The Dividend Cafe - Market Outlook w/ David L. Bahnsen - Conference Call Replay - Oct. 19, 2020

Episode Date: October 19, 2020

We look at the state of the markets with the election a couple weeks away, what we mean by “post-COVID” market realities, and spend time reviewing some of the major takeaways of our recent meetings with New York City portfolio managers. Links mentioned in this episode: DividendCafe.com TheDCToday.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, thank you very much, Erica and Scott. Thanks for joining us once again. I hope that everyone is having a wonderful month of October and looking forward to us kind of getting into the later parts of this fourth quarter. Obviously, we have a pretty big election coming up here two weeks from tomorrow. And then, you know, at that point, we're in the homestretch of this crazy 2020 year. So I'm going to turn it over to our host, Scott Gamm.

I think he has plenty on his plate to kind of grill me on here today. No particular theme around today's call. I think we're going to cover a little bit of everything from COVID to stimulus, to election, to the market, and even the recent portfolio manager meetings that I've had out here in New York City with Brian and Daya from my investment team. So without further ado, Scott, welcome back with us and fire away. Well, David, thank you so much. Great to be with you as always. And yes,

hard to believe two weeks to go until the election. And, you know, when we spoke, you know, a couple of times ago, we did a whole hour on the election. So we'll still talk about that. And then obviously, David, I think we want to get into some of the takeaways that you had from your time in New York last week, meeting with portfolio managers. And I'm sure you gained a lot of intelligence in terms of what they're thinking. And obviously, we'd love to hear about that as well. But I think, as we always do with these calls, just starting off with your general temperature of the markets right now. Obviously, we're down today. But just generally speaking, what do you make of some of the levels we're seeing in the major indices?

Generally speaking, what do you make of some of the levels we're seeing in the major indices? Well, I think that it's going to be very surprising to me if we don't have a lot of volatility over the next couple of weeks. And that would be true in any period of an election year. And volatility does not mean only downward. And it's important that people have a refresher in the vocabulary of that word, because a lot of people expect volatility to only mean to the downside. And in fact, there's been more upside than downside volatility lately. We're sitting here with the S&P on a down day above 34,450. And that's what the S&P down about 30

points today. So we entered today with the S&P very close to 3,500. And that number, the reason I bring it up, and I'm more accustomed to speaking about the Dow than the S&P because I think the Dow is such a better representation of the broad nature of the US equity markets, and the fact that the S&P finds itself in its most distorted place as a cap-weighted index. I think it's been in history, including 1999, where such a small amount of names are so representative of what the overall index will do. And in fact, I have a chart that will be in the DC Today, our kind of daily market recap bulletin, which if you're not receiving, I think you should sign up for.

But I have a chart in DC Today this afternoon that really alludes to the just kind of silliness of the weighting within the S&P right now. Well, the reason I bring up the S&P, Scott, and this 3450 range it's sitting in right now is in the midst of the COVID hysteria, and as the S&P was working its way down to the 2000 spot back in March, having given up over 1,000 points. And it was eventually a 36% drop in that month, that 31-day period from late February to late March. I remember reading a report from an analyst at, I believe it was JP Morgan at the time, who was predicting that the economic

recovery was going to be so vibrant that we would be back to a 3,400 S&P by the end of the first quarter of 2021. I remember me thinking that they were really making a very bold call in their optimism for that recovery. And it wasn't that I agreed with it or disagreed with it, but I was just somewhat struck by its boldness. I can assure you that Wall Street sell-side analysts are not known for their boldness very often. And yet, here we are, really having forwarded around at 3,500 S&P at the very early part of the fourth quarter, not the late part of the first quarter. So they undershot the goal, and they did so six months later than it would prove to be. So it's hard for me to be taken aback by days where the market on the Dow is down 100,

