The Dividend Cafe - Market Outlook w/ David L. Bahnsen - Zoom Replay - Nov 30, 2020

Episode Date: November 30, 2020

David L. Bahnsen with Scott Gamm - Market Outlook National Video Call 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. Welcome to the Bonson Group's national video call, Market Outlook with David L. Bonson, November 30, 2020. Our host for today's call is David Bonson, the Bonson Group's founder, managing partner, and chief investment officer, and Scott Gamm of Strategy Voice Communications. For this call, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. Please send your questions for that Q&A session to questions at thebonsongroup.com. I will now turn the call over to your hosts. Gentlemen, you may begin.

I will now turn the call over to your hosts. Gentlemen, you may begin. Thanks, Erica. And thank you to all of you who may have noticed that she just said our questions, our incoming questions email is in fact changed, as we have promised at our last couple of calls. So questions at thebonsongroup.com. Send anything off real time. And we have people that are going to get it to Scott so we can adjust your question in the middle of the call. The reason I laugh about it a little bit is that we've been using the COVID at thebonsongroup.com email for so long and we had decided we wanted to kind of move past it and use a broader type question. So let's go ahead and tee it up here. Scott, I hope you had a wonderful Thanksgiving weekend. Thank you as always for joining us and tell me what we're going to talk about here today. Well, David, thank you. And likewise, hope you had a great holiday weekend as well. And I think it's interesting, David, of course, the last day of November, last trading session of November for a month that is on track to be, I believe, the best month for the market since 1987. Is that statistic right?

It's been pretty incredible. We had a sell off in late October, obviously the election. So maybe just, you know, characterize kind of your thoughts on where we stand right now, especially given what we've seen over the past month. Yes. And of course, in my business, we adopt far too many superstitious things than is good for us or can be rationally defended by intelligent people. But it's a little dangerous talking about this with two hours to go in the trading day. But you're right, it is on track as we sat now. And that's even with us down a few hundred points here today. You did mention the late October sell-off and a lot of that

November run is a byproduct of the just coincidence of timing that October ended on a big sell-off, November started into a big rally. And then until today, but I mean, even with last week's market action, it's been a very robust month in the markets, but that's really not the story. The S&P has had bigger months. The NASDAQ has had many bigger months and in fact this is going to be the biggest outperformance of the year of the Dow over the S&P and over the the NASDAQ so essentially that's a way of saying that even though technology has actually done okay this month, technology is, in fact, the laggard on a relative basis. And we certainly have not been able to say that for quite some time. So that's been the story in the markets in November has been some degree of a sort of

catch up of some of the underperforming sectors relative to the outperforming sectors. the underperforming sectors relative to the outperforming sectors. Well, and that's a great point. And in fact, this morning, the Wall Street Journal running a piece talking about how the stock market breadth is finally widening out. And you were, of course, quoted in it as well. So talk more about that rotation and the fact that more sectors are participating in, I guess you could call it this new ball market. Yeah, the different sectors and then even different equity asset classes. And so when you talk about the S&P 500, you're talking about US large cap stocks, and then a sector might mean the distinction between financials and energy

and materials and so forth. But then when you look at the equity asset class at the high level, underneath that you have US and you have large cap, but you also have things like small cap, and you have things like international or emerging markets, which is our favorite exposure in international, meaning those asset classes that refer, excuse me, that element of equity investing that refers to non-developed countries. And so when I look at what we've seen here in the last month in the small cap space, this will be the biggest month of all time in the Russell 2000, the small cap area, which is now, as I speak, on the year, the Russell 2000 is up over 9%. And on the month is up just uh huge but it was down um you know 30 percent on the year so your your recovery from its trough level to peak is just huge well even when the market began recovering scott back in in late March, early April, that was not the case.

