The Dividend Cafe - Could It Be the Bottom?

Episode Date: March 13, 2020

It is so hard to stick to my normal Dividend Cafe format these days (not that anyone cares). I am trying to write two per week, and the markets are changing minutes after certain segments get written (or more challenging, the news itself alters or stories take on different shapes). On two days this week (Monday and Thursday) the violence of the market drops required additional email communications. Clients receive their special bulletin specific to portfolio holdings on Wednesday, as well. The state of affairs now makes the exact timing and precision of these communications difficult. We hope you understand. I set it up that way because there are things in flux right now as I type that by the time I submit to my team may change, and by the time you read this may change again. I apologize for that. But that is the state of affairs in which we find ourselves. My feeling is that the market this week went through a Black Monday type day (October 1987). On that fateful day we dropped 22.6% in one day (and it did rebound 6% the next day). This week, going into Friday morning the market is down 18% in four days (and as I sit here in type from a Starbucks on 47th Street at 5:30am eastern, the market looks set to open up 5%). So while the violence was four days, not one, and 23% is a lot more than 18%, there is still the same feeling of shock and horror and the rapidity with which this all happened. I am dedicating this week’s Dividend Cafe to what happened this week, what has to happen from here for markets to (a) normalize, (b) begin recovery, and (c) finish recovery. It is a long one, but hopefully easy to read and useful to your understanding and thinking about this crisis. Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. end what has been a week that many people will never forget and I am on that list as they're all members of my team and a good portion of our clients. Of course I'm sure that they're plenty of investors, not plenty but some, small minority at this point that may not even know what's transpired this week because they really are pretty disconnected from the day-to-day of their portfolio but with a week like this that tends to bring even the most sidelined of investors off the sidelines to some degree. I want to say, and it's a little bit of a risk, but I did it on purpose, to be recording this before the market is closed on Friday. The market is closing in another hour

and a half or so and I've already completed my Dividend Cafe written version. I've kind of written I think four different ones this week because of just everything that's been going on with the markets. And so as far as what I want to dedicate this podcast to, I kind of want to recap a number of things from the written Dividend Cafe, but just also a lot of the kind of behavioral elements and emotional, psychological, practical things going on right now so let me just get right to it i'm sorry for kind of the dilly-dallying i i i don't recall the last time i had a week where i've slept less than this and that's fine i feel i feel um you know i have plenty of energy but i definitely am a little worn mentally but um you know this is this is part of the life I chose and it is part of the life that every investor chose if they chose to be involved in equities

um but for myself being involved in equities on behalf of of hundreds of clients hundreds of people with with dreams and with goals and with financial expectations it's a bit different um i haven't spent two seconds this week thinking about my capital um i am buying equities in my own account heavily as i'm buying equities in certain other clients accounts that have the the stomach for such thing i don't I don't do that right now with any expectation that we've seen a bottom. As I'm sitting here talking right now, the market's up over 800 points. It's been up about 1,000. It had gone up 1,000, went all the way back down to zero, now back up again.

And President Trump is going to be speaking in another 45 minutes and i think that we've mostly uh heard now what he's going to say but you just never know um so you know are we going to rally into the close are we going to stay flat where we are or are we going to sell off in the close i mean all three are possible so the, first and foremost, let's just say you've been taking a nap for a couple weeks and you woke up and the first thing you did is listen to this podcast. The market went up 4,000 points, what seems like a journey to go now, but it was three weeks ago, the week of three weeks ago. And then last week the market was up a bit, it was up a thousand down a thousand up a thousand

down a thousand squeaked out a 400 point gain on the week with a lot of volatility so we called week one a slide and we called week two a roller coaster and then week three has had some roller coaster elements but many more slides in that roller coaster. Two of them with a point of utter violence, and that was Monday, which on Monday was the worst day on a percentage basis in the market since October of 2008. And then yesterday, Thursday, it became the worst day in the market, down 10% on the day. Worst day since October of 1987 the infamous Black Monday so equities all entered an official bear market from a closing point to a closing point Nasdaq S&P Dow all down over 20% and in fact

now from their peak levels down in the Dow case, it was 25% coming into today. S&P was like 23 or 24. Now, you know, both indexes, as I talked, are up three or 4%. So that will be adjusted a little. But my point being that this, the shock and awe and the rapidity at which the coronavirus issue and more particularly the the the market's fears of what our response to coronavirus would mean to the economy so you had a barrage of news this week of NBA season being suspended of now golf tournaments being suspended in some case canceled march madness one of my favorite events of the year being canceled altogether obviously just a massive amount of travel being canceled and so forth and so on so you do have an absolute decimation coming in economic activity in late Q1 and

certainly well into Q2. Will that last into Q3? I mean this really is the major question facing the economy, facing so much of our society, and facing the stock market because you, I believe both of these scenarios I'm about to lay out for you are possible one is that you have a big move down in q1 going into q2 q2 would be where it's hit much worse and that most of that creates pent-up demand people People work from home, they cancel trips, they reschedule conferences, they reschedule vacations, and then in Q3, you have an utterly parabolic rebound in GDP. I would no way in the world would bet against that outcome. But I also would not bet with high conviction for it because of the basic reality of uncertainty. We just simply don't know.