200 points like today. In any normal election period, you generally get some volatility in the couple weeks before. This is not normal. I think that there should be an enhanced level of volatility. And yet, the fact of the matter is that first couple weeks of October, even after some of the technology-driven problems in the market in September, that really October has already been a pretty big move higher. And now we go into the final couple of weeks. And I just think investors should be prepared for up days of a few hundred points and down

days of a few hundred points. But and again, I'll turn the mic back over to you. As I remind readers in DC today, this afternoon, today is a 33-year anniversary of Black Monday. And so we are talking about a Dow that 33 years ago today was 1 16th, the price level that it is now, and in one day dropped over 22%. And in both of those factoids, we capture the lion's share of what people need to understand about being an equity investor, that very violent and painful and sudden moves are part of the DNA of stock investing, as we saw in multiple days during the COVID panic of March,

Black Monday 33 years ago, and of course, in between the financial crisis and multiple event-driven moments along the way, markets can have very, very violent slrooms down. And yet, the trajectory of where earnings and corporate innovation goes speaks for itself. So that's the period in which we find ourselves now, Scott. And some striking similarities, David, between the current market crises that we face, like the ones we faced in March and the one 33 years ago today, right? The Fed had to step in essentially a few days, a few weeks after the 1987 crash and kind of assure markets. So here we are 33 days later and 33 years later, and the Fed

is still involved, so to speak, in assuring markets that things will be OK. Yeah. And if you think about it, it actually is a story of just how much that needle has moved, because it is true. A very newly appointed Fed chairman by the name of Alan Greenspan, after Black Monday, was on the phone trying to calm markets, was trying to assure through the press that there would be ample liquidity. He opened up swap lines with foreign central banks. But that was about it. There was no 0% interest rate after Black Monday. As a matter of fact, I think the Fed funds rate was about 5%. And that was considered the emergency level. There was no such thing as quantitative easing. And there were no central banks anywhere

in the world trading at negative interest rates. They weren't even near the zero bound, let alone in negative territory, where about $15 trillion worldwide finds itself now. So yeah, the intervention of central banks into coddling risk assets has evolved quite a great deal over the last 33 years. And where we find ourselves now is a position where all of the major central banks around the world are heavily involved in their capital markets. And when we just isolated to the Fed, we now have a balance sheet that is over $7 trillion. And they had gotten as high as about $4.5 trillion years after the financial crisis,

after three rounds of quantitative easing that collectively added near $4 trillion to the balance sheet. And they were working their way back down. And they had gotten to just south of $4 trillion. They had given indication to capital markets that they wanted to get it down near maybe the $3 trillion mark. And yet, here we are now above $7 trillion. So this market is certainly heavily supported by a very accommodative central bank.

You know, David, we talked earlier about kind of what you're expecting in the market leading up to the election, more volatility. I'm curious your thoughts on sort of what to expect in the market after the election. Now, obviously, there's a lot of ways you could answer this, assuming we know who is going to win and then during the outcome in which we don't know who the winner would be. And I'm just curious about your thoughts on that and what you think the market is telling us right now about what it expects after November 3rd. Well, let me make all of the listeners who are big Trump supporters really mad for a second. On the day after the election, I think the best

outcome for markets would be a Republican Senate win and a Biden victory. And people go, why would the market rather have a Biden victory than Trump victory? But the trick in my answer is I'm saying the day after. And I do believe President Trump can win this election. I think he has a very uphill climb. The betting markets had been all the way to 50-50 at the beginning part of September. As of a week ago, they had blown back out to almost 70-30 in the betting markets in favor of Biden. Now, as we sit here today, they've contracted to about 60-40. Now, that's still pretty overwhelming odds that people are betting on in favor of a Biden victory. But the reason I'm adding this kind of trick dimension is that I don't think that there's a path to Trump winning

where we know the day after the election. It's possible, but I think more than likely, a Trump victory, given his challenges in the national polling and the way the Electoral College works, popular vote versus Electoral College, more than likely, you're talking about close wins that he could get in those same states, Pennsylvania, Michigan, Florida, et cetera, which would mean that it's going to be very unlikely that he secured those on election night, that because of the mail-in balloting, which is going to be very unlikely that he secured those on election night, that because of the mail-in balloting, which is expected to be in between 40% and 50%, that you're probably looking at six to 10 days after the election best case till close states can be called. Well, why would