The small cap space was not recovering. It was a much more narrow recovery centered around, in one sense, the S&P, but in an even more specific sense, only a very few companies in the S&P. And so when you see small cap participating in the rally this way, companies under $5 billion, under $3 billion, much smaller market capitalizations, it really speaks to breadth. You can have a higher breadth, a higher participation than we saw with four or five companies, all within large cap. But when you get small cap participating, that really means that you have a much more favorable risk on environment. Well, and I think, you know, people have been talking about this for quite some time, right? Obviously, tech has had its day in the sun for as long as a lot of us can

remember, certainly over the past, you know, seven to 10 years, you could argue. But then, you know, with this pandemic, we're reminded of the importance of tech and the usability of tech in our lives. So I wonder if there's anything else to say with that, meaning has the pandemic kind of given new life to tech as an investment? No, I don't think so. I think that it's given new life to certain categories, some of which is tech oriented, some of which is not. I think that the trend towards food delivery and obviously in a business enterprise standpoint, cloud, but I mean, that's almost like a sector in and of its own. The reality is that when we talk about home exercise equipment stocks and food delivery stocks, and you talk about cloud

computing stocks, they all have a certain tech orientation and they all have a certain pandemic, you know, stuck at home orientation, but all of them were on the way up much before the pandemic. And then they had an acceleration of that dynamic. Some like, let's say various video streaming services may have had a very specific, fundamental, quantifiable revenue kicker from the pandemic that then comes off a little bit post-pandemic. And that's what you've seen with some of the video technology and what the market might be afraid you're going to see more of going forward as there's increasing amounts of normalization. But I don't think that the basic reality of the largest technology companies that have these market caps that are over 500, 700 billion, in a couple cases, well over a trillion dollars, I don't think those are very pandemic-oriented. E-commerce, yes, there's less shopping at malls and more people buying online.

That's not a trend that snuck up on anyone. The e-commerce reality has been alive and well forever. But when you look at the two largest companies and the biggest beneficiaries, I don't really happen to believe that smartphones became more useful during the pandemic than before. They basically have dominated American life before the pandemic, during the pandemic, and after the pandemic than before. They basically have dominated American life before the pandemic, during the pandemic, and after the pandemic. But none of that has anything to do with stock prices. And that's one of the most important things that a big tech bear like me has to continue reminding people is I'm not bearish because I'm down on the companies. I'm overwhelmingly impressed by the company's businesses, cash flow creation and ability to continue growing and monopolizing market share. I mean, those are all really positive things to say about these companies.

I'm purely commenting on a valuation basis. That's it. That there is such a thing as too expensive. Every time I hear people tell me that there isn't, that's when I know it's gotten too expensive. And this has been the case in 100 out of 100 cases throughout my career. So you don't necessarily have a trend that's gone away where the trend was really creating a great investment result.

And now that trend is going away. In this case, let's call it the pandemic or work from home. And so therefore, you're going to lose some of that investment merit. The investment merit was only in a very minor way related to pandemic to begin with. And the bearishness I have is not remotely related to the pandemic now. I believe technology will play a bigger role, not a smaller role in the future, post-pandemic or not. And I also think that a lot of the companies that are outside that big tech category, but were specifically boosted from video streaming to home exercise equipment,

to food delivery as a byproduct of the pandemic. I think all of those are going to be growing companies. Now, some of them need to figure out a way to make money. I know it makes me sound like a dinosaur, but I do believe that most businesses need to make money to succeed. And there's a long period of time where stock prices can go up when a company is not making money. But that period of time goes away. And one of the very interesting things about the last 10 years, you refer to the kind of last seven to let's call it, you know, a decade, a really strong technology performance post crisis. But this is a categorically different thing I'm about to say. And I alluded to this when I talked in our call two weeks ago, about a couple books that I had read on my little brief getaway with my wife.

The so-called unicorn companies of the last 10 years. You did not have companies waiting 7, 10, 12 years to go public pre.com. Companies were going public very early on and they needed access to public equity to finance their survival and their growth and development. Right now, companies have had infinite access to private equity and have been able to stay private much longer and go through a lot of the various evolutions of their growth phase before they go public. So when a company is not making money in its third year in existence, but it's its first year as a public company, like some of the famous dot-coms of the 90s, that's one thing. But when a company has already been around for 12 years

and is still losing billions of dollars, but they've only been public for one year, it's not a one-year-old company. It's a 12-year-old company that's not making money. Okay. So these things have got to be understood in the right context. And a lot of the names that exist out there, that's why you've seen such just woeful IPO performance from some of these names, because the big money was already made. The big money was made by the private investors who owned it from $5 to $50, but then it goes public at 50 and comes back down to 30 or something. And I'm not going into specific names, but this is not one or two isolated cases. This has been the rule that disproves the exception,

if you will. Now, some of these companies, by the way, that are hot tech related, cloud oriented, maybe they did well during quarantine. Some of them could be acquisition targets. We have a big announcement of that. One name there that's come over the weekend, one of these unicorn stocks that went public in a very disappointing way, is being acquired by the largest cloud company in the world. You've had a big food delivery company get acquired by a ride-sharing company throughout the pandemic. Both the ride-sharing company and the food delivery company lose billions of dollars.

