on Friday. So yeah, you're talking about, uh, 4,000 over 4,000 points in, um, one week in the market. And on a percentage basis, that's over 10% from the market highs. That's technically a correction. Obviously nowhere near a bear market yet. But let me put this in context. This is the worst week in the market since the financial crisis on a percentage basis. So that's real.

The point thing is kind of misleading, but the percentage thing is real. But in the fourth quarter of 2018, December 2018, that's not exactly ancient history. That's 14 months ago. The market at one point had dropped 19.8% from its high of a couple months earlier. point eight percent from its high of a couple months earlier. And and so you you had almost a 20 percent drop 14 months ago, peak to trough. We've had something about around a 13, 14 percent drop right now, all just within a week. And and, you know, I can go back through history. I don't know how much you want me to do all this right now, but February 2018, exactly two years ago, we had a very similar thing, multiple thousand point down days when the initial very first launch of a China trade war started. August of 2019, we had significant

disruption around an unwind acceleration of the China trade war and currency war and inverted yield curve and recession talk. May of 2019, we had over about a 6% drop for a few days around acceleration of Mexico trade issues that were quickly resolved. In March of 2018, you had another spike, multiple significant down days like this around the trade war. And at that time, too, I do want to point out that not only were stocks collapsing, but bonds were collapsing as interest rates were coming higher. overlining from an asset allocation standpoint that bonds have rallied huge this month which has served the purpose of course of offsetting the downside in the equity markets where people have bond exposure let alone alternatives in their portfolio. You know many people were in 2017 I have no such examples because there weren't any. It was this incredibly low volatility year. I've talked about a lot as being very ahistorical.

The Brexit drop in the middle of 2016, very violent, lasted a few days, very quick recovery. January of 2016, worst January in history. Market down again right around this level. Correction territory began rebounding the few weeks thereafter. But again, around oil collapsing, it got down to the 20s at that time, and fear of Fed tightening, fear of China, economic weakness at the time. This was all way before trade war issues. August of 2015, very similar. China driven, the word getting out that tons of capital had been leaving China.

And you had a reversal in their currency, which again, apart from their interventions, it did cause the market, you know, several thousand point down day type range. market, you know, several thousand point down day type range. You know, I can keep going if you'd like. Summer of 2012, summer of 2011 was the real big daddy. That was where we did drop 20%, 19.8 or 19.9 to be precise, around European weakness and economic fears, double dip recession, both in the U.S. and abroad. May of 2010, flash crash down this level in one day before bouncing back a little. So Greece and Europe were all over those other three.

So just simply in the decades since the financial crisis, I think I just went through something like 10 episodes that were between 5% and 20% drops. And in all of those cases, the recovery was rather quickly. And I don't know that the recovery will be quickly here. It's acting like it will be because of the total lack of discrimination around what's being sold. The computers then get involved because they have to.

Machine selling kicks in because of the vast amount of equities that are held by index funds. Then the selling generates the need to go sell more shares in the marketplace. And that trigger, selling begets selling, okay? I am not wanting to spend our time on the podcast right now focusing on the fundamental reasons for the sell-offs that I talked about through all these kind of last 10 years of stories and where we are now. As much as the just general principle, just in the last decade, I could easily do the

last hundred years, but I don't think that's helpful or necessary. I just want you to understand that there is nothing that can be done right now. People can go in and say, look, the selling is continuing. I want to get out and they go sell their equities and they risk missing like 40% of the downsides recovery in hours. That could easily happen. That has historically happened a lot. I don't think we're going to get 100% of the recovery in hours or days. I think that now we're in a position where we're certainly going to have to work our way back to those market highs.

But my point being a big percentage could come back quickly and there's nothing that can really be done. But I would argue, and this is where I really hope you're listening, because you don't have to agree. And I am talking even more to clients right now than those of you that are listening aren't clients, but the principles are all completely universal. We view at the Bonson Group, I can only speak for how our company operates, how we've always articulated these messages, how we believe about these things,

that we are business owners. It may be 25, maybe 30 businesses. They are publicly traded, so you get to call them stocks, but we do not view it as stock market speculation. All things being equal, I prefer significantly, as you do, I know, to not have weeks where the market drops 1,000 points a day several days in a row. However, our focus earnestly and sincerely is on the cash flow generation of unbelievably well-run businesses who have the strength and defensiveness in their balance sheets and business models to withstand these types of events.