it be different for Biden? Because if the polling is correct, and if there does end up being a kind of blue wave and a broader margin of victory, if some of the counties that President Trump won in Florida in 2016 are really showing on election night that he's way behind there, then I think you have the possibility of more clarity, wherein in verse, I don't see that as a possibility that there's a broad win or a high margin on election night. OK, so back to your question. My long answer is sort of important, though, because I'm giving a few nuances. I want everyone to understand I'm thinking about these things with a lot of detail and not just in a binary thing of Trump wins versus Biden wins. You know, there's so many possibilities here of how it could go, what the margin could look like, the time taken to obtain clarity in electoral results, and then where those Senate races fit in. The Senate race in Montana seems to be a little more favorable to the Republican right now.

The Senate race in Iowa looks like it's going to be an uphill climb. That's an incumbent Republican, Joni Ernst, there fighting for her re-election. The North Carolina race looked like it was getting away from the incumbent Republican, Tillis, and then a scandal against his challenger, Cunningham, has kind of brought that race back. against his challenger, Cunningham, has kind of brought that race back. The polls indicate that Susan Collins in Maine, who won with 69% of the vote in her last electoral bout, that she faces an uphill climb. And those polls have not worked to her favor recently. And yet many people in Maine tell me that they don't believe it, that they do think she's got a fighter's chance there. So all I can say is that I think it's going to be very unlikely that we

have clarity on the presidential race and the senatorial outcome on the day after the election. I think it's very unlikely. It's certainly possible. And to the extent that the market, back to my kind of cutesy answer about what the market would like the most, the market would love clarity. They'd love to not have a drawn out debate. And yeah, quite frankly, the market would prefer a divided government to all blue wave government where tax raises and a death of filibuster and potential court packing and other things could become more likely. So look, most of the people I talk to that are very confident as to what's going to happen, they are basing their confidence on what they want to happen.

It is kind of human nature. This is sort of sport for a lot of people. I truly believe that the Lakers were going to win the championship this year, but I don't think I believed it just because my assessment of their odds against really good Western Conference playoff teams and a really good Miami Heat team in the finals. I don't think it was just based on me handicapping the Lakers' talent and ability. I think part of it was wishful thinking of being a lifetime Laker fan plays into it. I can confess to my own challenges with objectivity there. I would hope most people

could do the same when they're thinking about the election. The market is the only animal in this race that doesn't suffer from problems of objectivity. The way it is pricing things in and the way it responds is pretty formulaic. It's pretty cold, pretty calculated, and doesn't suffer from its own political wishes or inclinations, all of which are totally respectable and normal from those of us who are just mere human beings. Yeah, well, it's very interesting. And I want to take this a step further and loop in a question that we received from Aaron, who wants to know how he should deploy a lump sum of money that came in from a few maturing CDs and how he should deploy that money into equities all at once or some before the election and some after the election. some before the election and some after the election? No, I would not be deploying it all at once. I think that this is true whether we had an election event or not, but just from a risk management standpoint, you know, the easiest way to answer that question is always to ask

oneself, will you be more upset if you don't deploy all and it goes higher, or if you do deploy all and it goes lower, which one will bother you more? And you have to get past the childishness of saying, ideally, what I want is that if I deploy it all, it all goes up after I deploy it. And if I don't deploy it all, it goes lower so I can buy more. You have to understand that you're making a decision based on not knowing the future, not based on knowing it. Generally speaking, most people would prefer to not deploy all at once and then see markets go lower. They'd prefer to be able to have some dry powder. Now, that is the case, despite the fact that dollar cost averaging probably does cost people money most of the time. But we average, Scott, because we're controlling risk. We're avoiding that particular situation that we don't

want to feel that we've left ourselves with no dry powder and there's a meaningful drawdown in markets. So with an event like the election, and without it, I would be given the same answer, that short of being in a real screaming buy and very compressed, really distressed valuations in the market, I think it generally makes sense to put to work some level of capital you're comfortable with, 10%, 20%, 30%, 40%, 50% at one time, and then tether in the rest in a systematic way thereafter. time and then tether in the rest in a systematic way thereafter. I think that that's a disciplined and thoughtful way to do things, but it has to be driven by one's own comfort level with the potential outcomes.

