The Dividend Cafe - Market Outlook w/ David L. Bahnsen - Zoom Replay - February 8, 2021

Episode Date: February 8, 2021

Your hosts David L. Bahnsen and Scott Gamm tackle the important finance and economic news of the day. 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. Okay, thanks. Thanks, Erica. I think we're all good to go here. And thank you everyone for joining us. And congratulations to all of you in the city of Tampa Bay. So I just want to kick it over to Scott Gamm. I think we'll be kind of a normal length today. I don't think it'll be extra short, but probably not particularly long. There's a handful of things we want to be able to go through and kind of stay up to date on in these communications. So with that, I'll turn it over to my co-host, Scott Gamm,

who will drive for us today. All right, David, always happy to do it and great to be with you as always. And, you know, lots to talk about in the markets. We've got stocks up, a yield curve steepening, oil prices up. So, you know, like we usually do, just want to start off with your broader temperature on where things stand right now when you look at the broader markets and then when you look under the hood as well. Yeah, it really is an odd market right now. And actually, I'll even kind of pull up where we are intraday because you and I are no strangers to having kind of triple digit moves on the days that we do this. And the markets are making some new all-time highs as we speak across the major indices. And I think it's a surprise to a lot of people. Now, interestingly,

the market did have a bit of a sell-off. Its first sort of downside volatility of any note at all in about almost three months, really from the end of October into the very end of January. And then coming out of the last couple of days of January, it's really recovered all that and then some. And so it's difficult to sort of pick what macro theme and what market sensitive theme you think is most relevant. Because of course, the most common question that a lot of the investors listening to the call right now want to know is, well, how long do you think this can keep going? And that's a really difficult question to answer. But I do think the clients of the Bonson Group are blessed in this sense that we don't try to answer. Like there's nothing worse than people

that try to answer that question because they're making an answer up out of thin air, which I consider to be not just an inaccurate or a, you know, potentially fallacious method of investing capital. I consider it to be inherently dishonest, you know, just even pretending one may have the answer. The reality is that if I was just answering around feel, which isn't really all that helpful to anybody, the feel for a lot of people could have been that the markets were going to top out quite some time ago. And so the idea of sort of being able to time when things will kind of level off, I don't think is the real important thing to get to. The important thing to get to is this, markets will correct. They will end up going until they want to kind of slow down a bit,

and there will need to be some form of correction. And that correction will either be because of a catalyst, a news-oriented event that kind of puts a little shock into the markets and the higher things are in valuation at the time, the quicker the correction will be because there won't be that margin for error. And then there may not be a catalyst. There may just simply be a kind of end of oxygen in the exhale. The markets just sort of kind of run out of that steam and end up needing to recalibrate to some degree on a technical basis. That happens all the time. These things are all very normal. And I can't speak for every investor out there, but for the investors of the Bonson Group, it just simply isn't part of our investment policy or our investment methodology or strategy. The manner in which returns will be generated do not come from being able to get in and out at highs and lows.

so we're a little less sensitive to that right now but i would say we're probably in heightened sensitivity around where there may still be some deeper values things that might still be somewhat disconnected from from price and i'm happy to talk about where some of those things may be because there's less of them than we used to be you know i used to have up on my screen all of the my screen shows shows today's price and the volume and all the normal metrics. It'll show the year-to-date movement and then the 12-month movement. And for the longest time, even as things have gotten better and better, there was still a 12-month backward look that had an awful lot of opportunities in various aspects of the equity markets. There's a lot less things right now that show as washed out

from where they were 12 months ago. So we're sensitive around that. And I think probably, Scott, you could guide me into some specifics that maybe we want to cover because I'll just sit here and talk the rest of the time. Well, no, I'd say a couple of things.

