The Dividend Cafe - All-Time Highs and Trading Away the Tariffs

Episode Date: November 8, 2019

Topics discussed: I am quite happy to say that this week's market saw several new all-time highs reached (Dow and S&P 500) - more on that in the Dividend Cafe - but additionally happy to say that the reason for such was largely centered around pretty significant movement in the China trade talks ... So we unpack at great length this week all going on with the trade talks, and we also cover the math of "all-time highs." We also get to discuss manufacturing, the crazy IPO market, the reason people like the stock market right now (us too!), and so much more. This is a weekly Dividend Cafe I am proud of - click on in ... Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello, welcome to this week's Dividend Cafe. You can probably tell we're in a very different location than normal, neither New York or Newport Beach studio, but we are actually at our all team retreat offsite out here in Palm Desert, California. We do it every year. Last year we were in New York for the retreat. This year we're in the desert. So we are in all day meetings, Thursday and Friday, kind of just doing a annual regrouping of our business and discussing whole lots of things. But in terms of, I'm going to spare you the details of what we'll be discussing all day in our meetings.

In terms of what I want to talk to you about this week, it has been an absolutely surreal week in markets in the sense that a lot of the things that we have been kind of hoping would play out but not totally expecting have indeed now been playing out. I'm recording early on Thursday morning. Market just opened and we're up a little over 200 points. We're at an all-time high in the Dow. We're at an all-time high in the S&P 500, both in terms of where they closed yesterday and where

they've opened and are trading at right now. And we see that as a very positive thing based on developments in the China trade deal. And what you had take place overnight that I woke up to very early this morning was Bloomberg reports that China is now alluding to some of the tariffs coming off that were indeed legacy tariffs, not just the planned escalations, but a kind of repeal of some of the 2018 tariffs. And we don't think the market had priced that in at all. Started to get a good response in markets from that news. But even then, it isn't fully developed yet.

We don't have the kind of final outcome. So it's all based right now in just general optimism. And I want to continue with that theme about what all the optimism is in markets when you have the Fed being hyper accommodative as we've talked about ad nauseum you have a China trade issue that a couple months ago looked like it was blowing up that not only has really come back in and taken out a lot of the worst case outcome risk but in fact has gotten substantially better and and I just have I just feel like there's this possibility of it being tremendously better that's not an assured outcome but we're really in the

right trajectory and certainly markets are saying so oil prices I commented this week in dividend cafe look they're at a price that is apparently high enough for producers and low enough for consumers. And that is a kind of little median sweet spot that markets seem to like. European risk is the theme I'm going to start writing more and more about. I don't think very many people are talking about it. A couple of the really potentially difficult outcomes were kind of held off some political things that could have gotten out of control in Italy, for example. You know,

all these people that have been talking about a no deal Brexit. I think that it's held together. But you do have an unbelievably soft economy short term with an even worse outlook long term. And there's some kind of tail risk in there that we want to unpack in the months ahead. And the fact that everyone's talking about U.S., China, no one's talking about Europe. And to me, that means Europe's probably a bigger risk than the one that no one's talking about, than the one that everyone's talking about, rather. Let me let me talk with some of our time here this morning though about this concept of the market being at all-time highs.

And one of our analysts at the Bonson Group ran a report for me this week and I put the results into DividendCafe.com, but I'm going to share with you now. There have been 215 all-time highs set since the financial crisis, or actually just the last 10 years. Okay, think about this for a second. And by the way, I guess today it looks like it's going to be 216. That means that there were 215 times that to have said an all-time high means something bad, you would have been wrong. Okay. The reality is, I think everyone knows this, but sometimes it takes me saying it for the light bulb to go off, that markets are always making new all-time highs and the path they're on from one spot to another. And there

are points at which markets, whether at all-time highs or not, are very overvalued. The thing is, is that in the year 2000, the NASDAQ was at an all-time high, but the Dow was not. It didn't come down a bit. And the crash that took place in 07 and 2000, sometimes markets get overvalued and drop when they're not even at an all-time high. But an all-time high is an irrelevant metric unless you believe that 215 out of 215 times it would have hurt you, but the 216th time is the one that's really going to get you. It's kind of intellectually indefensible. And I think people understand that once they hear it this way, but I don't want to stop saying it. The concern is that you're going to take money that's not in the market, put it in the market at the wrong time. It's a totally understandable concern.

But when you look to a value of an asset class, you have to be able to look to the whole spectrum of where fixed income is priced or cash is priced, where any number of competitive places that one can put money is. And right now, you have certain asset classes that are at peak valuations, and you have stocks that are not anywhere near peak valuations. Now, do I think that there exist various risks in markets, not just now, but always? Of course I do. And particularly now, are there outcomes that would concern us? There are. None of them have anything to do with the pricing of where markets are.

At 17 times forward earnings, that's not an issue that would cause me to say, oh my gosh, we have to take back. Now, it also is not a valuation that makes me say we've got to pile in. I don't think stocks are deeply undervalued. Nobody does. I think emerging market stocks are deeply undervalued. Nobody does. I think emerging market stocks are reasonably undervalued. I think certain pockets like in the U.S. energy sector are undervalued, but markets are fairly valued.