The quickness by which a lot of improvement medically has been taken hold in South Korea, China, gives a lot of people hope. The various treatment possibilities, therapeutic options are on the table. I can talk more about that next week. It gives a lot of people hope. There's no vaccine coming online anytime soon so there's just uncertainty and i'm going to divide up as i did at divinitycafe.com uh four categories of what's going on but how

which uh by for how investors can kind of interpret and understand the coronavirus issue right now one is the most important and that is from just the health care ramifications president Trump this week cut off any travel from Europe now was that the right thing to do wrong they do from a policy standpoint with health care let's just assume was the right thing the markets obviously didn't like it there was no coordination with Europe ahead of time There was no coordination with Europe ahead of time. There was no information with Europe ahead of time, no informing them it was going to happen. The markets panicked at it. And of course, if everyone has selling European equities, which they did, and certainly us being not weighted into Europe was a help this week in the sense that even as bad as U.S. equities did, European equities were really pummeled.

And yet I will say that it isn't like you can hammer European equities and not hammer U.S. I mean, there was margin selling and force selling and asset allocation that overlaps that just trickled into all capital markets, all risk assets. Okay, so the reaction in the market to the president's national address on Wednesday night obviously was pretty bad. But from a policy standpoint, we'll see what impact that has. But the biggest issue is what they're calling social distancing, various congregations, large groups of people. Just they're kind of putting American life on hold to some degree and especially American public life. So movie theaters are going to be very empty.

Broadway shows here in New York City have been canceled. Sporting events everywhere, you know, all of that going on. You have some high-profile people that have been diagnosed with coronavirus, the Prime Minister of Canada's wife, Tom Hanks, famous actor and his wife, two different NBA players on the same team. So it's just been a barrage of these headlines of things being bad. It's still a very low count of people diagnosed with it that we know of. There's very, very low testing being done.

So that number is most certainly going to go up, and the market's well aware it's going to go up. The market doesn't know how much, though. And then the two things that are very encouraging is the cure rate continues to be extremely high. People that are diagnosed and get better, and particularly in other countries, it's been very encouraging to see some of that. And then the mortality rate has still been very, very low, but it's obviously much higher than the flu. And so to the extent that the percentage of

people who get it, there's a higher percentage who will pass away from it and that cannot be accepted that's a scary thing and so there you know that the whole thing is scary and and and it's created uncertainty and it's created a panic it's not for me to sit here and say right now where I think some of the panic has been unwarranted where I think it's unwarranted because first of all I'm really only talking to you all in my context as an investment professional, as a fiduciary manager. And I also don't know. I'm certainly not a medical professional, but I also don't know that even medical professionals know because it really is uncertain exactly where this thing is headed. And that is what has largely caused markets to sell, sell, sell,

is uncertainty is a very difficult pill to swallow. One of the most important things I can say to anybody listening right now is that the notion of this being a bottom that we hit yesterday has got to be rid from your mind um i think it could be uh i wouldn't bet on it um but we have i think four times now in the last three weeks had thousand point updates and none of them that held uh maybe it's three times three times and now this is the fourth and we'll see what happens but also you're just very susceptible until we get on the other side of the healthcare aspect you're very susceptible the market continue to

trade with the headlines and the headlines aren't good now that's when we'll know things have changed because there is coming a time when the market's going to stop responding to the headlines because it's already priced in, it's already baked in. We know there'll be another school closing. We know there'll be, God forbid, a certain contamination area and a celebrity and a this and that, you know. And it is awful. I don't belittle any of it.

