The Dividend Cafe - It's Not Always in the Numbers

Episode Date: August 23, 2024

Today's Post - https://bahnsen.co/3ACbF38 Insights from Jackson Hole and Behavioral Finance: This Week’s Dividend Cafe In this week’s episode of Dividend Cafe, David discusses the Federal Reserve Chair Jay Powell's recent speech from Jackson Hole, Wyoming, focusing on future rate policies and economic outlook. David highlights the change in focus from price stability to labor markets in Powell’s speech and discusses the likelihood of future rate hikes or cuts based on upcoming economic data. The episode also dives into behavioral finance, emphasizing the importance of avoiding common investment mistakes and the value of behavioral modification for clients. Additionally, David shares statistical insights on GDP growth, corporate profits, and stock market volatility, and compares the performance of gold, inflation, and the S&P 500 over the last few decades. The discussion wraps up with an analysis of inflation data and rental market trends. 00:00 Welcome and Market Overview 01:02 Fed Chair Jay Powell's Speech at Jackson Hole 01:33 Understanding Rate Policy and Market Reactions 05:11 Behavioral Modification in Financial Services 09:14 Statistical Insights from Howard Marks 12:34 Inflation and Investment Strategies 17:05 Wrapping Up and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to this week's Dividend Cafe. We are getting very close to the end of summer. We're not quite there yet. We will officially end the summer next week, then go into Labor Day weekend. And what that means, of course, is the football season will be here and our lives can recover the joy and meaning that they have been missing. In the meantime, it looks like right now, as I'm sitting here

recording in the middle of the day, the middle of the market day on Friday, that markets are going to end this week right about where they ended last week. There's been some ups and downs on the way, but it's actually been a very flat week for markets. And I decided to go directionless this week in terms of Dividend Cafe. What I mean is, as opposed to one particular big theme, there's a few different things I want to cover. And I don't want to rip off the podcast listeners and video watchers. So I'm going to try to cover all those things that I do in the Written Dividend Cafe, give you just a kind of potpourri of some different elements. But we will start with where, unfortunately, the media started and ended and where a lot of the financial industry has been focused this week,

which is in Jackson Hole, Wyoming. Fed Chair Jay Powell did give a speech this morning. I got a transcript of the speech in advance and then listened to the speech very early this morning. And initially, markets jumped up over 400 points. As I'm sitting here talking now, they're up about 200. They may give all of that up. I wouldn't be surprised if they do. They may stay where they are. I don't know and I don't care. But I want to read you a quote from Chairman Powell that I think is an appropriate way to understand where the Fed is viewing things and make a big point about where rate policy is going to matter. The time has come for policy to adjust.

The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. And he went on to talk about the balance of risks in the ongoing context of labor markets that he emphasized about five times more than price stability, where a year ago and two years ago, it would have been about five times more focused on price stability and less focused on labor markets. So this isn't anything more than a very specific, explicit, and undeniable purposeful messaging that, hey, when we say we're more focused on labor markets and price stability, it's our way of telling you, yes, we are going to be more accommodative. The futures market on the Fed funds rate are pricing in now a 67% chance of

a quarter point rate hike in September and a 33% chance of a half point. And I do not know what they will do because there's still a full inflation report to come in September for August and a jobs report to come in September for August that could skew things one way or the other. But more or less, we're looking at either a quarter or half point and it means nothing to me which one it ends up being and it shouldn't mean anything to you. But if we are in a position in three months, six months, where the Fed is cutting 100 basis points, a full 1% at a time. Someone had sent me a note this morning about how, remember, Volcker sometimes was raising rates like 400 basis points. But let's remember 1981, 82, if you're going from 15% to 19%, the base effect of that is very different

than when you're going from 2% to 3%, right? The percentages of an amount of movement depend on what you're starting with, okay? No, I don't expect they're going to be doing big, dramatic, they're going to be doing big, dramatic, unexpected, high magnitude rate moves. But if they were, that would be the worst thing for markets. It would mean that there was some sort of economic calamity, economic collapse, more than expected economic slowdown and contraction that they were responding to. If they're responding to normal economic slowness that has been well telegraphed and discussed, and we're going to do a quarter point here, a half point there, methodical, measured, periodic, that would be this sort of ongoing Goldilocks narrative. Any market watcher who says interest rate cuts good, interest rate hike bad, and therefore 1% cut, 2% cut would be good. A sort of caveman