One, let's talk about earnings, especially some of the beats we've seen in the financial sector. And then two, maybe we can shift to the surge in oil prices. And then finally, I think we should acknowledge some of the heavily shorted stocks that had been getting a lot of attention. We won't mention specific names,

but I think everyone knows what we're talking about. Yeah, I would imagine they do. And if anyone doesn't, I just want to congratulate them because they've avoided some just, I don't know, bizarre types of things out there. Look, it's funny, if you don't know what he's talking about like the names of the companies and the sort the story that it captured a lot not just of the financial news cycle but the total news cycle over the last couple weeks particularly two weeks ago then it's almost sort of like in my living room last night where i had never heard of or at least didn't know that I had ever heard of the halftime performer at the Superbowl. Like sometimes you're just better off not knowing things, I guess. And I find that happening in pop culture more and more as I get older and significantly less

cooler. And I already started off at a vantage point of being incredibly uncool. And it's just accelerating at this point. The thing where you refer to with the shorting stock stuff, let me just start there to kind of get that done. It was a newsworthy story. I don't want to belittle it. And there were some interesting takeaways from it, but they're takeaways around excess and around human nature. And so what you got was just a total illustration of the insanity that takes place from one side of greed. And then you got an illustration of what takes place, insanity, what takes place from another side of greed. I don't mean greed as in those aspiring for investment returns, because I'm not critical of that. And that also isn't greed.

And that also isn't greed. I'm referring to those that are willing to be irrational and illogical and excessive in risk and thoughtless about risk in their pursuit of of news event to which you refer. And I think it's mostly in the rear of your mirror at this point. There's some things that will still get talked about. It probably isn't everyone's best interest if Congress and the regulators and all those people just sort of flex and grandstand, which they're super good at doing and don't really do anything else. Cause I don't know really what can be done or should be done that wouldn't end up being perhaps more detrimental. So, yeah, I think that we, you know, are somewhat immune to those types of things. And,

and actually I saw a question I imagine you're going to get to later. I did see a question that came up about the Bonson Group's use of alternatives. And if there's anything in particular about some of the short selling side, I want to be able to talk about those two things. I want to talk about that in two different ways, because first of all, I do not, um, I believe that there's a certain lesson out of this on the short selling that is completely different from the broader application of where we use alternatives in the Bonson Group. Like I would never want to be invested with a hedge fund or an alternative strategy that was short 140% of the float of a given stock. I do think that some hedge funders are psychopaths, but they don't usually get through my due diligence process. And if I mean psychopath in a complimentary way, which most people usually don't. You can write that down if you want. I mean it only

as a euphemism for someone who has this incredibly laser-focused process and competitiveness and whatnot. Not that they are being utterly reckless with the ABCs of risk management. So our view of the use of alternatives is completely separated from a couple isolated hedge funds just acting, you know, like I said, like psychopaths. But later on in our conversation, I'll come back to where I think alternatives still have a great utility in the present environment, as strong of a usefulness in our process as they've ever had. But we'll talk more about that later. I think, Scott, you had parts to your question before we got into that short selling drama and story, and I got sort of distracted. So maybe bring me back to center here. Well, sounds good. And I think we'll leave that part of our conversation there, you know, as this story continues. But yeah, David, to your point, the other things we wanted to discuss were some of the earnings we've been seeing over the past couple weeks, particularly the beats in the financial sector. on these calls for quite some time. That's a core holding or area of the stocks you hold for clients. And I'm curious about your reaction to oil being back above $60 a barrel.

Yeah, I'm pretty blown away by the speed of it. I'm not blown away by it happening. I always believed it was obviously inevitable that supply and demand forces would have to kind of do what they do. But I think that pricing, the demand has not come back enough to single handedly warrant $60 oil, although I certainly think it's going to. And I certainly think prices do discount future, not present. And I certainly think prices do discount future, not present. But what's happened is that the greater than expected acceleration has not been on the demand side, but it's been on the reduced supply side. And it's a byproduct of the complexity of producing oil. First of all, Saudi, whether they're up to no beyond what would have been expected and has been mathematically