But when the market stops responding to all those things, it means that that part of the bad news really baked in and the whole thing becomes a very economic proposition at that point as far as markets are concerned which is how severe will earnings end up being affected and how low economic growth go and that's gonna take a little time to sort through so with those kind of uncertainties is the best play for someone to just go on the sideline and wait? Well, if they knew this was all happening three weeks ago and they could have been on the sideline at that time, then I guess it would have been a pretty good

thing. But nobody knew. And by the time anyone could have looked up, they were down so much, you were stuck. So what have we done about that? And what do we continue to do? We asset allocate. And so equities go down 25%. And clients with 50% to 55% of their money in stocks and 25% in bonds and 20% in alternatives and things like that end up with a very different return result return result now I don't like being down 8% or 10% either but I do think 10 is more palatable number in 25 I think for some people 25 is palatable recognizing it is such an extremely rare event and they don't need the money but

see every clients different that way. Every investor's different. So one gets a chance to really kind of test their own natural risk profile, their natural comfort level of volatility in periods like this. It's not a dress rehearsal, though. It's really happening. But there's some other things really happening, too. Companies are still paying dividends. Every company we own own companies are still going forward a dividend growth that they've already announced and already planned companies are looking at stock buybacks with lower stock prices in the wake of what's happened companies have an opportunity now to look at acquiring other assets

where other companies maybe it will be more affected by this so it creates different acquisition targets there's a lot of moving parts and I made the analogy yesterday in a kind of emergency dividend cafe that I did to 9-11 into the financial crisis and in both cases you had world changing events you had national you know nation changing events and and it just felt like you were punched in the gut and you didn't know how long you were gonna be out of breath and and in this case I think that that feeling is where people have naturally gone of just how bad can it

get where do we go and the reason i believe that the best psychological device is to literally just wait a few months to get very engaged with equity accounts i can't do that because i need to be in the market every day deploying cash where it's appropriate rebalancing where it's appropriate we have some significant decisions to make in our investment committee monday um if there's going to be a more prolonged recession do we really want to rebalance right now We have some significant decisions to make in our investment committee Monday. If there's going to be a more prolonged recession, do we really want to rebalance right now from bonds to stocks? Or do we maybe want to rebalance some part out of our bonds into dry powder that will be prepared to go into stocks, but it will be tethered in over time instead of put in all at once?

Those are decisions we have to make, and I don't want to speak for what the investment committee will decide, but you can probably guess from the way I'm talking as chief investment officer the way I'm leaning right now. But I have a weekend of thousands of pages of research to read, and I have a lot of prayers to utter and thoughts to reflect on. But that's my job, and that's the part that I don't believe our clients need to worry about as much as avoiding the temptation to respond to something that's awful permanent, awful temporarily by making it awful permanently. And unfortunately, you know, there's always going to be that kind of natural temptation. But we are adamant that those who are able to wait this thing out, whether it's three weeks, three months or nine months, most of China has gone back to work. South Korea has had unbelievable improvement preparing to normalize.

We now see Italy's draconian measures as they get back into place. The U.S. still has an extraordinarily low amount of folks who have passed from this awful thing. Diagnosis have gone up, but again, can the worst outcome still be avoided? They most certainly can. So the two different ways in which it can go or totally unknown in the meantime we're going to find out here a little bit where some of the sort of quote-unquote fiscal stimulus is I lay out in different cafe this week a lot of what they're looking at doing there we're the monetary side we know the Fed has been providing a lot of liquidity into the repo market and now today announced a lot of treasury bond transactions meant to kind of steepen out the yield curve a

little bit brought 30-year yields much higher yield curve is the steepest today it's been in some time I have not yet spoken on this podcast about the what took place on monday with uh the oil prices dropping 30 overnight on sunday um and i think that that leaves us in a position where um now you you wonder if there's a trickle-down effect oil markets being so low it hurts certain producers hurts the credits hurts the banks that are behind some of that. I don't think that we can answer exactly right now where Saudi Arabia and Russia are going to go with some of this. But what I really do believe is that whether market ends up fading this rally today at the end, or the market ends up rallying further, or next week is an up week or next week's a down week.

I believe we're so much closer to a bottom than a top and that on a risk reward calculation basis that it behooves people to stick to what was hopefully going into this situation, a properly allocated plan. I've been looking over client accounts all day. I mean, starting like at three in the morning, going till 10 or 11 at night, literally every day. And I do really feel, even with the pain I see in equity markets, that our allocations have been right. And that one of the things that equity investors have to live with are these moments where markets drop precipitously and this one was particularly precipitous particularly quick and particularly dramatic and so our view is absolutely unwavering that this will pass there will be health care resolution there will be monetary stimulus for good or for bad that comes there will be fiscal stimulus for good or for bad that comes and some of the very negative things that are priced into the markets right now

will turn and whether it is q3 whether it's you know um the economy will likely turn after the market. The market won't wait for the economy as it prices things in advance. And indeed, the economy and the data obviously has not yet turned, but the market was pricing in this week what they expect will end up being the case, and that's where we are. So it is difficult for me to record this in the middle of market day, even though we're near the end of the day, make about the oil price war, about monetary policy specifics, about fiscal policy,

where we stand on the health care side, what data needs to be presented that can make the markets feel better about the direction we're going. Understanding on the health care side the fatality rate, where the deaths from the disease fit into the big picture. And then how you ought to think about this stuff as an investor, what it means for those in retirement, wanting to go to retirement. I ask eight questions.

