The Dividend Cafe - Markets Love Midterms

Episode Date: November 9, 2018

Topics discussed: Jobs, jobs, jobs Diversification Means Always Being Upset, and Achieving Your Financial Goals Regulation Decline Spurring Growth? Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. I am recording from New York City this week. We are out of the annual Bonson Group team retreat. And this is David Bonson. I am the chief investment officer of the Bonson Group. And we have quite a bit to cover this week. What a difference a week makes.

On October 29th, the Dow went as low as 24,122 in the middle of the day. And now, as I'm recording, we had closed Wednesday last night, the end of day at 26, 180. So over 2,000 points higher and just barely a tad over a week from the low point to the current high point. What is the market owed the snapback rally to? Well, I think the violence of the sell-off itself in October was wholly overdone. Earnings season has remained strong. And then now markets this week got the basic certainty that they wanted out of the midterm elections. And that gave us all we needed to rally. So I wouldn't say we're out of the woods.

Many issues persist. But let's jump into the Dividend Cafe and talk politics and money and a few other things as well. So, you know, the midterms did what the consensus view said they would do. There was a little extra padding on the Republican side of that. The Democrats did take the House, as was widely expected, though the margin was a little less than many on the Democratic side probably were hoping for. It ended up being only the 10th largest reversal of House seats in the last 50 years.

It ended up being only the 10th largest reversal of House seats in the last 50 years. The 2010 GOP takeover of the House was obviously by far the largest. But that's not to say it's insignificant. I mean, the Democrats have a mathematical majority in the House. They'll control a lot of committees now. Legislatively, it gives them the ability to keep any legislation from getting done. So I think that the gridlock factor is really not very problematic for markets. The markets actually historically like gridlock. But on the Senate side, the GOP not only maintained its majority,

but added to it substantially. And they protected all but one of their vulnerable seats. So, you know, partisans will each try to take the news from the election the way that they most like, and that's fine. Place the credit here and there for how markets behave. But the fact of the matter is this. Markets like certainty. And this week, the speculation and prognosticating about the midterms ended and certainty took hold. The divisions of the country as stark as ever, the red got redder, the blue got bluer, but fears of a blue wave and reversal of market-friendly policy were proven all for naught.

Let's talk about October real quick in the context of the third quarter of this year. talk about October real quick in the context of the third quarter of this year. What exactly was the horrid month of October following? It was following a third quarter, July through September, wherein markets rallied 7%, where the VIX, the measurement of fear, dropped over 35%, and there were no plus or minus 1% moves for the entire quarter. We're talking like 2017 level non-volatility. But then October ran into enhanced fears of China, enhanced distress in Europe, enhanced realization of the Fed's determination to normalize monetary policy, and also ran into the questions of sustainability of corporate profitability or

profit growth in the S&P. So rather than absorbing these developments, absorbing these developments in the midst of a sketchy market and high volatility context, the fact of the matter is that the low volatility and high return of the preceding period, the third quarter, created a platform where we were reversing from instead of adding to what was already kind of, you know, a sketchy market. And that reversal going from something so positive for risk assets made October feel even worse. The jobs market in October, excuse me, created 250,000 new jobs. There was about 200,000 estimated. Unemployment rate continues to sit at 3.7% and wage growth year over year, 3.1% increase.

Really positive number in the U.S. labor conditions. There's a chart at DividendCafe.com I want to point you to. Really important for you to see the expansion of non-residential fixed investment, which is essentially business investment, capital goods, capital expenditures, and how strong those numbers were in the first quarter, second quarter within GDP, and then how they totally declined in the third quarter and why that added to so much market fear in recent weeks. So check out that chart at dividendcafe.com. Just incidentally, so you know, I've written a lot about China over the years,

and sometimes it can be kind of heady and harder to follow. But look, we got the numbers this week for, let's see, $34 billion of decrease in China's foreign exchange reserves last month. Whenever you have a big spike in the decline of forex reserves in China, it essentially means that they are having to sell reserves to defend the yuan against the dollar. The yuan is their currency. That intervention where they're defending their currency against a rising U.S. dollar is necessary because they're trying to keep capital from flowing out of the country. And that is not something that is creating a problem. It's something indicating a problem of weakness in China. And now when you go back to August of 15, January of 16, February of 18,

the last periods where we had this really big enhanced volatility in global risk assets, which obviously tethers into U.S. stocks, that has been at the forefront of it. So I will not stop watching. China's foreign exchange reserves as one of the most important economic indicators on the planet. I'm going to close with this because it's one of the most important points I would ever make. I've made it in recent weeks. I've made it recent years. I will make it for years and years and years to come. But because I have to get rolling and need to stop the recording, I want to close

with this very, very, very important point. Diversification means always being upset and achieving your financial goals. There should always be something in your portfolio that's underperforming or you're not invested right. There is something down when you own markets that are up, there should be something that's down and something else you wish you own more of when markets are down. This dynamic is intrinsic to proper diversification and is most often resisted by investors who instead choose the brilliant strategy of selling that which is already down to buy more of that which is already up. I do not offer any alternative to the frustration of diversification because I love it. I want more of it. I embrace it.

I don't find anything in it that is frustrating when you look at the reality that underpins disciplined diversification, which is a properly protected, insulated, growth-oriented, Properly protected, insulated, growth-oriented, but non-fatal exposed portfolio. I will leave it there. I can't urge you enough to go to DividendCafe.com. Extensive coverage of politics and money at this week's Dividend Cafe. Our sister podcast, Advice and Insights, has a special dedicated issue to the midterms and our chart of the week looking at the deregulatory environment of the Trump administration and how much markets have loved that. So DividendCafe.com there.

Sorry for the kind of quicker podcast this week. Hopefully we scratched a few itches and you can reach out to us anytime. Look forward to coming back to you again next week. Thanks for listening. Forward around, share with a friend, like us, subscribe. And if you don't like us, then do nothing whatsoever. Have a wonderful weekend. Thank you for listening to the Dividend Cafe.

Financial food for thought. The Bonsai Group is registered with Thank you for listening to the Dividend Cafe. Financial food for thought. Investment process is free of risk and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information containing this research is provided as general market commentary. It does not constitute investment advice. not constitute investment advice. The team in Hightower should not be in any way liable for claims and make no express 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 reference herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower Advisors LLC or any of its affiliates.