Okay. And David, I think we'll return to some of the other market topics we had towards the end of the call, but I want to sort of switch and talk specifically about some of the meetings you had in New York last week. Maybe just give us a general recap of what took place, and then we'll go into your takeaways. Yeah, I mean, at the risk of really boring people to death, and I definitely want to be able to make notes available to those who are interested as those all get kind of assembled and curated in the days ahead. But it was a lot of meetings and much more so than normal with more esoteric asset classes, with more niche, with things that are, frankly, a bigger priority as we go forward with our operation Magnify and look to the challenges of deploying client capital in a zero-bound interest rate environment. So there were a lot

of meetings with hedge funds, private equity, with alternative investment platforms, and with some of the more structured credit-oriented managers that are becoming a bigger part of what we're doing in our efforts to diversify and look for good risk-adjusted returns in this environment. We do continue to believe, Scott, that investors who leave their fixed income portfolios as they were, the same weighting and the same composition, probably are making a mistake. That there's at least a need to revisit return expectations, income expectations, risk characteristics, the investor's own risk comfort level in light of all of these circumstances, and then to maybe apply those decisions and all that information into a new context

that might very well represent either a much higher weighting in their what we call boring bonds allocation with very low return, but very low volatility expectations, or a much lower allocation, depending on the investor's specific situation. So out of that driver, the potential increase in private equity, private markets, which could be either equity or debt or even real estate, um, you know, it puts a lot of due diligence burden on an outfit like ours. We do not invest client capital without doing our homework. And a lot of homework is necessary in the, uh, present, you know, state of affairs.

necessary in the present state of affairs. I do think that we have some really good managers that we are talking to, working with, that we've added to our platform, incorporating into our credit portfolio. And I would say that we do have a kind of across-the-board reality that, as I talked about earlier in the call with the S&P 500's recovery, a lot of things that were highly dislocated March, April, it isn't just that they've recovered. They've recovered and then some. And the easy beta has all been made. That applies to structured credit, public equity, and so forth, the easy beta, where things that were just really divorced from reality and recovered to a price that now reflects a greater aspect of

reality. Now it's in the weeds. Now it's up for managers to go create some alpha. And whether it's in short-term fixed income, whether it's in municipals, and certainly in the high-yield credit space of tax-frees, there's a whole asset class there that's very inefficient and really allows for investors to pursue attractive opportunities. It was one of the most meaningful meetings of the week, was in the tax-free, high-yield credit space. of the week was in the tax-free, high-yield credit space. And I also think the same is true in structured credit, that the easy money with asset-backed securities that were trading in very wide credit spreads, those spreads have narrowed a great deal. We've made good money in that opportunistic fixed income space. But now, in the final lap, where is there still more accrual to par to be had in some of the non-agency residential mortgages and some of the credit risk transfers, stuff that is very nuanced, very niche, and by no means easy. So we're looking into some of

those opportunities and reallocating around it. But on a top-down level, as we perform the asset allocation function on behalf of clients, we're revisiting the whole enchilada. And where clients have real juicy cash flow generative investments that are meant to be income enhancers, and they're a client that doesn't need income enhancement, doesn't need take away cash flow, We're trying to eliminate those asset classes and the risks that go with them, but maybe replacing with different risk. We've added a more innovation-oriented growth strategy into our equity portfolio in the growth enhancement sleeve, a manager that we performed excessive due diligence on and really believe in their philosophy of looking out five years for tremendous

returns in some of the new themes of innovation and equity growth. Same thing in small cap and in private equity and in emerging markets. I alluded to this philosophically in Dividend Cafe last Friday, but I want to repeat it in a more transactional way and in a more practical way for people listening to the call right now. We have no interest at all in finding managers that tell us our job is to predict what stock prices are low now that are about to go high. Now, if we thought it could be done, of course, we'd change our mind. If we thought that was a repeatable discipline

and a talent that existed in outer space, we'd love to go monetize that talent. So when I say we're not looking for it, we're not looking for it because we don't believe it exists. And when someone presents their talent or value proposition as being able to do that, we wanna avoid them because we think they don't even know their own talent or what their own objective as professional investors ought to be.