expected in their OPEC plus deal to decrease supply, bring back supply demand into balance. And they've cut production in excess of a million barrels a day beyond what was expected of them in this accord with the OPEC plus nations. And so I think that these, you have both factors that affect price, supply and demand, both working together to push oil prices higher. But see the other piece to it, I've written about this a little in the DC today, and I really think it's important for people to understand this is not a situation where, well, you get supply low enough to let prices come back to provide that incentive to produce again. So then you can put supply back on when the margins are there because prices have recovered. And you think of it almost like the way you might with a bread line or manufacturing

a widget. There's that sort of dynamic and that tension in supply and demand with a lot of consumable items and a lot of individual products that play a part of a manufacturing assembly line does not work that way with crude oil. You cannot just flick the switch. Sometimes you want to use your pool and and and it's gotten cool and because you weren't heating it and you say okay well now i'm ready to use it i want to turn the heater back on but the pool might take a long time to heat up i just made that analogy up right now so i have to think about if i like it or not the problem is that with all of the rigs that have been taken offline and i'm only referring right now to u.s production to get all of the rigs that have been taken offline, and I'm only referring right now to US

production, to get all of these wells activated and get yield out of those efforts in the EMP side of things, it will take a very long time. And so they cannot just instantly ramp up production. And so that lag effect between supply and demand is a problem. You could end up getting really high prices in oil, but not for the right reason, not because there's so much economic growth and so much demand resurgence that then all of a sudden everyone's coming back online, pushing prices higher. It may just be that we have a legitimate supply shortage. And this is why I'm always beating the drum about the need for energy infrastructure investment and why I want to be levered to that energy infrastructure investment. Because I think

when people look at the current events, like you go back to March and April of last year, and we remember that ridiculous day where there was so much excess oil and the forward contract was expiring and people are having to pay money to offload storage. So effectively looking like a cosmetic negative oil price for a day. And then now you look forward and you see the stockpiles are declining. I have a chart in DC today showing this. All of the supply and demand factors are headed in the right direction. But I don't think that they can possibly get there quickly enough. Because of that sort of back to my analogy of the timing of the heated pool,

the pool is going to be needed well before it's heated up. And that's the problem on the supply side for US producers. And so these are tricky things and they become all the trickier when it is such a geopolitical story and international story. But ultimately, I don't think we're going to be swimming in the world of $30 oil again. I think that right now they're hoping to avoid $80 oil. that right now they're hoping to avoid $80 oil. And in terms of the regulation aspect, right, I think I've heard you say in some of these previous calls that some of the larger EMPs out there may actually benefit from more regulation under the Biden administration.

Yeah, I don't think that's the intention of the Biden administration, but I most certainly think that's the effect. A lot of that is just a kind of macroeconomic principle. I was brought up under a little rule of thumb that regulation is a subsidy. And what that means is that regulation, which sometimes can be really needed, sometimes may not be as advisable, but that's not the point. Whether one likes the regulation or not, whoever is being regulated, the smaller companies in the pool of regulated companies are hurt more by it. And therefore, the regulation becomes a subsidy to the bigger companies, because they have more means with which to deal with the regulation. And by means, I do mean financial

resources. But out of that is the tax and the legal and the consultants and the lobbyists. and the lobbyist. And also the regulation as a cost is a smaller percentage to whatever it is for a larger body than it is to a smaller body. And so that impact it has to smaller bodies, which also, by the way, generally are more levered. They usually have more debt on their balance sheet, it can create a spiral effect where it really can put the smaller players out of business and allow for an increase in market share. The greatest example is post-financial crisis in the financial sector. There's just simply no debate that all of the large banks have gotten much larger and picked up significant amounts of market share and done so at the expense of a lot of the smaller and regional banks. And so I do see a lot of that likely playing out in the energy sector. But the specifics of what regulations are coming in the energy sector are difficult to pinpoint right now.

You've got a couple of executive orders that some of which are not immediately enforceable, some of which were a little bit more headline oriented than substance oriented. But we know that there is a broad based bias towards a higher regulation of the fossil fuel industry in the new administration. And that there was a broad based bias against higher regulation in the fossil fuel industry in the new administration, and that there was a broad-based bias against higher regulation in the fossil fuel industry in the prior administration. And so there is some lag effect as to when some of the prior deregulatory efforts can kind of go away in favor of new re-regulatory efforts. And I just don't think these things happen instantly, and it's not so easy to price it into equity markets.

