The Dividend Cafe - Market Outlook w/David L. Bahnsen - December 6, 2021

Episode Date: December 6, 2021

Topics discussed: Volatility The Fed Energy Omicron Variant Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to our national video call. And once again, as we're trying to do every other week, just present to you the answers to the questions that you have for us, real-time things happening in the market. And of course, this particular period happens to be in line with what was one of the most volatile weeks of the market last week, which followed the biggest down day of the year, which was that half day after Thanksgiving. So between end of the year stuff, the Fed,

market volatility, the COVID moment, the fact that as we're sitting here recording right now, the market happens to be up 700 points. And last week we had up and down days every day, but all of it speaks to the fact we're in obviously a volatile time in markets. And so we imagine those things on your mind, and I'm here to answer those things. And to do so, I brought in my very favorite interviewer, Scott Gamm from Strategy Voice Communications, who as he always does, is going to capably lead us in a dialogue. If you can't tell, I'm not in my normal studio. And so we'll

be keeping it short here today because I'm getting ready to jump on a flight. And so hopefully we'll give you something succinct and useful as you think about the investing environment we're in. Scott, you can ask me anything you want. I am all yours. Well, David, thank you. And we will make sure that you don't miss your flight. But great to be with you as always. And David, let's start off, obviously, with some of the market action we've been seeing over the past couple of weeks. Very volatile, as you said, but we're still not too far off from all time highs reached a few weeks ago. A lot of uncertainty around the Omicron variant.

What are your thoughts, to your point, as we sit here with a Dow that's up 700 points? I'm pretty firmly of the opinion that there's a lot less uncertainty than people might have thought. uncertainty than people might have thought. And even when there was more uncertainty, like a week and a half ago, that responding to uncertainty with a certain response is quite irrational. And so when you hit the sell button around uncertain news, you've done something certain. And yet it was in response to something uncertain. And I don't think that that is generally a very wise thing for investors to do. But then now what do I mean by the fact that we're getting more certainty? In the DC Today, the Monday, December 6th edition, which by the way, a little trivia for people, this will be the longest edition of the DC Today that we have ever had.

There is a lot of medical updates that have come about. I was blown away by the World Health Organization's update last night that there is not a single fatality in the world from this variant. I had thought that there was very light severity so far, very minimal hospitalization, but some percentage of cases that resulted in death. And there has not been a single death, not only here in the United States, but even in South Africa, where the infections have been growing more exponentially. So the genetic sequencing that I unpack in DC today, and that there was a great deal of research done over the last 10 days on, has basically got to the bottom of this. And then obviously new information can come, new things can be discovered. So we respond to what we know, not what we don't know. But effectively, it appears

that the host here that had COVID-19 for this variant mutation, that the other blend was the same coronavirus that is essentially what we refer to as the common cold. And so the uniqueness of this is a COVID mix with a cold that has not been a mutation yet that had that same variant and that blended with the cold. And so if you were to say two things about this variant so far, which is, yeah, it seems really infectious, sounds very contagious, sounds like a cold, and it's really not very severe, sounds like a cold. It's all starting to make sense when it is a cold, and that's what we're dealing with. And so the market is now unwinding a lot of the irrationality of the last week. And hopefully somewhere in there, some people learn a lesson. And of course, we'll be watching over the coming weeks to see, you know, maybe from some of the vaccine makers as to how effective our current vaccines are

against this new strain. But David, by the way, Scott, I want to point something out. Let's say that they're not. Then this strain becomes a vaccine in a sense, because it gets spread and puts antibody into people without killing them or hospitalizing them. And so you, in a sense, get an additional level of immunization at some degree, which I admit is not fully known, but you get some greater immunization for people with or without a prior vaccination that just simply severe, the vaccines in assumed lack of efficacy against this or minimal efficacy against contracting it means nothing. And so because people are going to get something that goes away as a cold. So I really do think that there's a chance this turns into very good market news because you've had a percentage of people that have had a vaccine hesitancy and to the degree that there ends up being spread from this that creates greater antibody protection. Eventually, we see higher T cell immunization and and then of course, combated with additional vaccinations that have had an increasing penetration, you just get a greater protection. Probably never

foolproof, probably never zero COVID, which seems to be the continually abandoned policy approach for, I think, very good reason. But I just wanted to point out that if the vaccine proves to not stop people from contracting this variant, and yet this variant proves to be a common cold, I don't know that you could get a better outcome. David, let's also talk about the volatility we're seeing in the markets, because you've also said that, and it's clear just from the performance of the market so far this year, that the market really hasn't been that volatile this year, even though we have been experiencing volatility over the past couple of trading sessions and weeks. Could you square that for

us in terms of people following the market now might think that there's volatility, but we've actually had a pretty quiet market this year? Yeah. And so that's the way I'd square it is by sharing both of those facts as simultaneously true that we have had a very low volatility year and then we've had this one higher volatility week. But within the context of the full year, the intra-year highs and lows are incredibly low volatility, even factoring in last week where the S&P never even did get to a 5% drawdown. And now you have S&P and Dow that haven't even had a 6% drawdown going back a year and a half. It's just unheard of. I mean, it's incredibly rare.