What we are searching for in the equity asset class that could be in third world countries, it could be in private markets, and it could be in small cap equities. And then obviously, in our dividend growth, we're seeking this through companies that have mature cash flow generation. What we're seeking for in these other equity asset classes are people that can find growing companies with growing earning streams that they think can be monetized in a client portfolio. And the stock prices that move around those growing earning streams are not predictable, and they're not guessable, nor should they be.

And so I can't tell you how happy I am to have equity managers that we deal with that are experts in their fields, experts in their niched asset classes that are applying that same philosophy of not trying to predict the unpredictable, but trying to do the heavy work and research around that, which we believe is academically and financially and economically discernible. And so that was a big takeaway last week to just really find ourselves in a sort of alignment with the managers we need to be aligned with. And I'd even apply the same thing in the fixed income world. People that have made a career out of predicting what interest rates are going to do, they're in a tough bind right now, unless they think they're going to add value by predicting when

the 10-year goes from 75 to 85 basis points. That's not much of a move. It's not going to make a career. Whereas predicting 6% that drops to 2%, that was quite a movement. We're in a different space now. There's less on the line for forecasting interest rates. Where there is tremendous need for human talent is in the structured credit space where there's real risk. There's real economic fundamentals around home ownership, around real estate prices, around the realities of forbearance. In the CMBS space, commercial mortgage, tremendous talent needed to understand the credit risk

of a lot of these, and where some things are being dislocated and mismarked, and others have true fundamental challenges that could even get written down to zero. We take this stuff seriously. I think we're doing a good job selecting the right managers and then allocating the right weightings of these different sleeves of a portfolio into our client accounts. Yeah, no, it's pretty incredible. And it's important to hear those views and kind of juxtapose them with your own. Is there anything that you would change in your outlook after participating last week? Is there anything that you might now be doing differently in some of the strategies that you're implementing for clients? Yeah, there's a couple of things. I think, let me start with the structured credit argument.

I had believed well into the summer that most of the easy beta in equities and other asset classes, high yield and corporate credit was a great example. Those things got blown up in March, and they recovered throughout April, May, June, recovered really well, recovered as we forecasted they would. And yet, the easiest parts, I think, were largely done pretty quickly. And my argument was structured credit was different. There was still a pretty significant dislocation with asset-backed securities, pools of securitized debt that was linked to credit cards or student loans or auto loans. That ABS market was still very dislocated. The residential mortgage market still had a lot of questions around what the forbearance was going to look like and how many consumers in the midst of a COVID

lockdown recession were going to continue to perform in their mortgages. And so those things continue to trade at distress. And I don't think they are anymore. I think that the easy money of structured credit has been made. And this was a key takeaway for me last week. I think there's still a ton of money to be made in structured credit. But I don't think it's going to be easy variety, where the whole beta of the asset class sees spread tightening that brings prices up higher. I think now it's going to take more discernment and more bottom-up analysis, more research, more credit fundamentals. And so we want to be aligned with those managers that can deliver that research-driven alpha.

I think in private equity, there really is a wonderful opportunity as the COVID moment creates both sociologically a certain degree of sellers that may not have been sellers before. I think that the COVID moment does push some equity investors to look into private markets and the benefits of illiquidity versus the transparency of market-to-market realities and how sometimes difficult it can be to have your price movement tethered to the behavior of other people. They may have very different goals than you do, which is certainly the reality that mutual fund and index-like investors live with daily.