I think every investor needs to ask themselves. And I really would love for you to go spend a little time with that. Because I think that the answers to those questions may very well have a lot to do with what ought to happen with your portfolio right now and what ought to happen in your portfolio later. So I will leave it there. I'm going to close out with a quote that I put in DividendCafe.com this week. But it's a quote that I actually taped to my desk. An old executive that my former employer, Morgan Stanley, had given it to me on September 17, 2008. That was the day my dad would have turned 60.

8th. That was the day my dad would have turned 60. I talk about this in the podcast and writing series I did a year and a half ago, a year and four months ago, whatever, commemorating the 10-year anniversary of the financial crisis. And on September 17th was the day that Morgan Stanley looked like it may be going under. Lehman Brothers, AIG, Merrill Lynch had all gone down that week. There were other major financial players on Wall Street in disarray. The market was down thousands of points, much bigger percentages. Credit markets were blowing up. Banks were closing. And someone turned me on to this quote from a old british poet named john dryden um i am a little wounded but i am not slain i will lay me down and bleed a while then i'll

rise up and fight again so i took that and i taped it up to my desk and i uh i read it on my desk every single day through the entire financial crisis, which was a life-changing and career-changing period of time for me. On March 9, 2009, I took it down. We were on the anniversary of March 9 this last week. I took it down because I believed that we had survived the financial crisis. And in the course of a couple of days, markets rebounded 20%. The economy stayed in recession for a year. Unemployment stayed very, very high for two years.

But we troughed. high for two years, but we troughed. And those of us who laid down and bled a bit were not killed, got up to fight again. And at the risk of this sounding more dramatic than it is, everybody is going to be fine. Nobody's financial goals are going to be undermined. It can feel, when markets are collapsing window bottom in sight differently. And even when things do bottom, the recovery can take a lot of time. One of the problems when you're afraid of more downside to going to the sidelines is the fact that when a rebound comes, there's a big portion of it that comes so quickly,

and when one misses it, they eliminate the mathematical possibility of that full recovery in prices that they may want to achieve. And it's one of the reasons why I've studied this so much and I'm so adamant that even though it may be the path of least resistance, the last thing I would do with my own personal money, let alone client money, is go take advantage of the opportunity to hide in the sideline after the most violent of the burst has already taken place. So I don't know where this market will bottom. I am assuming it will go lower. I'm hoping it will not, but I'm assuming it will.

lower. I'm hoping it will not, but I'm assuming it will. But I'm very confident that wherever it ends up bottoming, there will be rapidity to the upside. It will move quickly when it's ready to respond to improved healthcare data. And then when it responds to improved healthcare data, the fundamentals of the economy started off strong enough that it will fertilize a reasonably good and quick exit from the weakness that the economy is now about to suffer. And it will then be coupled by incredible monetary stimulus that will boost up equity valuations. And I can't bear the idea of clients missing out on that recovery after a week like we just had and after three weeks like we've just had. So I'd rather have more bad days on our way to some great months than miss out on that. And that's the way I feel about it. And I could talk to you about this all day.

Any client listening who'd like to talk, please reach out to us. Talk to your private wealth advisor. Talk to me directly. Email, call, whatever you want. And we're going to host a national conference call on this subject on Tuesday. That information has been sent to you. So with that, I will say goodbye to this week for the history books. And a week that hopefully will not be repeated anytime

soon but the history of markets tells us it will be right now my thoughts and prayers are with the families of those who have been diagnosed with the disease may you be one of the 55 to 60 percent of people that have already been cured may you be one of the 96 to 98 percent of people that um survived it and and may we get a cure and a vaccine and and may this uh deadly killer be no part of american or global life anytime soon and god bless you and your families and I thank you for your trust and confidence in the Bonson Group, and I welcome ongoing communication throughout this period, and to the extent that you don't need to communicate or want to communicate because you just want to wait it out a few months,

I commend you. I believe you'll be happy you did. We'll continue working. Take care. Have a great weekend. Thanks for listening to The Dividend Cafe. 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's 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, 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

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