When I say unheard of, in 2017, the market never went down more than 2.9% at any point from a high to a low. But that was the lowest volatility year in the history of the market. And so we're in all things considered, relatively speaking, a very low volatility year. But I acknowledge within a week, having a minus 900 point day, a couple of point plus 600 point days, and then a couple of minus 400 and 600 point days, all of that back and forth on a point basis is more volatile on a percentage basis, not so much. But still the reality is that we have a point coming, Scott. And now this appears to be the sixth time in which it is not this time that the market will really correct something more in the range of, let's say,

8% to 14%. And we haven't had that for a very long time. And David, also, we should point out, when you look under the hood, there are many names, many individual stocks that are in correction territory, bear market territory. So perhaps the story is a little bit different when you look in the weeds of the market versus just at the index level. Yeah, Scott, I'm so glad you brought that up. I really appreciate it because it's a very important point. Just as last year on the upside, there was a lot of companies that were down over 20% and the market at one point was only down about 7%. And it was the largest delta we'd ever seen between the cap weighted market and the even

weighted market. And let me find a simpler way to say this. The blended market, because of outperformance from larger issues, was reflecting a better index result than the average company in the S&P was. And right now, you most certainly do have a market that is not down anywhere near as much as a lot of the most popular holdings from last year are. anywhere near as much as a lot of the most popular holdings from last year are. And so this is where there could very well out there be a high dispersion of results of what investors are facing. Some people may have a general feeling of an incredibly good year. Most people probably have a feeling of a good year or better. And then there might be some that are actually starting to feel like it's not a good year. This is another thing that will be in DC today that I have to share with you.

Small cap growth is down on the year now, 2%. It had been up about 25%. Large cap growth is up 21%. That delta between large cap growth and small cap growth is absolutely unheard of. So the question is, does small cap growth just bounce back and come back to where its large cap growthy counterparts are? Or is the risk reward skewed to what I would suspect is that large cap growth comes down to meet its small cap growth brethren? That's my suspicion, but it's a very interesting dispersion because you have rather healthy double digit returns in large cap growth, large cap value, and small cap value. So the value cousins

large and small cap have done just fine, but then it's the small cap growth that has led this way down where there was lower quality, where there was higher PE ratios, where there was a significant amount of different risk factors. Where do we go from here? How do you get those quadrants to kind of come revert to some sort of normal historical relationship? I think the most likely scenario would be large cap growth coming down, but who knows? But these are important market metrics to understand. David, I also want to get your thoughts on oil. When we spoke a couple weeks ago, maybe even a month ago, obviously oil was a lot higher than it was now, just under $70 a barrel right now. Do we go back up to the 80s or where does all this market volatility put oil?

Yeah, I don't go back to the 80s, but the fact that it came down to the low 60s last week and bounced back so violently to the high 60s without really much news is just a testimony to the continued supply demand realities. The OPEC plus cartel is continuing with their planned production increases, which you could argue is either bullish or not for supply. They're increasing production, but they're not increasing production more than they've already said they were going to be increasing production for almost a whole year now. And so I think that some of the little gimmick things going on about the emergency reserves and so forth are pretty immaterial. It becomes more of a demand factor. and so forth are pretty immaterial, becomes more of a demand factor. The supply is not going to get up high enough to offset the demand that is assumed in pricing if demand meets there, if demand ends up materializing to that degree. That leads me to a 65 to 75 window, but not a 75 to 85 window.

And the only way I think you get to a 55 to 65 window is if you do, in fact, having very disappointing demand. Doesn't seem to be in the cards right now. Well, David, I think that's a good place to wrap our conversation for today is we want to make sure you make your flight. But I'll toss back to you with any final comments. And thanks for your insights as always and safe travels. Well, thanks, Scott. Yeah, I think we covered the basics there. I appreciate that. A couple interesting things to note in the way markets are shaping up, the high dispersion

of results that allow us to have a conversation that has been very, very rare for about 13 years now, which is on dispersion of results. It's a market conversation that is not about all risk on versus all risk off. And so underneath the hood right now in markets, you're seeing what I suspect would be early innings of a period that is very different, where there is certain risks that are on and certain risks that are off. The issue with this variant, as I wrote about in Dividend Cafe on Friday, and it was one of my favorite Dividend Cafes I've written in a while because it's a point that's so important to me, that oftentimes people just want you to either say, is it going to be

good or is it going to be bad? And when you say the thing that people think is going to be bad is going to be good, but there's another thing that's going to be bad that we got to talk about, to be bad is going to be good, but there's another thing that's going to be bad that we got to talk about. It's nuanced. And that is so rare in our public discourse, even in financial conversation. But that's my view right now. I want people to be focused on where risks are, which is high valuation, bubble-like craze type mentality and vocabulary and behavior. And then thirdly is Fed distortions. Those to me represent very meaningful conversations and very meaningful things to express in one's portfolio, which of course is what I think we do quite vigorously at the Bonson Group. But to the extent that people want to talk about the worry

of more infections and so forth on the COVID deal and this variant coming up, I really do believe it's been a week of some of the most shameful media coverage. And in some cases, not many, but in some cases, some policymaker things that were just wildly irrational. We had plenty of wild irrationality in prior months, but this one didn't get too bad. Most people kind of waited to see, and now what they're seeing looks a lot better. Investors would be wise to learn from that mentality. So that's where we are. A lot of challenges as we come into the end of the year to prepare for next year. I'm going to keep covering them every day at the dctoday.com, whether you're a client or not. I'm going to keep

covering them every week in dividendcafe.com, whether you're a client or not, but I'm going to really be covering them in your portfolio if you are a client. Scott, thanks for everything. And we will go ahead and adjourn here. And we welcome your questions anytime at questions at thebonsongroup.com. Take care. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities Thank you. is 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 and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein.

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