The Dividend Cafe - Is A Bear Market In The Cards?

Episode Date: April 13, 2017

Is A Bear Market In The Cards? 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, Chief Investment Officer and partner, founding partner at the Bonson Group. We want to bring to you here as we go into the weekend before tax day, our thoughts on the market. We expand upon these thoughts and provide more charts at dividendcafe.com with a more written version. But for you listeners who prefer the verbal word, here we go. I am actually doing this from the high seas of the Caribbean where I'm enjoying a week off for my kids spring break a little family vacation getting a lot of reading done enjoying the time with family it's been delightful I'm not really capable of totally turning off from the markets

much to my wife's chagrin so there are some interesting reflections to focus on here this week and the kind of a byproduct of much of what I've been reading and researching from afar. Let's talk about something interesting with Q1 real quick. It didn't really embarrass anyone, or did it? Look, I mean, even most perma bears came into Q1 pretty quiet, not exactly screaming their stocks are going to collapse message from the hilltops. Most perma bears have mastered the art of just being vague enough that they can essentially stay to the sidelines while markets rise 14,000 points, for example, the real number for the Dow in the last eight years. But then they jump out of the bushes after a thousand point drop to say I told you so. However, bearish market forecasts for Q1 were not common as Trumpian momentum was

still in play and earnings results were presciently expected to be solid. Bond markets stayed in the range most predicted with the 10-year yield not breaking out above 2.6%, but not reverting back below 2.3% either. Even most alternative strategies did quite well in Q1, as best we can tell from our surveying of the land, both in-house and around the neighborhood. All in all, a great quarter for forecasters, right? Well, almost. We forgot the area where more reputations are ruined for those who dare than anything else in financial markets. Currency. Forex. Waves of predictions that dollar strength was the new normal and that it would bring emerging currencies, emerging bonds, emerging stocks down as the dollar ascended, all those predictions have fallen flat,

or actually much worse than flat. Not only did the dollar index drop 1.74% in the first quarter, but it declined against every single major currency in the world, the exact opposite of what were mostly pretty smug, confident predictions. We would still watch European growth and inflation. Any dollar bear thesis has to account for the secular headwinds in the euro, and we wouldn't enter Q2 with any more of a quarterly projection for the dollar than we cared to make in Q1. But it's a helpful reminder that the world of currency speculation is not a world where one spends their days or nights celebrating. And forming an investment philosophy around someone else's highly vulnerable views on currency and foreign exchange is almost pathological.

The market's policy dream. There's so many things at play right now and how markets discount their expectations for the Trump administration policy agenda that we may lose sight as to what the markets most want to see. Understandably, investors have to reconcile what they want to happen with what they expect to happen. And there is a need to understand both the politics and the markets response to the policy particulars. understand both the politics and the market's response to the policy particulars, but I do want to think it's helpful to look at where we believe the greatest market impact would come from. We have said since the election that we think energy infrastructure is a major, major story from a market standpoint in the Trump administration. We think he will succeed in achieving much of what he wants here and in fact is doing so. This will prove to be stimulative in our opinion for the broad economy and it will prove to be beneficial to that sector. The overall deregulatory efforts matter too. The

market is most focused on this in the sector of financials and and that's understandable, from the way Dodd-Frank gets implemented to Fed stress tests, to capital rules, to replacing key Fed personnel involved in oversight. There is, again, an inability to affect change here that the market is likely to embrace without the complexity of Congress and legislation. We then get to tax cuts and tax reform. These are the issues markets care about the most, and they happen to be the ones most complicated from a political standpoint. There are so many ways it could go, including a quick corporate tax cut that passes easily with a promise to readdress tax reform later. But the apparent resurrection of the Obamacare repeal bill may change things as well. So while we wish there were easy predictive factors to look at in all this, there are not.

What we do know is that the market wants something to get done and has priced much of that in. We have a wonderful chart at DividendCafe.com on the correlation between credit extension and then CapEx, capital expenditures. And our belief is that this consumer confidence, especially small business confidence, has not yet led to increased revenues that we can see, but it has begun to lead to increased credit expansion, and that that should lead to more CapEx spending, which is good for the GDP. Needless to say, we look around the world, see the French election coming up, and

we have to wonder what that holds in store for markets. Our expectation is that there will certainly not be a clear winner at their first round at April 23rd. The top two candidates will then go into a runoff on May 7th. And our guess is that the trend is in place for more and more of the citizenry of Europe to reject the European Union, certainly the currency, but not enough yet for it to happen. We don't think that you're looking at a full revolutionary election in France. But of course, the polls had Brexit wrong too, although these polls are quite a bit wider. What we do know, though, is that even apart from an immediate shock, which may not happen from this election, the trajectory is clear. More and more are rejecting the euro currency, and we think a more moderate batch will eventually

join full-blown euro skepticism. We would love for you to look at the chart at dividendcafe.com this week showing literally a hundred years of bond yields and what exactly it looks like historically to have seen the treasury bond yields come so far down over these last 37 years. And we look at the reality of buying short-term bonds and what that means for your return, whether it be the interest rate risk of long bonds or the inflation and tax risk of giving you a negative return with short bonds. it's an important time to be thinking about credit and not duration in your bond portfolio. The price for trust. We operate off of a reasonably simple expectation at the Bonson Group that our clients will trust us in the advice we give them

and that they will do so because we are at all times worthy of such trust. Proof is an evasive concept in most fields, but particularly so in financial management. We do more study and research and data analytics than anyone I've observed in this business, but we do not teach clients about the superiority of dividend growth investing, for example, because we can prove it will outperform a different market approach over the next 12 months, let's say, to the extent that we can prove a particular outlook or approach or philosophy has performed as certainly in the past, even that does not prove anything about the future. My mentor, Nick Murray, has beaten into me for nearly 20 years the importance of moral authority and how we stand as investors and an advisor to investors. We have the

competence, track record, research vigor, commitment to learning, discipline of execution, and most importantly, obsession with the best interest of our clients, to deliver investing outcomes to our clients that will meet and exceed their goals. We substantiate this morally by maintaining firm convictions, not wavering from what we believe, and telling clients the truth, even if we know they do not want to hear it. Why do I believe clients should trust us and be assured of our trustworthiness? Because when clients most want us to say, don't worry, we can get you out of the market when it's going down and back in before it starts going up,

we say to our clients, no, we can't. And neither can anyone else. Moral authority comes from truth-telling. We tell our clients the truth about capital markets and the realities of investing and about the impossibility of risk-free returns. It is in those harsh realities that you can find trustworthiness. It is the guaranteed 8% return one you should run

from if for no other reason than the fact that it is a lie. We're gonna leave it there this week. We encourage you to look at our chart of the week at DividendCafe.com which lists out literally nine factors that we normally would follow to see if we're at the top of a bull market. We think it's very interesting. But with all that said, we're going to let you go. We hope that you've enjoyed this week's Dividend Cafe. We look forward to coming back next week.

Welcome to the Dividend Cafe, financial food for thought.