But that's one way for a billion-dollar loser to survive is to get bought by another billion-dollar loser at a premium. So I know, by the way, forgive me if it sounds like I'm being coy around not saying the names of some of these companies, but it's going to make it easier for us to be able to distribute this to a broad audience besides just clients. If I don't say specific names of stocks, once I start saying specific names of stocks, then we can only just because of the regulatory environment only distribute this to clients. And so I'm purposely avoiding saying it, but in case you can't tell, I've gotten pretty good at how to do that. Well, and David, I think that sort of begs the question, how does everything you just said change your market outlook as we get closer to 2021, right? I mean, how are you, you know, kind of recalculating or maybe not recalculating anything different for next year? And maybe what

you're describing is more of a long-term phenomenon? Well, my view of 2021, I'm going to be really crystallizing a lot of those things throughout December and trying to create a pretty comprehensive perspective on things. But anyone who's been reading or listening to our stuff over the last few months and quarters and whatnot is probably not going to be very surprised by a lot of it. I think in the real short term going into 2021, there will be questions around what kind of stimulus bill gets done. In the economy and in the society, there's still continued questions about what some of the policy response to COVID is going to be. I think there's much less of that in the market. But I think 2021 is going to be a very interesting year. I think 2021 is going to be a very interesting year because on one hand, everyone knows,

everyone has a reasonable reason to expect that the economy is going to do better in 2021 than it did in 2020. And yet markets are forward looking and there are discounting mechanisms. So did some of 2021's economy get reflected in 2020's market? And will some of 2021's market be dependent on 2022's economy? Well, the answer is yes. I mean, that's how markets work. And that's not just an answer to this question in this time, in these years, that's kind of the permanent reality of these things. Now, of course, in 2020, excuse me, in 2019 2019 the market couldn't be pricing in the covid reality of 2020 there are things that come up that change things that are unexpected that are surprising

but do i have a generally optimistic view of what economic growth will look like next year i do and are there knobs that can be turned that can make that a little worse than i want it to be, or that could make it better than I want it than I expect it to be? The answer is yes. So I don't fully know about those knobs, but I want to be able to lay out for people in the weeks ahead, going into 2021, what those knobs are that are going to really determine how well 2021 goes. The policy dynamic in Q1 is going to be very important. But I also think that the reality of corporate cash being at record levels and how that cash gets deployed, what the psychology is for business investment out of the C-suite,

it's going to be very important. Some companies that's less significant for than others. No one really ever has to guess if the technology companies are trying to invest into the future. That's what they do. But then when you look at some of the industrial names, real estate names, companies that are more CapEx sensitive, what banks are doing with their own balance sheet, what the Fed lets banks do with their own balance sheet. Those things are question marks. And I believe that that's really what's going to dictate the direction of 2021 is the optimism people have into the future.

It's very simple to say we think that when Broadway is shut down, that Broadway will do better when it's not shut down. Well, that's fair enough. That's a pretty simple or pedestrian comment. But to be able to evaluate on a more holistic standpoint, what the business investment environment will be, what business confidence is to be able to invest into the future in what will be a pretty completely post-pandemic and post-COVID consideration. Now we're talking about real economic nitty-gritty, and that's the stuff I'm totally fascinated by right now. So then with that, are there things we should be watching for, I guess, really in the next month that could perhaps affect the market in the short term? I mean, we saw, you know, Biden set to announce Janet Yellen as his treasury secretary pick.