And so we think that we found some really interesting private equity possibilities for appropriate investors as we go into the later part of the year. And one of the things that stuck out to me, this trip, Scott, so different from 2008 going into 2009, is that most private equity investors in 2009 were not willing to jump in. They waited until later vintages because of concerns about the market, concerns about the economy, concerns about liquidity.

of concerns about the market, concerns about the economy, concerns about liquidity. And sure enough, they ended up investing in 2011, 2012, 2013 in vintages that did fine, but did not deliver anywhere near the returns that those immediate post-crisis years did. Capital that was being deployed in 2009, 2010, delivered over the next five to seven years, five to nine years, really much more attractive returns than the later vintages. I think that there's a lot of really savvy investors right now, and hopefully, we're one of them because I can tell you this is exactly how I feel, that are not going to let that happen to them this time. They're not going to wait for the whole private equity space to feel better three or four

years later and then get somewhat muted returns relative to what might be available now. So there's a lot of appetite and a lot of liquidity and demand right now. And I think that that's probably a good sign, to be honest with you. So it sounds like what I'm hearing is there are still deals to be found, even though this was a pretty short crisis with a swift recovery, at least in the stock market. And I know the stock market is not necessarily representative of other asset classes. representative of other asset classes. But maybe just compare the speed of the decline in the recovery now versus 08, 09, which was a little bit slower. Yeah, I think that coming out of 08, you really did have a very fundamental, a very deteriorative effect in capital markets and a lot of questions as to what the future of credit was going to look like.

You did have an incredibly aggressive Fed, but the Fed was having to go pretty slow because it was first time for them as well. So a lot of what the Fed has done this time with unlimited QE, with these various special purpose vehicles into commercial paper, into corporate credit, into high yield, into asset-backed securities with this TALF 2.0 facility. The dollar swap lines they created with central banks of other foreign countries, they didn't have to slow walk this. it has created a different environment, not to mention we entered 08 with a battered and bruised economy that had all kinds of froth to let out of it from the housing bubble. And we entered COVID with a really healthy economy, very low structural unemployment

and wages that had been rising and balance sheets that had been rising, and balance sheets that had been delivered, particularly for households. And so thank God that one of the great things we're seeing in the housing market that's so different now versus 12 years ago is just simply the reality of what a lot of equity means in an asset class. The ability of people to faithfully make a payment when they have 20%, 25%, 30% equity in the underlying asset is just categorically different from when they feel that they don't have any equity or upside down equity. The incentive to continue performing on that loan changes. So these are some really paradigmatic differences between right now and where we were post-GFC. But I also will say that the investor

psychology is more opportunistic. There's less fear and more greed right now than there was in 2009. Early 2009, I just don't think people were ready to put the greed hat back on. And a lot of people right now have the greed hat on. So that's both a good thing and a bad thing. It's good that it has shortened the cycle of the pain. But it's bad in that there isn't as much opportunity as there otherwise would be. That's where you really then have to invest, where there's talent, where there's diligence. Everyone loves the beta trade. And what I mean by that is the easy money, where all you have to do is go buy something. And the laws of economics, as either spreads compress or PEs expand, it brings up everything, that rising tide, lifting all the boats and whatever that thing was, generally equity indexes, but it could be anything else. Right now, it's definitely more

selection driven. And we can see that there's plenty of things that have not participated to the same degree in market recovery. And I think some good money stands to be made for investors that are willing to go against the trend of momentum and popularity. Yeah, well said. It's interesting just to kind of get your take on the current crisis versus the one we saw 12 years ago. And you wrote extensively about that in last Friday's Dividend Cafe. And David, before we move on to some of the more market topics, what were people saying last week just about being back in the city, being back in their office? Give us your kind of brief temperature there. I know that's not exactly market focused, but I think it's worth the audience hearing that side of this as well.