David, let's also talk about stimulus. What are your expectations for the potential of more fiscal stimulus coming and what that means for not just the economy, but the stock market as well? Yeah, I certainly expect that at this point, we know that a stimulus bill is going to not only come, but will get passed. We've kind of always known that. And we now know that it does appear that they're going to go through with budget reconciliation as a means of getting it done, which is a procedural issue that will allow them to pass it with only 50 votes, as opposed to needing a filibuster-proof 60 votes. The catch to that is the only things that will be eligible to do this through budget reconciliation are things that are specific to a budget.

So revenue items such as tax rates and then expenditure items that are a matter of government spending from their actual treasury, which is the bulk of what this is. But there are some things that have already have to be crossed out. out. And one of those things that was in the initial bill that now over the weekend, the Biden administration has said, yeah, we're not going to be able to really include it was that $15 an hour federal minimum wage aspect, because it can't go through on a budget reconciliation process. By the way, just from a kind of partisan versus nonpartisan standpoint, I'm not really here to say anything positive or negative about the use of budget reconciliation. I don't really care that the Bush administration used reconciliation, the Obama administration used it, the Trump administration used it. This goes back for decades. So this isn't like, oh, it was a bad thing to use or a good thing to

use. It's just what every party does when they're able to do it to some degree. The only noteworthy thing about it politically is I do think there are 10 senators, Republican, that would have voted yes, probably much more than 10, that would have voted yes on a bill that the Biden administration would have liked a lot. And so that would have given this opportunity for this kind of, even if it's somewhat symbolic, a sort of bipartisan bill that would have not had to go through reconciliation. But, you know, that bill may not have had all of the things in it, the bells and whistles that they want. And so that's fine. But the interesting thing, Scott, for those paying attention over the weekend, And the interesting thing, Scott, for those paying attention, over the weekend, it was really kind of Thursday night that the Washington Post ran this story from Larry Summers. It's an op-ed. Larry Summers was the Treasury Secretary at the end of Bill Clinton's presidency.

And he was the National Economic Council director under Barack Obama, who wrote the first stimulus bill that President Obama passed back in 2009. And he's been a kind of, you know, centerpiece as the sort of Democratic Party intellectual heft around economic policy for most of my adult life. You know, he's a neo-Keynesian. He's a significant thinker. There's a lot that he puts out that I happen to disagree with and a lot that I find really invigorating and interesting. And I've had the occasion to sit with him and talk one on one economics on a couple of occasions. And he's a really very interesting guy to engage with.

But he wrote an op ed kind of critical of the bill. And again, on the merits of the policy side, people can agree with some of what he said, disagree. That's actually not why I'm bringing it up. I bring it up because you would think that that could then produce a political environment that forces them to back down a little bit and lower the size of it. And what's interesting is I'm not sure that's what's happening. I know some Republicans have used Summers op-ed suggesting that the bill is too big. It needs to be watered down a little because of its excesses and so forth. Some Republicans have used that over the weekend, but for the most part, it does appear the Biden administration is kind of digging their heels in a little. They've expressed acceptance that there's some legitimate points in Summers

pushback, but that they think they've dealt with those, accounted for them, sort of want to go forward. So on the margin, what I have guessed when the Republican bipartisan effort came out with a $600 billion counter to the Biden proposal, $1.9 trillion, would I have thought we were going to get to $1.2 or $1.3 trillion in the middle there? No, I still thought it was going to favor closer to what the president wants. But then with Summers' article, would I have thought it would have come down a bit? Yes. But now are we talking about it coming down 200 billion or 600 billion? That's a lot of money in between there. And'm not really sure the answer so far the only thing i can tell that looks pretty clear that biden is going to excuse me

president biden is going to have to capitulate on is the aid the income bracket for who gets the the direct payment to taxpayers if you recall they had done uh two thousand dollar payments back in the spring um just to anyone single married under certain income level, and it was up to 200,000 for a married couple. Then they did the $600 one with this $900 billion bill back in December. And now Biden said, I want to do $1,400 more to get up to the $2,000 that had been discussed earlier, up to $300,000 of income for a married couple without any financial hardship or anything. Now the dollar amount starts to tear down, but the point is there's just sort of a direct payment. And it does look like he's not going to be able to get even enough Democrat support at that income level.

