The Dividend Cafe - Market Curiosity Peaks as Volatility Adds Tension

Episode Date: October 19, 2018

Topics discussed: Are rising interest rates to blame for market volatility? Unpacking what really happened in last week's meltdown Housing market weakness Links mentioned in this episode: TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe. I am recording very, very, very early on a Friday morning here in New York. I actually fly back to California late tonight, but I'm getting ready to leave the apartment. I have very early start here today and haven't recorded yet. Normally I record Thursday but it's been quite a week. All of the meetings that we've been having here in New York, our whole investment committee, meeting with every portfolio manager and hedge fund and asset management relationship that we have here in the city. And it's been an absolute

whirlwind week in the markets as well. There's no point with an entire day to go of trading and even bothering to forecast how the week will end up. You've had a down 300 point day, you've had an up almost 600 point day. So it could feel like maybe running in place. I suspect the markets might end up up on the week a tiny bit based on how futures are looking so far this morning. But that will come from just big swings up and down. So obviously a lot of volatility still in the markets. And I don't have a lot of really profound things to say as to what's driving it and when it's going to end and what the causes will be when it ends and what the causes have been to what's going on. I mean, the things that I said last weekend, for those of you who read the Saturday post I put up at marketepicurian.com, I really do stand behind. I think there's a lot of global jitters that are working their way into the states and into U.S. markets.

I think that the Chinese currency issue yesterday, our Treasury Department announced that they're not labeling them as a currency manipulator yet again. But the jawboning kind of pretending that they were going to and the stern threats they give them in not doing so, it creates, there's this underlying tension on the Chinese markets. And a lot of it is that there is this trade war going on. The Chinese economy is very volatile. But then it has to do with what it represents to the rest of the global economy when China's currency is weakened so much against the dollar. And then you get a lot of capital flows out of China. And that undermines the sort of belief in Chinese growth as an anchor around the world

where there is a lot of inadequate growth in Japan and in Europe and in other geographical pockets. So the whole world has been very dependent on China in a lot of ways for quite some time from a global growth standpoint. And I think that when I've said this for years, it doesn't really matter if people are able to piece together exactly why. When there is fear of China sneezing, there becomes fear of the whole world catching a cold. And I'm tweaking an old cliche that actually involved the U.S. to make my point, but I stand behind my point. I have a lot I want to share about the takeaways from this week's meetings and broader issues pertaining to our portfolio positioning and our outlook right now. We definitely this week spent a good portion of our time delving into the state

of credit and what the monetary base looks like in the country. And these things may sound very boring, but I think that there is a really profound impact on risk assets and on how we want to think about the present economy for the next six months and so forth. Sure. But especially the next 12, 24 months, probably a longer version next week to lay out for you a lot of our takeaways from this week and what it will mean. Because I do believe some adjustments are coming in terms of some portfolio strategy. Now, I think oftentimes people say, OK, just cut to the chase. We don't really care about what you're saying on China. We certainly don't care about currency and foreign exchange. Don't even know what you're talking about. And that's nice if you have some different macro thoughts about the

economy and how you're positioning, you know, asset allocation and so forth and so on. But just tell us, is the stock market going up or down? And that's oftentimes what people's kind of bottom line may be. I do get that, actually. I don't agree. It's such an important question. I'm going to take a sip of coffee before I answer. I believe that the way we are positioned from an equity standpoint right now is exactly correct. There are particular positions that we may want to bring up a little bit, positions we may want to bring down from a rebalancing and risk management standpoint. But I think a relatively neutral stance on equities is right. I don't believe that people who want to be overwhelmingly overweight at this time are necessarily in the right spot tactically. And I don't have any desire

whatsoever to be running for the hills at this point. I think valuations, where we are, particularly after this last couple of weeks, are very, very attractive. And they're even more attractive in certain spaces than others. And I'm pretty well on record as to where I don't think valuations are attractive. And that is mostly names in the consumer discretionary space and the new media, new technology space. So in other words, a lot of what we're doing is where I think the best value is. And yet there's some need for adjustment within that weighting. You know what? Someone's percentage of equities may not need to change a lot,

but there could be some composition changes within the equity portfolio. I'm going to elaborate on a lot of those things more next week. As for this week, I believe that there is a certain combination of events, but the one that kind of the cliche of straw that broke the camel's back, you know, people saying, well, it was rising interest rates. There's some of that, but I do believe it was the speed of rising rates that made a much bigger difference. The 10 year at 3.2% is not a deal breaker for risk assets and for equity markets. But the 10-year getting there

in literally three weeks from 2.85 to 3.2 in such a quick period of time, I think that impacted markets. But then, of course, as I pointed out last week, a lot of money flowed into treasuries, into rate-sensitive areas, including the utility sector and equities where we're invested. And so I think that you had an underlying tension in markets. We've had trade war. We wonder if this great earnings growth we're getting has been wonderful to be invested in up till now. But is it going to start to taper off, even if not right away, next quarter, quarter after that. So there's already that kind of underlying tension that people always have of has the best already happened. I get that.

But then you have beyond that, the question of are we going into a tightening monetary policy environment when the global economy cannot really handle it. Weakness in China, tensions in China, their currency dropping relative to the dollar to a point that it sort of tweaks the equilibrium of economic stability. We are aware of the tensions that exist in Europe, both political tensions and then the underlying economic disparity in the bond markets evidenced by Italian bond spreads. So those global issues become the prominent story. So I don't want to soft pedal this. I think there are significant sources of volatility in the market. And I think that there are tremendous reasons to be invested in growing growth in U.S.

equities and the productivity story, the productivity thesis that extends the bull market around CapEx, increased innovation, and the productivity that will generate enhanced profits for the corporate sector of the U.S. for another period of time. I'm not going to say a year or two. I kind of think that's about right, but it's not something I'm interested in trying to time. Okay, so that's why markets are tense, and that's why equities are investable, and both those things are true at the same time. Okay, so that's why markets are tense. And that's why equities are investable. And both those things are true at the same time. And then how as an asset allocator, we want to monitor that on the bond and debt and fixed income side of our portfolio. And then on the alternatives,

where we want to be defensive and also opportunistic. I think that's kind of the fun that we're having right now. Hopefully it's fun for us. It may not be fun for all you, but we're going to try to take a lot of that weight off of you. So I got to get going here. I hope this has been helpful and I'm very open to any of your questions. You email us anytime. I'll address anything you want to know. And then next week, we're going to do a fuller recap of this New York week. And I am off and running. Thanks for listening to this week's Dividend Cafe video.

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