Yeah, I think that you can learn a lot about the culture of some of the firms and the mentality. I'm doing my best to have a lot of grace and a lot of empathy for people who have a different psychology on some of these things or have liability concerns and things like that. But it's amazing being here in New York. The city, like on Upper West Side on Saturday, there's nobody that would tell any difference at all between the current New York and pre-COVID. I mean, the restaurants are crowded. The streets are crowded. There's a lot of activity. It was a beautiful day weather-wise. And yet, in midtown Manhattan in the middle of the week, where the offices and skyscrapers are,

they think they're back to somewhere between 15% and 20% capacity, which is a lot better than the 3% we were at when I reopened my office back in July. So we had meetings with money managers last week that it was their first meeting back in the office since March. We had actually quite a few of those. We had meetings with tons of managers that said they were so grateful that we dragged them in the city and that they were putting on their suit and going to a restaurant or going to a conference room or what have you and meeting. I think there is that big appetite for people to kind of be grownups again, get back to work. In Manhattan, the positivity rate on COVID continues to be almost nil. Schools have largely reopened. So apart from my own personal opinion that these asset managers have a moral obligation to get back into normalcy and support the economic infrastructure of the city and the businesses around them.

I also just think there is something to be said for those companies that have the will and the gumption and the kind of cultural inclination to engage in normalcy. It's a self-fulfilling prophecy. And so there were some managers we met with, I won't say the name, but a particular structured credit hedge fund that we met with that had 50 employees in their business, and all 50 were back at work in their office off of Madison Avenue. And I got to tell you, I loved it. I loved seeing that energy. I loved seeing their trading floor. And we need more companies doing the same thing. So everyone has different parameters, different dynamic with their employees, different regular, whatever. I guess my feeling is that I want to do business with people that want to do business.

And it is time to wisely, safely, diligently pursue the health of our community, which is both a medical term and an economic term. Yeah. And David, as we kind of shift back into market topics, as we get closer to the end of our discussion here, I'm almost a little bit worried about asking this, but is it too early to be thinking or kind of trying to handicap what's going to happen to the markets in 2021, going to happen to the markets in 2021, given how we have such a big near-term event via the election? Or is that a wise thing to be doing? Is that a reasonable thing to be doing right now? Well, it's always a reasonable thing to be doing, and the markets are doing it. But would I say that one could formulate right now a real high conviction call on what the S&P will do from January 1 to December 31 of next year when we have the lion's share of the fourth quarter still in front of us?

Probably not. I think that we'll be able to have a better forecast of what 2021's outlook is when we see where 2020 ends. But aside from the earnings results that are to come in the next couple of weeks from the third quarter results, most of which are going better than expected, what I think people can safely assume is even if we don't get a stimulus deal here in 2020, it is very, very likely that regardless of who wins the election, there will end up being one in 2021.

And I think that would have both some good and bad associated with it. But the notion that the primary driver of markets throughout 2021 will be something related to fiscal stimulus, I think is very naive. My take for 2021 is that you will see a pricing true-up, where things that are overpriced in a challenging and kind of gyrating economic recovery are likely to have to get re-rated into some more sanguine normalcy. And things that have not been re-rated or have been overly handicapped in their expectations are very likely to participate more robustly. The cyclicals will disproportionately benefit from that

inevitable recovery. So I don't think COVID is going to be the main story of 2021. And I obviously don't think the election will be the main story of 2021. But I do think we'll have an uneven recovery. I think it'll be disproportionate in how it goes. And so for my money, I would believe investors will be wiser, take a more contrarian stance to where we go in 2021. Because I think that a lot of the things that have been driving markets here in the post-COVID recovery of 2020 are likely to change. And you will see a very different leadership group next year. Yeah. And just going back to the expectation of more volatility that you mentioned at the

top of the discussion, we're seeing markets take another leg downward with the Dow now down over 300 points. It was down about 150 points when we started speaking. So markets are listening to you, David. Yeah. Yeah, I think that you get right now the NASDAQ, S&P, and Dow all down about the same on a percentage basis. You get kind of a little general risk-off correlation. And you may have more days like this up until the election. But the reality is that we primarily had quite a breakup in correlation across the major market indices, an awful lot of days since early September, where the Dow did just fine