They're going to have to teeter that down. But I don't think the fiscal impact of that is more than $100 billion or so. So we're still looking at a pretty sizable package that's probably going to get passed within about a month and get done so through budget reconciliation. And I think there'll be some things in it that are effective and some things even needed. And I do think there'll be some things in it. And I've said this about all the bills that took place with the prior administration as well. I'm not being remotely partisan here. There are some things in it that I think are just completely absurd. Let's also use this as a jumping off point to discuss inflation versus deflation, which was the subject of some of your recent Dividend Cafe commentaries. Curious,

kind of your overall takeaway and what you want people to know about the risks of inflation, especially coming off of all the stimulus that we're expected to get. Yeah, that subject is near and dear to my heart. I did a little two-part dividend cafe on it a few weeks ago. And I really do want people to understand that there is a harmony between the belief that you can and will have inflation for certain periods of time in certain prices, and at the same time believe that the broader secular pressure is disinflationary or deflationary. And that's exactly what my view is.

So the notion that housing prices are inflating or that health care costs have been inflating or that college tuition had been inflating. I think that those were inflationary items, all with some form of subsidy attached to them in the midst of what had primarily been a very low inflation type environment. very low inflation type environment. I don't speak about deflation to suggest that purchasing power goes down over time. What I mean by it is a period in which the bias in the economy as reflected in bond yields becomes the opposite of inflationary, which is disinflationary. And so it plays out more in a low, slow and no growth environment, very similar to what we've seen in Japan for a few decades. And that is a really important thing to understand and how we weight asset classes in a portfolio. how we weight asset classes in a portfolio. Now, the problem that we face right now is it's entirely possible you will get some cyclical inflation in the midst of secular deflation. And what I mean by that is prices that will rise this year out of the big increase in the monetary base, out of a reflation in commodity prices and other things, most of which has already played out. It was not hard to reflate commodity prices off of what took place last spring, but then they had a big rebound higher and you've seen that in lumber, building materials.

Anyone building a house right now with construction prices is well aware of what price inflation they've seen there. And yet the two things that really people have to understand to try to take this kind of subjectivity out of this and also to take the speculation out of it is whether you're using the CPI or the personal consumption expenditures that the Fed uses, you still have some 2% growth in the price level. And I am well aware of the criticisms out there, but yeah, it doesn't factor in this, doesn't factor in that. They're not perfect. None of them are perfect. And the only reason those measures aren't perfect is not conspiratorial or sinister, although some people do believe that. The reason is because it can't be perfect because there is no such thing as an aggregate price level. And I think in Divinity Cafe a couple weeks ago, I talked about this in the context of there being no such thing as an aggregate weather level.

And if there was, if you did actually do the work to take the average temperature across every zip code in the country, it wouldn't be worth exactly nothing because all that matters is the specific impact in your own environment. The same is really true at price level as well. So I guess what I want to get at on this is that bond yields have to move higher for it to matter if people believe that there is inflation. And bond yields are not simply responding to the belief that there isn't inflation. Bond yields are telling you that there isn't inflation. Bond yields are telling you that there isn't inflation. And the bond market is that effective and that powerful of a market signal. And you're talking about many, many trillions of dollars. There are absolute central bank distortions embedded in there. But where monetary policy lies, and has always lied, is on the short end of the curve. What monetary policy cannot do is substantially influence the longer end of the curve and where you would start seeing inflation expectations.