Of course, Janet Yellen, very familiar face to the markets for investors, a former Fed chair. Anything you'll be watching for in the next month? I am watching closely the economic appointments and the cabinet appointments that come from the Biden transition team. I think that the markets responded favorably to the announcement about Janet Yellen as Treasury Secretary. And I believe that the markets responded favorably to the announcement about Janet Yellen, a Treasury Secretary. And I believe that the reasons for that are not fully understood by a lot of people. Although I guess I'm biased a little, but I think we got that right, which is that it has to do more with the perceived compatibility that will now exist and will

continue to exist between the Fed and the Treasury Department. The so-called accord between fiscal and monetary policy is very liked by markets, has been for a long time. And it would be pretty difficult to imagine a greater nod to an ongoing accord between the Fed and Treasury than by naming the former Fed head to now head the Treasury Department. So that particular pick had a kind of idiosyncratic reason for markets to like it. I'm not quite as thrilled with some of the economic appointments that are more advisory or council driven, some of which came over the last couple of days. You're going to read about it in DC Today

today. But I think Neera Tanden from Center for American Progress, a very, very left wing person to head office management and budget. I think she's very unlikely to get approved by the Senate. And I don't think that I've seen anyone else, by the way, that I would say that about. I think everyone else so far is going to get plenty of no votes, but they're all going to get enough yes votes to be confirmed. I don't think that I've seen any names right now that are really going to set off Republican opposition in any meaningful quantifiable way. But I do think this OMB selection of Biden's is very unlikely to get approved. And I don't want to bore everyone with the details, but part of me wonders, is that on purpose? Is there a sort of sacrificial lamb

to let her get shot down and then others to be able to go through unscathed because there's only so many bullets, so to speak, that an opposition party wants to use. That's not a bad theory. I couldn't really prove it. I couldn't bet on it, but it does make political sense to me. But then I look into the Council of Economic Advisors and the National Economic Council, environment advisors and the National Economic Council. And we're starting to get some of these names nominated. And they're more left wing than I was anticipating in a couple cases. And so I think that could matter. But nothing matters as much as the actual cabinet appointments. And so having a Treasury Secretary Janet Yellen is so much different than what a lot of people were fear-mongering around it being. And I just think that you're pretty much going to get a pretty conventional center-left cabinet out of President-elect Biden.

And it's interesting when you look at the market reaction to the Janet Yellen news from last week. And it was obviously very short term, right? Very knee jerk. So, you know, that reaction can be erased, you know, when the next bout of news comes about. So perhaps any market reaction to these developments will be short term in nature. Yeah, I think so. I think that if the market barely reacts to who the president is, the market barely reacts to who the president's advisors are. And a lot of people don't agree with me on that. I'm a little surprised that there's not more agreement on it because the historical testimony I've tried to provide is pretty compelling. But I think that the specific, we've talked about this so much, I know some are getting sick of it, the specific policy things that a president can do to damage

markets that then really can't be done with legislative gridlock takes away a lot of the excitement out of what markets, what can happen to markets from a president. I always think that there's symbolic significance. If someone's talking down markets, talking down business, talking down profits, that's not good. If someone's talking them up, it really can help. I mean, people forget that the biggest move higher in business investment and markets on a percentage basis in President Trump's term in office, were all at the very beginning. It was not because Obamacare had gotten repealed. And by the way, Obamacare never got repealed. And it was not because of the tax reform bill. That came at

the very end of 2017. And it was not because of any particular trade deal. A lot of the trade stuff spooked markets throughout much of Trump's term. And even the trade things that did happen didn't happen much later in his term in office. It's because there was just a general resurgence of business optimism. It had been very muted, very low in the later part of 2014 throughout 2015 into 2016. And all of a sudden, that small business optimism and that CEO confidence number skyrocketed higher. So it's not traceable to a particular piece of legislation or particular policy. It is more sentimental, but it has some relevance. But I don't expect

President-elect Biden to come into office and start talking down business. I don't think he's going to speak about it in the way that a couple of the other candidates in the Democratic primary might have. Now, that's not to say that everything he's going to do I'm going to agree with or that anyone listening to the call right now is going to agree with. And it's not to say that there are not specific things out there that I am concerned about as it pertains to markets and so forth. But honestly, I just think this stuff is so overthought. When you have the specific issue of repair to corporate profitability coming out of the COVID moment, and when you have monetary policy on the table,

I cannot fathom there being more important things to the direction of markets than those two things. Those two things should be taking up all the oxygen in the room when it comes to discussing what 2021 market outlook will be. And a lot of the specific things about this person at this committee or this person as deputy undersecretary to the Commerce Department, you know, they're not as significant. They're just not. And, David, I want to go to a question we have from somebody writing in.

