The Dividend Cafe - Finally some Clarity on this Stock Market!

Episode Date: August 10, 2017

Finally some Clarity on this Stock Market! by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, managing partner at the Bonson Group. And here we are with another week in the markets, a little discussion about nuclear war, ongoing concerns about market levels and tops, and all kinds of things that should warrant investor attention. This week, I actually intend to address a broader philosophical approach to the issue about market price levels, about those systemic things that can interfere with market stability, disrupt the way we think about market prices, and just generally give investors anxiety. You know, it's interesting. We had more or less kind of a flat week in the markets, a little bit of up days, a little bit of down days. Thursday, we saw the market go down over 100 points, and there was a time in which 100 points was a big movement.

Of course, it's barely 50 basis points of downside volatility now. But the reality is that obviously the real-life belief of nuclear annihilation would not result in a 100 point drop in the markets. I think last I checked, a nuclear war that eliminated humanity would probably bring the market to zero. So I'm going to go on a limb and say that the market is not trying to price in jitters about real life nuclear conflict with a 100 point day or 150 or whatever the number ends up being. My point is this. It doesn't matter exactly what the reason is, whether there be valuations, whether there be technical factors, whether it be geopolitical headlines,

100-point days, 300-point days, not to mention multiple days and months and quarters of actual real-life downside volatility is part of being an equity investor, part of that experience. What we have had to take out the sort of North Korea concerns of this week, what we've had for quite some time is people being very skeptical, very concerned about the high price levels of the market. But the reality is, is that the market has now hit an all-time high 34 different times in 2017. The market had hit an all-time high 122 times 122 times in 2013 through 16. And as I never tired of pointing out, every price the market has ever been at was an all-time high on its way up. There's no price that we've ever been at that wasn't at one point that market's all-time high. The issue that we have to address as investors,

and particularly as those that are sensitive about risk and sensitive about a client's comfort level and market volatility, is to understand valuation, understand where excessive sentiment may be disconnected from reality, and therefore calling for adjustments to our balance, to the allocation of asset classes in the portfolio. The way in which we attempt to manage risk is not around market timing. I'm going to be in the market when it's up and out of the market when it's down, and force myself to time exits correctly, and even worse, force myself to time reentries correctly. Even worse, force myself to time reentries correctly. The brighter approach is to utilize the blending of asset classes around a desired return and comfort level of volatility to create an asset allocation and a attempt to add value when we see things getting frothy to trim gains, to hold into our target allocations, to, you know, obviously add some active management overlay that will generate a better result. But to do all that within a construct of discipline, of target allocations, of a real-life investment policy that is not driven by Kim Jong-un or driven by the New York Times.

So to me, I believe that we have a great opportunity right now for investors to revisit their asset allocation, to make sure that they are indeed practicing the disciplines and in line with a real strategy investment discipline, but also to consider their own risk tolerance and to define risk the right way. Volatility is something that can be very trying, and we do not want to belittle it. When people see the value of their money fluctuating, it can be very unnerving. But fluctuation of value, whether you see it with stocks and bonds or don't see it with real estate and liquids, is a constant. Volatility of any asset that has ability to deliver a return premium is therefore subject to volatility. And what we want to do is control the volatility in line with

a particular investor's needs and in a particular investor's level of comfort, tolerance, and sleep at night position. So overall, I am skipping most of the meat of DividendCafe.com this week where I talk more about how we think of valuation, how we think about all-time highs in the market, what will we do if the market does correct, whether it be tension surfacing out of the North Korean situation or Trumpian policy problems or just plain markets getting a bit exhausted? If we get to a point where indeed there is some type of correction, not 1, 2, 3 percent, but maybe 5, 7, 10 10%, the answer is that we'd be buying more stocks. We'd be buying really good companies that are growing their earnings at lower prices. I do not feel a frustration that stock prices are so high. I feel a frustration that we are not even lower.

I do not feel frustration of it potentially moving. I feel an expectation of it potentially moving. It's just that we have no ability to time it and neither do you and neither does anybody else. So to build an investment policy of round timing is to do the futile and guarantee really potentially disastrous results. All that to say there's plenty at DividendCafe.com that don't want to just hear my vignette on market timing and a philosophy to asset allocation, but would like to dig into the jobs report, correlations in the markets.

We talk about how in 2016 the yield on a one-month Treasury bill was 5%, and in 2017 the yield on the 30-year treasury is 3%. Okay, so that's how much things have moved in the last 10 years, that the one-month treasury was far and away higher income creating than the 30-year treasury is now. And therefore, comparisons about valuation become extremely distorted. So all of that and more at DividendCafe.com. I ask you to read it. Hope you'll sign up here. Please email us any suggestions you have that you'd like to see covered in the podcast. We want to get your feedback. Want to make the podcast a little different than the weekly commentary as much as I can handle it. Doing the video each week, doing this podcast, doing the writing. It really to me is an important part of the value that as the managing partner at the group believe is necessary for our business.

We want our clients to be receiving in any venue and forum they choose an incredible amount of communication from us and perspective that can help drive a better result for them as investors. So I will leave it there. Hope you will have a wonderful weekend and we look forward to your feedback. Reach out anytime. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonson Group is registered with Hightower Securities LLC, member FINRA, MSRB, and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services 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.

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