and the NASDAQ got hit hard, or other days where the Dow was maybe down a little or not up much, but the NASDAQ rallied a lot. So if you get some sort of normalcy where whether it's up or down, the markets are performing together, I think that will speak to a mean reversion that is building up in markets and is, very overdue. But yeah, with only 15 days till the election, I would just set your expectation around the idea that anything could go over the next couple of weeks. And then once we get that greater clarity, even if it's not all the news the market wants, the ability of markets to price in quickly, bad news that is at least certain and over with, it's quite a clear testimony of history. Yeah. And hard to believe, but one more debate to go

until the election. The one presidential debate and the one vice presidential debate in the town halls last week didn't really have much of a market impact, right, would you say? And is that customary? And would you expect anything different after Thursday, assuming this week's debate proceeds as normal? Yeah, I really don't know what to expect. I think that the I would not expect a huge market impact. I possibly am naive about this because myself being a lifetime political junkie, I'm always just shocked to hear that there's such thing as undecided voters. You know, I think in my circles, whether it's with, you-oriented friends or right-oriented friends, I have very few friends who don't know what they think and what they believe and how they plan to vote. And so for a debate to really move the needle implies there's a lot of undecideds.

And we've had elections where there's been a lot of undecideds, generally more moderate or independent type centrist wing of voters. It doesn't seem that this particular election has lent itself to a lot of folks in the middle, but you never know. I wouldn't expect a big market change, but it's possible you could get a change in the momentum or trajectory of the race itself. But overall, I think there's a couple of things that could be very bullish for markets relative to other outcomes. The outcome of a four-week, six-week

uncertain outcome post-November 3rd is a very bearish thing in the short term for markets. And if there is any event that eliminates that, that really produces a clearer and more accelerated outcome, it's probably bullish for markets. And then again, on that Senate side, if there were to be a situation where it's not blue wave, but perhaps more divided, I do think markets would respond very favorably to that. It would take out a certain tail risk in the presidential change if that were to happen. But again, all of this is speculation until we get there. Well, and to your point, David, obviously, speculation, but we have a good amount of early voting going on right now. It probably doesn't

have much of a market impact, but maybe just something for investors to think about. Any investors following the betting markets, things like that, trying to read the tea leaves as to what it means or how to get an edge on what the result might be. Well, yeah, I mean, Florida is just beginning their early voting today. And some states have already had early voting going on. Again, the expectations, and I don't really know what this is all based on, but the expectations are that it will be between 40 and 50 percent of people that vote by mail or early. And so that's very different than what we've had in times past. But being able to handicap what that means to the outcome

is beyond me or my ability. And even for those who say they have that ability, I won't be able to take it seriously because I won't have any way to verify that they're right. None of us are going to know until we know. Yeah, it'll be very

interesting two weeks. And our next call may very well be on the eve of the election. So we'll look forward to seeing how the next couple of weeks turn out before the big day on November 3rd. But David, I think that's a good place for us to leave our conversation for today. And thank you for your insights as always. It's always great to be with you. And I'll toss it back to you for any final words. Well, thanks again, Scott, for doing this and for driving the conversation. And certainly any of you listening to the call, reach out to us if you have any more questions.

I'm very happy to interact with you more on any of the moving parts that we kind of discussed here in today's call. So Erica, with that, I'll turn it back over to you. And I actually believe that our next call we're going to end up doing the week after the election. We normally would be scheduled for Monday, November the 2nd, We normally would be scheduled for Monday, November the 2nd. But because that is a day that I'll be flying from New York to California, I believe that we are going to end up moving it to the 9th. You'll get an email announcement as to the specifics of when our next call is. And who knows, we could even end up doing a special call somewhere along the way.

Maybe we even do one after the election. So, you know, feel free to email us if you have any special wishes there, but we'll have to get back to you as we firm up those plans. Erica, I'll let you take us home. Thank you, gentlemen. This concludes today's conference call. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory

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