So we look to tip spreads. Inflation expectations are higher than they were a year ago. But a year ago, they were looking at the world ending and now they're not. And so inflation has come up a moderate amount. But fundamentally, my belief is that the massive, excessive amount of debt, both in absolute dollar terms, nominal dollar terms, and as a percentage of GDP has taken away the ability to use deficit spending to grow the economy, that it has had enough diminishing return that you end up getting into this deflationary spiral and you need ongoing low rates to combat what has taken place from having low rates. And that is, to me, the spiral that we're in, in a more broad and secular sense.

So with that dynamic, then, David, what is the sort of investing playbook, right? I guess that might be a good segue into the growth versus value conversation that you've also written a lot about in the Dividend Cafe commentaries? I think that if one believed the tremendous inflationary pressures were coming and we were going to see a 5% yield in the 10-year again, you would really want to be selling with both hands anything you have with high PE ratios and high amount of quote-unquote growth stocks. But see, I don't believe that. Yet I do believe what I think is a pretty logical assumption that is also not quite real bullish on high valuation stocks, which is even though I don't believe those yields are going significantly higher and undermining the

PE ratios of all these high value growth stocks. I also don't believe they're going lower, right? I think a big part of the increase in valuation came from the journey, the journey down of bond yields and valuations going higher. And now we've sort of flatlined in there. And yet I'm predicting that we stay in that flat line. So then what you get is no, you get a real compression of growth. And yet you don't get a skyrocketing reversal either. So that's why I'm not being apocalyptic about it. I'm just simply saying that I think that the dependency on a higher market multiple is one that is kind of run its course and at some point probably results in a repricing of some of those very expensive assets.

Now, the first investment implication, Scott, we have to start with is actually not even in the growth value discussion or any part of equity markets. It is what one does on the bond market side. And this is so much of what we have focused our operation magnify around and so practical to where we are and are not allocating in the fixed income, whether it be credit or what we call boring bonds, just sort of generic high-grade treasury bonds, municipal bonds, investment-grade corporates, is if one believes that those yields are going from 1% to 3%, they probably want to be selling everything. If one believes they're

going from 1% to 0% or to negative 2%, maybe they just want to back up the truck and buy a whole bunch of 10-year bonds at 1%. And if one believes that we're just sort of stuck in that mode, then they have to kind of view it as a sort of no return, but not as a significant imminent risk asset class. Therefore, if that's the conclusion one draws, and I'm in that latter camp, back to the earlier question about alternatives, not in the context of short selling and the recent news hysteria, but I believe that most people's equity allocation was probably already set within a certain bandwidth of nearness to their comfort level. And therefore, if one needs to deliver a return that they're no longer going to get from the fixed income asset class,

it probably suggests some reallocation out of bonds into fixed income, given that inflation deflation dynamic. Let's also, David, just because you brought it up again, the news surrounding short selling, a parallel news story with that has been the surge in cryptocurrencies. And, you know, this morning we got news that a very well-known electric vehicle maker would be purchasing some cryptocurrency. Got a lot of attention. We've been getting some questions about it from people writing in. Somebody wants to know if you think other companies will follow that decision that we saw this morning from the electric vehicle maker

and your just sort of broader thoughts on cryptocurrency. I actually don't, but it is possible. Even in this particular case, they revealed in a regulatory filing that they had put something in between five and seven percent of their massive amount of corporate cash into digital or crypto form. So it was still what seems to be on a headline, a high dollar amount, but as a percentage, it was really quite small. But also just the nature of this company is pretty econoclastic. The CEO likes to troll. He likes to tweet. He likes to mess with people. He has long positions in the digital currencies himself. So it's not illegitimate.

