The Dividend Cafe - Here's Why Market Timing Doesn't Work

Episode Date: November 30, 2017

Here's Why Market Timing Doesn't Work by The Bahnsen Group

Welcome to the Dividend bang, not a whimper. An unbelievable week in the markets. We're actually recording just minutes after the market is closed here on November 30th. And one of the biggest days of the year today. We had one of the biggest days of the year on Tuesday. I'm pretty sure this will be the biggest week of the year in the market. Although we'll have to see how tomorrow, Friday goes. But my point being, really bad week for market timers. Really bad week for those that are waiting for that dip. Which is, of course, not to say a dip won't come. It is to say that when the dip comes, it will very likely not be dipping below the point

at which someone first began waiting for the dip. Think about that a couple times if you need to. So, yes, the folly of market timing being more and more revealed. Well, what was the big news this week? I think today it would be somewhat silly to deny that the extraordinarily high likelihood of tax reform passing is now kind of getting baked into markets. The particular movement higher is concentrated in a lot of the very corporate tax sensitive areas, both individual companies and sectors. There's a little anecdote I want to share from Tuesday, though, that I think is interesting. And it's important to understand about what drives markets in general. Tuesday morning, the market opened up quite nicely.

It ended up going up higher throughout the day. But at one point, my screen had two things going on at once. One was the Senate coming out of this meeting they had had with President Trump, and they were making a lot of progress, and some of the people that were a little hung up on the tax bill. And on the other side of the screen, you had Jerome Powell going through his first congressional appearance and getting ready for, you know, eventually being more formally brought in as the nominee to chair the Federal Reserve. And he was sharing things about status quo, continuity, without getting into the details,

things that the market liked hearing regarding monetary policy. And essentially, people were saying, oh, market's going higher because of the left side of David's screen. Other people are saying the market's going higher because of the right side of David's screen. Well, which one was correct? Was it both? Was it neither? It's a little silly when the market had already opened up before either side of my screen's developments were taking place. Market was going higher on Tuesday because there were more buyers than sellers, period. So it makes markets go up anytime. Markets go lower for the opposite reason. What exactly is driving more buyers than sellers is, of course, the question. And anyone who

believes they always know that answer is wrong. And it's just incredibly important you understand that. I do believe that there are certain events that are clear. Oftentimes it isn't clear. In this particular case, we are at a point now with Senator McCain saying he's on board, Senator Johnson of Wisconsin indicating that he's very close, Senator Corker giving a caveat to get him on board. Rand Paul came out earlier in the week saying he's very close. Senator Corker giving a caveat to get him on board. Rand Paul came out earlier in the week saying he's on board. They more or less at this point appear to have the votes to move the tax bill forward, even if both Senator Collins in Maine and Murkowski in Alaska are not on board. And they're talking as if both of them may even be on board. So the market right now is baking in what we've been saying more or less all year, which is that it was not going to be clean. It would be messy.

It was not going to be easy. There would be some horse trading and teeter-tottering and all that type of stuff, but they were going to get a bill done that was going to lower corporate tax liability. I happen to think that the bill that appear ready to pass is not particularly friendly for a lot of people in the income tax scale. The market's liking it because of the business tax side. Senator Johnson appears to have been effective in getting some improvement to the way pass-through entities will be taxed. But remember, let's assume the Senate votes. By the time you're listening to it, the Senate may have voted.

They haven't yet. Maybe it happens Friday, December 1. Maybe it happens Monday, December 1. Maybe it happens Monday, December 4. But the point is they're well on track to get a bill in the president's desk for signature by the end of the year. But regardless, once the Senate passes their bill, the House and Senate have to conference those things together. I suspect the bill is going to be much more Senate-like than House-like. There's opportunity for some tweaks to be made to improve the bill a little. There's things I personally like to see done. We'll see. But the point is, no matter what, entire sectors of the market paying 35% of their profits in tax are going to start paying 20 or maybe 22% in tax.

We have a chart in dividendcafe.com this week indicating it's the energy sector and that it will be a huge beneficiary of that improvement. The technology sector has probably one of the biggest beneficiaries around repatriation, but not at all benefiting from the reduced corporate tax rate because their effective rate has already been so low. So I think that more or less you're going to see the markets absorb this. That's probably what's been going on a lot this week. Timing is a bad idea. Fundamentally, it's been a good week for stockholders. And now we go into month of December. A little interesting factoid. The month of December has never in market history

been the worst month of a calendar year. Now that's not to say that the month of December can never be negative, it's been negative plenty. But however, since we haven't had a single negative month in the market all year, for this month to be negative would mean it would have to be the worst month of the year by definition. And that could happen. I don't like all that calendar almanac stuff when it comes to something as important as stock work. But I would say that 2017 looks like it's going to end up being a year for the record books.

And already is a year for the record books in terms of low volatility. Not really excited about what's happening in Germany and a lot of Europe right now. Very, very excited in terms of low volatility. Not really excited about what's happening in Germany and a lot of Europe right now. Very, very excited in terms of our thesis long term around Japan, doing a lot of very proactive work around tax loss selling and harvesting to maximize those opportunities. Began that work this week and will continue it into December and preparing for all the allocation changes and adjustments to optimize risk and reward scenarios for our clients as we go into 2018. We do hope you had a happy Thanksgiving. We do hope by this time next week USC will be

Pac-12 conference champions and we look forward to bringing in the holiday season in the weeks ahead. In the meantime, a lot of work to do. Thanks for listening to Dividend Cafe. Thank you for listening to the Dividend Cafe. Financial food for thought. 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.

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