Of course, as we discuss kind of your market outlook for 2021, somebody wants to know your thoughts about stakeholder capitalism and the World Economic Forum's great reset and whether that's a threat to stock prices. And if it is, kind of how you'd be altering your investment philosophy because of that? Well, I think there's a whole lot of things about this general ideology that are a threat to markets or a threat to free enterprise. It's difficult to ever quantify how an idea becomes a threat to markets when markets are essentially weighing mechanisms of corporate profits. And so if one can somehow figure out a way to model how certain kind of obscure ideological ideas that mostly exist in academia and not so much in the real world, but to the extent that they creep into the real world, how those things get priced in and isolated where you can measure their impact, it's very difficult. Mere posturing around the idea of corporate America not just existing for its shareholders, but existing for a whole slew of different actors is a topic I've spoken on all over the country. It's a topic I'm very passionate about, and it's a topic that I have very strong ideological opinions on.

on. And particularly the World Economic Forum and this concept of the Great Reset, there is a strong ideology behind this too. It's not a market viewpoint. It's not an investment strategy. It's a sort of rethinking around how some of these ideologues would like the world to function. And I don't believe it will prove successful, but I most certainly think it's going to prove persistent in being around as a discussion topic. It's going to get plenty of interviews on CNBC, and it's going to get a whole lot of coverage in journals at leading American universities. But to the extent that I am supposed to believe that corporate America is going to go to work and not be focused on growing profits, I do not believe it. Now, their press releases are going to read differently, but they've been reading

differently for years. And their kind of initiatives in their 10Q's and 10 K's are going to read a little differently. I think an awful lot of this stuff is rank marketing. But to the extent that there's even some true believers out there, either way, the notion of American business getting to a point where it is not existing for the purpose of optimal allocation of capital, I believe to be an impossible notion. And if there is a company out there that were to make that mistake, I think there would be another company that would eat its lunch. And therefore, if there's any investment change that would be required out of people like the Bonson Group as active portfolio managers, it would be in ensuring that our companies are living up to their fiduciary duty to optimally and rationally allocate capital. And it, by the way, is exactly what dividend growth is designed to do, is ensure the optimal allocation of capital for us, the shareholders.

I could talk, I think I've been talking for four minutes now on this. I could talk for four hours on what I think are some of the deficiencies and self-contradictions behind so-called stakeholder capitalism and the so-called Great Reset. The World Economic Forum is not something that has quite had its bite meet its bark for a long time. They're really, really prestigious people. They have really, really nice parties. They have really, really nice parties. They get a lot of really nice media attention. And they stay in really nice hotels. But as far as actually driving the nitty gritty that makes the world turn, I'm not sure these people are totally in touch, my friend. Okay.

Well, David, I think with that, we'll leave our conversation there for right now and always appreciate your insights and uh we will i'm sure be back in a couple weeks to uh you know get a better sense of your 2021 outlook thanks scott i appreciate it what we'll do is um you will get a dc today today here on monday that will recap not only today in the markets, but also the kind of summary of November. We will also be able to get in two weeks a better teaser of what some of our end of the year stuff is going to look like, but no, my goal is to is to provide do a kind of special call right after the new year. We're similar to what we did with our election white paper back in September.

We're going to have our 2020 recap and our 2021 forecast all done right at the end of the year, going into 2021 and then right at the beginning of the year, do a special kind of one hour type call to go through all that good stuff. So bear with us as we kind of fight through the next few weeks of the year. We're working on tax loss selling right now. We're working on optimizing positioning. Obviously, there's nothing that materially makes a difference between the month of December and the month of January. The calendar year is more astronomical than it is investment oriented or economic oriented.

But with that said, as a clean break to kind of summarizing data and giving a good opportunity, much like a New Year's resolution for us magnifying the wisdom we can embed into your portfolios. We're working on that pretty hard right now. So thanks for your time today. I hope you all had a wonderful Thanksgiving weekend and reach out to us with anything else we can be doing. And with that, I'll turn it over to Erica to adjourn us. Thanks, gentlemen. This concludes today's conference call. Thank you all for attending. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC,

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