like simplicity will get a caveman like result. I don't know. I got to think about that. I'm making this up as I go. It's not good. You do not want the Fed cutting dramatically in response to very significantly negative economic data. I hope that would be obvious. And yet, to the extent that there is not calamitous economic data and the Fed is cutting slow measured, still, they're not tightening, they're adding liquidity to the system, that becomes the most benign scenario for markets. Switching gears. Behavioral modification is something that is a term I've been using for the majority of my 25 years in financial services. Some point early on, I caught onto the idea of behavioral modification as a very important component of our value proposition and that

keeping clients from doing dumb things, doing the wrong thing at the wrong time, and maintaining an ability to resist our own human nature was a vital part of value. That has not waned at all. What is noteworthy to me and cause for significant gratitude is that we have done it so long and I think so well that we don't have a lot of clients that are calling saying, I saw this billionaire guy on TV, he told me to sell everything. What should I do? Or I saw this billionaire guy on TV, he told me to buy everything. What should I do? You get some of those things, and it's our job to talk through people, explain what is going on and how we think about some of these things.

We always have a point of view, but there are sort of cliche mistakes that people make. Some very smart people, some very sophisticated people, some not always super smart or sophisticated, but they're human. Everybody's human. And human nature is a failed investor, as my mentor Nick Murray taught me. And we have created a business that is trying to guide people around the realities of human nature. I am taken aback by how common some things are in the world of wealth management and investment management and investment practice that are not

common for us. Now, I also think it's possible that some of them might be a little bit more common than I think. And my advisors in our private wealth advisor group at the Bonson group hide it from me, which it would be actually even greater cause for gratitude. The only thing better than having hundreds of clients that are all doing the right thing at the right time or have had an intuition formed over time that is more immunized against human nature, the only thing better than that is having 20 advisors

that themselves are ambassadors of such value and philosophy. But that is an important way to think about it. We have a worldview. And to work at the Bonson Group, you have to believe in this worldview and practice it. And whether it's a client calling and saying, I can't take anymore, I got to buy some of this crypto stuff or someone who, you know, even the hot dots of the day,

the panic, euphoria, let's wait it out. Let's get on the other side of the election. That's a common one. I'm not at all suggesting that clients could be immune from that entirely, but we don't have a systemic issue with some of these behavioral issues that have become more common. And I do want to give us some credit for it. I think that we communicate frequently and we do a pretty good job trying to provide information and perspective. And I sure would like to believe we've earned clients' trust via our own trustworthiness

in messaging why some of these mistakes are so bad. Panic and fear at the wrong time and euphoria and greed at the wrong time. at the wrong time and euphoria and greed at the wrong time. These concepts have been with me my whole career. And I'm grateful that I believe we achieved a certain success with that. But that human nature being immutable, the need for ongoing practicing of it has not gone away. And there's always opportunity for new mistakes to mutate. But the major categories of mistakes that exist out there, I feel like they become very few and far between. And our advisors are highly capable of putting it down when symptoms are evident. And I'm grateful for that. this week via my aforementioned mentor, Nick Murray, the great Howard Marks does a monthly investment commentary. I generally don't miss it. But there was some statistical stuff that Howard included this week I wanted to share with you guys, that if you were to look at GDP growth, and I think most of you remember from either high school or college statistics classes,

what standard deviation is, measuring the variability around the mean. A high standard deviation doesn't mean that something is high. It doesn't mean it's low. It means that there's a high volatility around the average result. And a low standard deviation means that there's very little variance around the result. If you look at GDP growth and standard deviation, the volatility around its own average is 1.8% over what is this period of time here, the last 40 years. That is a very, very slight amount of volatility around economic growth, up or down. But the volatility around earnings, corporate profits in the stock market is about 9% a year. Now, there is one school of thought that says ultimately profits have to revert to whatever economic growth is.

That's not necessarily true, by the way. And if it is true, it's pretty unhelpful because what time period and what distribution of results goes with that changes things so much that it becomes a sort of unhelpful fact of life. But whether it's true or not, the variability around profits, that they can go up and down around their own average at a 9% standard deviation with economic growth only 1.8 means something to us. It means the economic growth is much less volatile than the profits that are a part of the economic growth. But here's the part that Howard is focused on that I want to share with you. The volatility around the stock market prices that reflect those corporate profits has been over 13%. So you have a much higher standard deviation around stock prices than you do around corporate profits. And you have a much higher volatility around corporate profits than you do economic

