The Dividend Cafe - Expectations for Trump Take Center Stage

Episode Date: March 23, 2017

Expectations for Trump Take Center Stage by The Bahnsen Group

Hello and welcome to this week's Dividend Cafe podcast. For those used to not having down days in the market or having the down days amount to mere rounding errors, it was good to get a reality check Tuesday of this week. It's always nice to be reminded that we can drop 1% in a day. It's actually been over six months since it happened, which was the ninth longest streak in history without such. But the complex side of politics and legislating has dominated the news this week and our long-held, long-proclaimed belief that the market was not appreciating the nuances and volatility

that would go into implementing most of President Trump's agenda legislatively took center stage this week. So we're going to unpack all of that and more in this week's Dividend Cafe podcast. So off we go. Finally, yes, the market dropped 238 points on tuesday the first day in forever that the market was actually down more than one percent in the given trading day the markets had actually opened up 50 50 points or so meaning it must have been midday news to change direction and that midday news was the jitters that came after Trump met with the GOP House to make his case for passing an Obamacare repeal and replace. Essentially, the thesis is this. If they, the House, cannot come together for this bill with $600 billion of tax cuts, the elimination of

the entitlement, and other deregulation and defunding efforts they generally love, then surely other parts of the Trumpian agenda are under attack as well. Setting the record straight. When I look back at Dividend Cafe writings and podcasts since the election, several media appearances where the same topic has come up, perhaps the theme we've harped on the most, the thing that I think I've said most repeatedly, has been our outlook that the reality of political volatility was not priced into the marketplace. We do indeed believe that much of what the market is hoping for and wanting will come to pass. And we include in that list a repeal-replace of Obamacare, corporate tax reform, repatriation of foreign profits, an improved individual tax code, and significant deregulation, particularly in the financials and energy sector. We focus more on where those things

can happen all out of the executive branch. There are not many, as that is reasonably quick and easy. But most reform and change requires the legislative branch due to the brilliance of our founding fathers in our system of separation of powers. So we have and will continue to have complexity in getting things done because the involvement of the legislative branch of government is messy. There are 435 congressmen and women, 100 senators. There are 50 states. There are a plethora of voting blocs, coalitions, special interests, and unique issues. There will be horse trading. There will be amendments.

There will be all sorts of up and down gyrations around what needs to happen and how it ends up happening. it ends up happening and yet we remain steadfast that much of the market expectations around the new administration's policy agenda will come to fruition coloring in the Dove to add a little color to the Fed actions last week they raised rates a quarter point again following up on their quarter point raise in December they still project two more this year, which would still only have the Fed funds rate at 1.25% from 0.05% now and from 0% where it was about a year and three months ago. Chairwoman Yellen did clarify that the Fed intends to continue telegraphing to the media their rate plans, but she also said that

March plans were initially not believed by the market because 2015 and 2016 ended up seeing a pace that was so much below what the Feds had initially intended. So in other words, their credibility probably suffered from that a little bit. Her major additions to the news in the press conference were that they're acting now on what they see in the economy now and not what they believe may come about after some potential Trumpian fiscal stimulus. She did not offer a lot of color on how Japanese and European policies and actions are informing their decisions, if at all. We see that as key, as should she continue to hike rates and the Japanese European central banks decide it is time

to tighten their own monetary policy to some degree, there could be a really ugly bond market route. And should she tighten even as the others do not, there could be heavy divergence resulting in a dollar rally that offsets much of what they're trying to do. Making monetary policy easy. There is a sort of play on words here as what we mean is making it easy for our readers to understand the terminology of monetary policy and yet easy is itself a monetary policy term, it being the adjective

used when the Fed is accommodating the economy, and tight being the term to describe the process of the Fed trying to take the foot off the gas in the economy to slow things down a bit when they worry things are getting overheated. I read a report this week that offered what we think is a great definition of when the Fed is easy and when they are tight. When the Fed funds rate is below the core inflation rate, it is easy. And when it is well above the core inflation rate, it is tight. inflation rate, it is tight. Today, after three increases of 0.25% each in 15 months, December of 15, December of 16, and March of 2017, we see a Fed funds rate that is still 1.3% or so below the core inflation level. Therefore, by any reasonable definition, the Fed is still quite easy, quite accommodative, quite loose. There is a chart backing up some of this, by the way,

at DividendCafe.com this week. Eating the steak but not the veggies. What if an investor was only invested in the stock market when the Fed was easing monetary policy, periods of cutting interest rates, etc., and went to the sideline during periods of tightening monetary policy. While it is true that historically returns have been stronger during easing periods relative to tightening periods, the fact of the matter is that being invested in both periods has trounced just being in during periods of monetary easing. Investors historically have not improved their lot by using monetary policy to time their way in and out of the market. So if not monetary policy, then what?

For long-term investors, valuations are a better indicator for future expectations than Fed policy. Valuations are a better indicator for future expectations than Fed policy. Finding companies at reasonable valuations with opportunities for growing free cash flow and the ability to grow their dividend has been a phenomenal indicator of long-term investment returns versus other macro indicators like the Fed. The reason for this is simple yet very important. No two macro periods have ever looked exactly alike. We can talk about two periods of Fed rates being X, but that ignores what inflation was doing in each of those periods or corporate confidence or fiscal policy, etc. In other words, extrapolating data and making broad conclusions is tough to do as an investment policy because the eras and data sets being evaluated usually have clear and compelling reasons to not behave in tandem.

Active versus passive. The debate of the investing world is often the debate between passive investing, buy and hold, low cost index funds, and active investing, using fundamentals and various criteria to make investing decisions about what to own and not own. The Bonson Group has a very simple belief on the topic. It's almost a moot point because 90% of investor outcomes come down to their very own behavior, not a passive versus active approach. However, an indisputable fact is the sort of silly debate within this silly debate is that passive approaches tend to do best in periods of great market environments and active approaches tend to do best in more challenging market environments. People are free to decide on their own if they believe the next five to ten years are likely to

be as challenging, excuse me, likely to be easy or challenging, you know, relative to the last five years in particular. We do know this, Tough return environments suggest an active approach, and tough return environments usually come when valuations have reached fuller levels and inflation has bottomed out. I suspect you can tell where this is going. We'd love for you to go to the chart of the week at DividendCafe.com and see a massive difference between the incoming flows into mutual funds from retail investors versus institutional investors. And you can see why we just oppose any form of market timing in that sense whatsoever. Well, we will go ahead and leave it there for the week. We hope you do have a

wonderful weekend. We'll close you out with this beautiful quote from Corrie ten Boom. wonderful weekend. We'll close you out with this beautiful quote from Corrie ten Boom. Worry does not empty tomorrow of its sorrow. It empties today of its strength. Please have a wonderful weekend. Thank you for listening once again to the Dividend Cafe podcast.