It's not invalid. It is relevant and worth following. But you really got to see a pattern before you can call it a pattern. And we're not there yet. So, yeah, I think that the notion of other companies following suit would be interesting, but it would not change anything fundamental or non-fundamental about the existence. Look, all it's going to take with corporate cash, most companies, and the one we're discussing here right now is not one of them, have very, very specific and tight mandates about what they can do with corporate cash. They're not even allowed to buy high yield bonds with their corporate cash because it undermines the credit characteristics of what

they have to do. And so it's very, very tight what they're required. Well, you're talking about with crypto, an asset class that goes up and down 30% all the time, for let alone 2% to 7%. So I have a hard time believing that will be a particular catalyst just around the normal responsibility mandates of corporate cash stewardship in corporate America. But this company this morning is an exception to the rule. Yeah, well, it's pretty incredible. And also to see the reaction. I mean, you're seeing folks

come out and say that this sort of gives a new case for cryptocurrency, sort of a new layer on the onion, if you will, that was not previously being talked about. Well, and I suppose if the thesis is that there would be a whole lot of increased demand in corporate America for cash reserves to go into a digital form, that it would push the demand higher while supply does not go higher and therefore push the price up. But there's a lot of assumptions in that that are not true. The supply side, for one, there is an infinite amount of these companies that can come online. particular thesis, there's no reason for anyone to be bearish on where the price of these cryptos are going to go because it's so highly speculative. There is not any fundamental way to measure off of a sort of internal rate of return assumption. I think people can make decisions based on what we already know, which is that within a recent 12- month period, it's had a parabolic move higher.

Within a 12 month period that was not too far removed from recent history before that, it had had a, I believe, 80% peak to trough drop. So there's a sort of roller coaster dynamic to it. Right now, it's been on more of the fun part of the roller coaster. It's had the other side as well. And I think it's going to continue to do that for a lot of different reasons. And at some point in the process also get to meet regulators. Well, it's certainly something we'll be watching over the next couple of weeks, couple of months, because I guess as the saying goes, what goes up must come down. But for right now, we're just talking about the first part of that phrase.

David, let's also talk about, and I think we'll keep it very simple, top three things to be concerned about in the markets right now. And it may very well be some of the, you know, quote unquote, euphoria we've been seeing in various stocks right now. And it may very well be some of the, quote unquote, euphoria we've been seeing in various stocks or cryptocurrencies. Yeah, I had made some notes this morning that are going to be in DC today. If we were to get a negative earnings season, that was by negative, I mean, relative to expectations later on into the year, I think that would be really problematic. But the inverse is equally true. And one of the totally underrated realities of what's happening in markets right now,

and we're going to get a whole lot more companies than announced this week, but we are over 50%. I think we were at 57% of the S&P 500 had announced results coming into today. 7% of the S&P 500 had announced results coming into today. And you were at 1.1% revenue growth for this quarter's reported results versus a year ago. And you were at 2.4% earnings growth this quarter for where we were a year ago. And of course, we're still in the middle of a pandemic and significant parts of the economy not even fully reopened. The biggest aspect, though, is not on the margin one and 2% growth in both top line and bottom line versus a year ago. The biggest aspect is what had been

priced into expectations. And the financial sector has outperformed earnings expectations by about 20%. And technology is outperformed by about 18%. Materials, we talked about some price reflation that's gone on, have done similar, I think, high teams relative to expectations on earnings on bottom line profit results. That's a big deal. And it's pretty hard for markets to go down when those kind of upside surprises are coming. But that will be hard to repeat throughout the year. I think that's noteworthy. So when you talk about kind of three things that should be shared, I continue to believe that there is the potential for something with China to surprise global markets. Some sort of negative development in negotiations with the Biden administration and Chinese authorities.