growth. How could this be? The answer is, it's as easy to answer of a question as I will ever rhetorically ask. The only reason why the variability of results around stock prices is so much higher than the variability of results in corporate profits and especially the economy is human beings. Getting too excited, getting too panicked, up and down movements that are a direct byproduct of human behavior, which stems from human emotion, psychology, etc. It is empirical proof that humans do not respond to empirical data. They respond to their own emotions, their own feelings, their own excitement for good or for bad. Okay. A couple of other statistical things that I'm switching gears around some of these categories on purpose, but I think it's very interesting. Gold is up three times, 300% since 1980. Pretty darn good. It's actually 3.1 times. Inflation is up four times, 400%. The S&P 500 is up 49 times. I share this to make the point that on an absolute basis with

cherry-picked start and end data, I can come up with other years in which gold had outperformed inflation, but I like to take when I graduated from kindergarten, because it was such a momentous part of my life, and now being 50, I think going from age 5 to 50 is a pretty good coverage of a period of both my childhood and adolescent years, and now up to being a middle-aged person. childhood and adolescent years, and now up to being a middle-aged person. Gold has underperformed its own metric being inflation. But then when we look at something like stock prices, which reflect corporate earnings, which reflect pricing power and actual activity, competitiveness, and so forth in the market. 49 times your money in the market versus four times in inflation and three times in gold. This is, to me, the message of how to combat inflation.

You combat it with growing earnings and with growing dividends and not with something that has no internal rate of return. With a hat tip to Ben Carlson, who is always good for some good charts, I put in two different charts that I want to quickly dwell on in the Dividend Cafe this week. That over 12 years, 14 years, 15, 18, 20 years, 100% of the time, the stock market has been positive. As far as the number of days in the market, going back to 1950, 54% of days have been positive. 64% of months have been positive.

So you have almost half the days are negative. You have a little bit over a third of the months are negative, but in any longer period of time, it's been 100% that one has over these 10 years. It's 97% for seven years, and then it goes to 100% in 10, 12, 20. Now, the problem with that stat, which I think is very compelling on a risk mitigation standpoint, but the problem with that stat is it doesn't speak to what the positive return may be. And so we put another chart in showing a 60-40 portfolio over any 10-year period since the Great Depression. 60% stocks, 40% bonds. That over any 10-year period, it's been positive since the Great Depression. it's been positive since the Great Depression. Now, there have been three periods where the 10-year return was close to 0%, 1%, 2%, or 3% per year. It's averaged over 10 years, 116%

cumulative return in 10 years. So let's call that about 7%, 7.5% per year. There's been a couple moments in which the 10-year return had been 250 or 300%, so something more like 13 to 14% a year, really big returns. There's a pretty decently high variability of return over a 10-year average of a 60-40 portfolio, and it's never been negative. But 1%, 2%, or 3% won't get most people what they need. And you don't want to live off of the 250%, 300% periods that are few and far between. And the average being 116% is unhelpful when it could be, for a long period of time, much lower because of periods of range-bound markets. of time much lower because of periods of range bound markets. And it could be higher, big expansion periods. To me, this is just a very powerful reinforcer of the message of dividend

growth, where you change what you're monetizing. You're not monetizing a price performance that could go for 10-year periods very different, let alone in shorter periods of time negative, because people don't withdraw all at once in 10 years. They would draw over the 10 years. But even putting that aside, monetizing over something that is always going higher, growing dividends, growing dividends takes away this calculus. I think it's a fascinating statistic. All right. Let me get ready to wrap some of this up. A couple great charts in Dividend Cafe this week about inflation showing the PCE, the personal consumption

expenditures, really are now back to 2%. And even that is showing a 5.4% inflation in shelter. But then there's a chart from Realt.com that is essentially showing whether it's one bedroom, two bedroom or studios, that you are now looking at irrefutable proof that rents are negative year over year for new rents in all three product categories from 2023 into 24. So you're not getting 5% or 6% inflation in shelter for that category. You're getting negative inflation. So that skew is becoming more and more dramatic. Good charts this week. Good data in the Written Dividend Cafe. Check that out if you get a chance. Enjoy your weekend. I am, as of late last night, back in Newport Beach. I will be here for the whole week

before heading back to New York City Labor Day weekend. So look forward to bringing you another Dividend Cafe next week from Newport. In the meantime, reach out with any questions. We'll continue monitoring things. And on Monday in the Dividend Cafe, I'll try to do a bit more elaboration of some of J-PAL's comments over the weekend.

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