to withstand these types of events because wars and diseases and weather events and pestilence, coronavirus to Katrina, Gulf War to Vietnam, there are these things that have happened in modern history and before that that are part of the human condition and part of, therefore, the investor condition. And I believe, unfortunately, and as difficult as it is, that absorbing these periods of time, which sometimes last a lot longer than four days, and this one may too, I'm being very candid with you, that absorbing the volatility and pain and panic and uncertainty in moments like this is part of the risk premium embedded in equities. It is very ahistorical to have it happen this quickly and suddenly. And so in this particular case, it may feel even more

violent and more shocking, and I get it. But I can only tell you that greater damage is likely to be done by not maintaining the portfolio construction that has been put in place, the asset allocation that was intended to withstand 15, 20, 25% drops in the marketplace. What it was not intended to do is know what would cause those because war, pestilence, disease, famine, weather, recession, these are all various things that can happen and do happen and have that potential to incur 10 to 20% violence upon markets. And then you have the really big ones like the great financial crisis and so forth

where it gets even more severe. And so that tolerance for that downside has to be addressed via the percentage one allocates into equities. Within the equity buckets, we had come into the week with cash. Obviously, it would be great to have had even more cash to be able to deploy, but we had cash that we've now been putting to work to buying stocks that we love, excuse me, buying companies. It's an important distinction that we love, that we liked the price before, and now they've dropped and we like them even more.

And that doesn't mean we're finding the right exact bottom. I have no way to do that. But what I do believe is that deploying that cash and then potentially even rebalancing some of the bond money into the equity money should we get to that point. We're not at that point yet, but we could very well get there. But that's the point of the asset allocation we have in place. Our bonds have all increased in value significantly this month, and that offsets some of the equities. But of course, most investors came in with an underweight bond position this year and

overweight equity. We were more evenweight equity, I think, from an asset allocation standpoint. No, it doesn't really help in a week like this. All risk assets have just gotten smashed in their pricing. But I think that that more moderate asset allocation approach has helped. And certainly the alternatives have done a great amount of help in terms of muting and neutering some of the volatility. I can't emphasize enough how much I get having gone through this a long time and having clients I deeply care about, understand their goals and their own emotions, psychology. I get the reaction to a week like this. And I also know that there is

only one thing I can do in this situation. There is more than one I could do. There's only one I will do. What I could do is capitulate to the emotions. And when someone is feeling a certain degree of fear and panic, take them out. Knowing it's the wrong thing to do, but knowing it might make them feel better in the short term. But I have a moral and professional legal duty. That's the least of my concerns.

A moral and professional duty to do the right thing and guide us through it. And I do not intend to tell anyone that I know when this will end. No one else knows when it will end. I can only use history as a guide and fundamentals and information as they become available. I do happen to think, I think there's some of you that will actually follow this. There's some I know won't, and that's okay. I totally get it. Some of you, maybe you'll just sort of think about it.

I do happen to think that the best thing to do is to pay as little attention to all of it as possible because there is nothing constructive that can come out of it right now. When I say pay attention, I'm saying looking at CNBC, looking at the stock tickers, jumping online and looking at it every day or things like that. But look, people have every right to do what they're going to do around that. I'm only referring to what I think is behaviorally and emotionally the best practice. And behaviorally and emotionally, I think the best practice is to just accept that this is a period right now. And we're going to have to kind of get through it. optimizing the opportunities where we can through deployment of cash, through rebalancing, and through adding to positions that warrant such. But right now, there's no sensibilities in the marketplace. It's indiscriminate selling. And I don't want to be cynical about it, but I also want to be grown up and just tell you, there are very sophisticated,

very capable investors that may very well, generally hedge funds, but may very well be in a position to get in front of when the Fed is going to announce that they're coming in and bailing out markets or some other fiscal stimulus announcement or some global coordination with central banks, various things that frankly that's what the market is looking for right now. They want to see some announcement from Powell or from Xi or from Trump or from someone that all these things are going to be, that there's this big kind of assist coming

and they can whip this thing back up very quickly as well. And so my view is that I don't want to invest based on not totally rational panic selling and I don't want to invest based on not totally rational whipsaw reversals either that I lack the capability to produce myself, let alone foresee myself. that I lack the capability to produce myself, let alone foresee myself. What we want to do at the Bonson Group is be very attentive to clients' needs and behavioral tendencies that may hurt them and their long-term financial outcomes, and along the way be opportunistic and yet patient through our convictions, and we are not short of convictions here. We have every confidence that the dividend generation, the companies we own, will continue and that it will grow.

And we say that even when the market is down thousands of points in a week. So I hope that this is a beneficial message for you. I hope you hear the a beneficial message for you. I hope you hear the earnestness in my voice about what I'm saying. But I also really sincerely welcome further dialogue. If you're a client of the Bonson Group, reach out to your private wealth advisor. Direct any questions you want about the market, economy, portfolio to me, email. I'm working 24 hours a day seven days a week right now

because this is our job. This is what we're paid for and I will be there as long as it takes to get us on the other side of this because this too shall pass. Thank you for listening to the Dividend Cafe and enjoy your weekend.

Markets and economy and news and all these things are going to do what they're going to do. But hopefully over your weekend, you'll have time for friends, family, basketball, food, all the things that make life worth living. Thank you. Thank you for listening to the Dividend Cafe. Financial food for thought. Thank you for listening to the Dividend Cafe. Financial food for thought. 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 is not a guarantee.

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