Some sort of economic disappointment that comes from China itself. We know what a large role it plays in global GDP growth. There's some things that linger out there with China. And I don't want to take my eye off of that ball. And then ultimately, I think the third thing I kind of talk about probably too much, and I know some people get annoyed with me about it, but I don't think you can ignore the fact that valuations don't leave a lot of margin for error. It has not mattered this last week, and it did not matter most of January, mattered part of January, but it certainly didn't matter in most of the post-COVID recovery. But at some point, it could matter. And in that environment, I suspect you'll see some repricing of equities. But I also suspect it will not be universal, that it will be more rotational than universal in the way that that impacts markets.

universal in the way that that impacts markets. And right now, when I look at price action, some of the things that were most distressed out of COVID, financials and energy, have really recovered a lot. A lot of things are still doing pretty well, and they had done incredibly well last year, as we know, in technology, consumer discretionary, some high beta sectors. But things that have really continued to kind of hum along and not fully participate on a valuation level and have not generated a whole lot of interest and flows coming in are some of the more boring sectors. I'm not using the word value because that's not really the context that we're talking about. I'm more referring to just the popularity. But I think consumer staples, utilities, some of the REITs, these things still seem to me to be pretty underappreciated from a valuation standpoint. So there's an opportunity for investors to be well positioned for that eventual rotation.

well positioned for that eventual rotation. But regardless of how one wants to be positioned, they shouldn't be unaware that that risk exists around a repricing of high valuation. Well, and we saw a minor pullback in valuations about 10 days ago or so when we saw, I guess, the frenzy around the heavily shorted stocks, I guess, bleed into the broader market. But even that was just a very short-lived minor pullback. Yeah. I mean, if you look just on a market index level, which is easier for me to talk about on this call than individual stocks, year to date, the Dow is only up a little over 2%, and the S&P is only up a little under 4%. It's still pretty good. The NASDAQ is up over 8%.

Small cap is up over 15%, and that's in the first 38 days of the year. But going back 12 months, which includes all of the COVID drop, we're pretty close to where we were at market highs a year ago. I think it was actually right near Valentine's Day weekend a year ago. The NASDAQ's up 47% from a year ago, and the Russell 2000's up 35%. The S&P's up 17%. The S&P is up 17. And so I think you're right that there can be little, you know, that move a couple of weeks back, like the Dow went down 600 points on a Friday or something on a percentage basis. That's really not what I would refer to as what is capable of repricing. When you look at these price levels and whatever earnings have taken place in the time period of that price movement, you've gotten a multiple movement.

And that multiple move has been really, really significant. Far outpaced the movement of the underlying earnings. And that's the area that I would be watching as it pertains to risk around valuation. area that I would be watching as it pertains to risk around valuation. Well, David, we know you're going to have more comments on the markets in today's DC Today. Why don't you give us a little preview of what's to come? Yeah, I do. I think DC Today is a pretty full one.

I had a good amount of time to work on it this morning with some COVID updates and a little more unpacking of some of the public policy environment. Kind of got into some trade deficit economic data because a lot of the sort of annual numbers had come out. And I thought it was important to revisit where we stand there. So I always want to have a little bit of each of the major categories. But today might have a little more than normal there. So at this point, my view on markets is very well known. I just don't deny that there's this

general feeling of things seem to be rather frothy and whatnot. But I am surprised by the people that themselves felt that way like 10,000 points ago, and they're still beating the drum. It usually kind of rotates, right? And I don't know what to say other than market timers just really end up suffering immensely. It's a dangerous game to play. I would love to play it. I really would. I, I, it would make my life a lot easier if, um, I thought it could be played well, but I don't think it can be played well. And, and I think that what really needs to happen is in the context of one's, um, financial situation, it's just very important that the macroeconomic realities,

we talked about bond yields, our role of using alternatives, the income generation, obviously ourselves as dividend growth investors, not only do I feel really good about the price reality of what we're seeing in our stocks right now. But I also feel very good about that embedded income growth. So when the market lets off a little steam or then adds a little steam, those types of things don't affect what we're looking to do on behalf of clients. It just couldn't. And so we're pretty disciplined around our process. And I'm always happy to elaborate more on what that looks like. So I'll let us close out here.

Scott, thanks so much for all your very thoughtful questions today. And I know we ended up going a little longer than I had said, but hopefully you all got something out of it. Erica, why don't you go ahead and dismiss us and we'll look to come back to you all in two weeks. us and we'll look to come back to you all in two weeks. Thank you. for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary and does not constitute investment advice. The Bonser Group and Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data

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