And when you compare them to a 10 year treasury at one and a half percent, you could argue that they're very attractively valued. But you have to think that way because assets have to be valued relative to something else. So when I look at the potential for this improved US-China trade deal, I don't go, okay, let's back up the truck. I have a feeling in a year I might wish I had. I have a feeling that in a year it may be better if we had gone and elevated our equity exposure.

But the reality is that I'm comfortable with a neutral weighting in equities. We're not underweight, we're not overweight, we're where we wanna be relative to each client's appropriate risk allocation. So follow up with me, send emails to us and your advisor if you have questions about it because it's a very important theme. Why do we think the overall China trade issue is getting better? China's enforcement on fentanyl

export into America in the last three weeks has been more than anything they've done in the last three years. President Xi made comments this week referring to the need to crack down on intellectual property theft. I don't mean President Trump, okay, I mean President Xi. There is language and there is mid-level negotiations and high-level negotiations that are going in the right direction. It absolutely could fall apart, but instead of that being a 70% chance,

and then it came to a 40% chance, I think it's maybe, let's call it a 10% chance. It it came to a 40% chance. I think it's maybe let's call it a 10% chance. It's hard to price perfectly. But my point is that we are in a better direction with China trade and that that represents tens of billions of dollars of fiscal stimulus into the American economy. You already were getting about a hundred billion of stimulus from corporate tax reform and repatriation. That effect into the economy was being offset by the negative impact of the trade war. If that is going to now be coming back the other way, it allows the corporate tax reform to reinstill confidence in corporate America, reinstill business confidence that leads to business investment, and it picks up that

manufacturing data that's been very weak. The ISM, I have both of these charts, by the way, at dividendcafe.com this week. The manufacturing data for October came back and it was weak again, like September, but the services sector, the ISM non-manufacturing was very strong in October. It had been weak in September, helping me to think, causing me to think, maybe that was an anomaly of a data point in September. The services sector looks strong. The unemployment report was outstanding. GDP growth was better than expected,

especially considering global conditions. So here we are. I don't get Pollyannish bullish. I I don't get Pollyannish bullish. I really don't get Pollyannish bullish even when I should, because I'm so humbled by markets over this career that I have had, and so aware of the history of markets' ability to provide unexpected volatility. But I also have to call it like I see it,

and right now, it's a very favorable environment for US equity investors. The tail risks that are there, why you have some fixed income that is entirely there for defense, not offense right now. And then where we're trying to create offense with our diversifiers, we're using alternatives. That's something we have to talk to clients about case by case. So that's our perspective right now. There's a lot that's gonna happen in the next couple of months. I certainly plan to go into 2020

with plenty of material for you about election years, about investing in election year, about investing in this election year. One of my big theories, by the way, I'm gonna mix the trade theme and the politics theme for a second. One of my themes is that China all of a sudden got a lot more accommodative and

a lot more open to negotiation when Biden started dropping in the polls for the Democratic primary. I believe that they wisely had a perspective that they could wait Trump out, that he, if he were to lose, that they'd be in a better position by negotiating with a Joe Biden, and that they could help create that outcome by damaging the American economy by not getting to a point of a trade war and then therefore not taking the second term Trump risk. But Biden's probability in the betting odds and in the polls have been cut in half. And I think that they looked at it and said, look, Trump could win, he could not win, but we also could end up having a very good likelihood of a non-Biden candidate on the left,

on the Democratic Party, namely one Elizabeth Warren. Elizabeth Warren would probably be no better for China than Trump, although for very different reasons. Trump and Warren's viewpoint on China is not the same, but they kind of get to the same place with a different premise that leads to their common conclusion. So I can't prove this, but I think that there is a real interesting correlation between Biden's drop in the polls and China's increased appetite for negotiation. But that's where we are. You have a political environment. There's a lot of uncertainty and a lot of very good things happening in the economy. And I do want to come back next week with a better report card on earnings season overall. A really interesting third quarter earnings season, one we've been loving at the Vonson Group, great for a lot of dividend growth names.

A couple names are disappointed, not just in our portfolio, but around the market. But then you had some high profile big tech companies that have driven a lot of the market the last couple of years that have had terrible quarters, and yet the market is still way higher. That's a healthy sign when the market is not reliant on what some of its past leadership kind of trendy names have been. So I've been a little all over the map here today, but that's because there's a lot of different things

going on. Please do read dividendcafe.com. I think there's at least six or seven charts. And then in our chart of the week we concluded one of my favorite principles to reinforce which is the historical level that dividends have played in a total return in the market and where things stand now and why dividends are as important for an equity investor as they've ever been i'm going to leave with that got to get to our team retreat here.

We will be a better company two days from now than we are now. And thank you for listening to the Dividend Cafe podcast and thank you for watching the video and we will be back with you next week. Take care. Thank you for listening to the Dividend Cafe, financial food for thought. 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 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, Thank you. 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.