The Dividend Cafe - Markets Meet Gravity

Episode Date: October 11, 2018

Topics discussed: What Happened This Week? Shooting Straight on Bond Yields Key Takeaways From the Sell-Off Links mentioned in this episode: TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. the message that I'm sharing to be used both for you podcast listeners and those of you who are watching the video right now. Those that are watching the video, you may be able to tell that I'm actually in my New York apartment right now. I'm getting ready to leave for a day of meetings. I want to get the recording done before I go, and it's bright and early on Thursday morning right now. So as I sit here, the futures are now down just about 100 points or so. They

had been down about 400 points or so when I was up around four o'clock in the morning New York time. But then this follows a Wednesday in which the market was down over 800 points. And I'm going to talk about that here in a moment. So all I have to say, by the time you're listening or viewing, I have no idea what markets have done Thursday and Friday. And I just ask you to keep that in mind contextually when you listen to what I'm saying now, because there's a very good chance that there will be new information or something that kind of makes obsolete some of the short-term things that I'm saying. But with that said, let me give you a little context as to kind of what has been going on in the market. It's really been about the last week or so. The early part of last week,

the U.S. announced its deal with Canada, a trade deal. Markets rallied another leg up. This comes off of a very robust, especially July and August. And then in September, things were a bit muted and moved around a bit. But again, you had an incredibly strong third quarter in equity markets, especially in the U.S. And then in early October, you got a little bit move higher around that trade deal. But then bond yields continued to sort of move. Economic data from industrial production to jobs was still coming in very strong. Bond yields on the 10-year and 30-year were moving higher. This was steepening the yield curve. Before, we had had an incredibly flat but not inverted yield curve. It steepened things out a bit, which had been good for some of the bank stocks.

It steepened things out a bit, which had been good for some of the bank stocks. But then as a result of higher bond yields, you get a repricing throughout equity markets. And the things that get repriced most dramatically are always those with the highest P.E. ratios, the highest valuations. Those real high growth kind of lofty areas of the marketplace began selling off. And because that high-tech, new-tech, big-tech, cool-tech sector has been the market leader for so long, to see its valuations drop precipitously has an inevitable spillover effect into other areas of the market. Now, utilities were down like half a percentage point yesterday. Consumer staples were down about 1%. A good portion of the market sectors were down around what the market itself was between 2% and 3%. But then you had

technology down over 5%. And a lot of the real leadership names down 6%, 7%, and 8% just yesterday alone. So the violence of that kind of sell-off in these high PE tech stocks is pretty significant. I think that this represents, and this is a very bold thing for me to be saying because, first of all, it's been forecasted and anticipated for a long time, but you don't ever want to extrapolate out of one day any kind of a new paradigm shift. But I believe that this has been preparing itself for the better part of this year. And I truly do believe, regardless of what ebbs and flows and zigs and zags we get getting there, I think this represents the leadership change that we believe has been forthcoming out of growth into value, out of these very high valuation leadership names, primarily in the technology sector. And into I think you're going to now see a leadership out of the stock market that is more rooted in what they traditionally call value companies. But by that, I just mean more stable, less exciting, lower growth rates, but yet still positive growth and much lower valuations in terms of their price to earnings, their price to book value, their price to sales revenue, et cetera.

So, yes, you get a spillover in some of the other sectors, but it was a fraction of where the real violence in the market bloodbath was. What do I make of these rising bond yields? And this is something I really want to make clear to you. The market does not respond to what bond yields just And do I think this is something I really want to make clear to you. The market does not respond to what bond yields just got done doing. The market responds to what it believes is going to happen into the future. And if one believes that the present bond yields do not just reflect what has now happened and transpired, but in fact point to an entirely

additional move higher in bond yields, then I think you're going to get continued repricing or at least elevated volatility. I don't frankly believe that that is the case. I'm not willing to forecast exactly where the top will be in treasury yields. The notion of 3.3 or 3.4 percent as a 30-year treasury yield being so high and concerning is just absurd. I mean, it's laughably absurd, the idea that we should be afraid of a 3.3 or 3.4 percent 30-year treasury yield. The economy is far too strong to have a 10-year and 30-year as low as they had been. And getting a 10-year now about 3.2 percent, to me, represents the fact that you have a stronger economy than you had earlier in the year. You can't have it both ways. You can't have a strong equity market because the economy is doing well

and companies are growing top line revenue, growing profit margins, and then growing actual take-home earnings and not have higher bond yields that come along with. You want a natural and organic interest rate, a price of money in the marketplace that reflects economic fundamentals. So from my vantage point, I think that we have healthy repricing taking place. The market levels where we are right now are just dramatically higher than they were just a couple months ago and where they spent most of 2018.

But certainly they are lower than where they were a week or two ago. And especially for those in that very lofty technology area of the market. So all things considered, I believe the market is much cheaper at the price level right now. Let's call it Dow 26,000. It's the same as where it was back in january ish about dow 26 000 i don't think those two 26 000s are the same because you have now over that period of time experienced a 25 percent give or take earnings growth year over year you've experienced a 10 11 or 12 percent revenue growth year over year so You've experienced a 10%, 11%, or 12% revenue growth year over year. So you have a pretty substantially improved fundamental outlook and yet the same price level.

That is a good value that has taken place in the markets. The volatility levels have gotten pretty low in the last couple of months. And now with bond yields moving, the volatility will be higher. I would not be buying with both hands at this point. Things are not nearly cheap enough to say that this is an extraordinary buying opportunity. I do think they are that cheap in emerging markets. I do think there's certain company names and certainly certain sectors that may offer more of that value. But overall, there is nothing I would consider to be panicking into the marketplace at this time. And if we do get another 800 point drop in the markets,

it just simply enhances our expected rate of return going forward. The earnings are not dropping, just the price we have to pay to get those earnings. And those are not profound things that I'm saying. It's a reminder of math and a reminder of investment methodology and investment outlook that you want to take in the way you look at these things and your understanding of risk and reward in the marketplace. So over the next week and a half, I'm going to be, like I said, in a couple dozen meetings. I have a really interesting fixed income symposium I'm attending at the end of the day today, including a dinner

with Chairman Bernanke, former Fed Chairman Ben Bernanke, tonight. And I'll be excited to share some of those insights with you as well. But this is a very important time at the Bonson Group in terms of our sort of intellectual capital our our viewpoints being you know the formation of our viewpoints and potential transformation where we might want to change the way we're viewing things and turn knobs and some of our allocations and whatnot I'm looking forward to the week, great deal. And in the meantime, based on where market conditions are and questions, anxieties you may have,

you probably are well aware of our fundamental belief that your behavior is going to drive the outcome out of this, not the market itself. But certainly reach out if there are questions, any kind of need to just sort of walk through things a bit that's what we're here for and all of our advisors at the Bonson group are here for and I encourage you to take advantage of that there's nothing I love more than talking about this stuff with investors and and and particularly our clients, you know, we believe we have this fiduciary duty

to in these times. So I'll leave it there. Thanks again for listening to the Dividend Cafe podcast. Thank you for viewing those of you watching the video now. And I'm going to go into combat in this, the greatest city in the world. Have a wonderful weekend. Thank you for listening to the Dividend Cafe, financial food for thought. The Bonsai Group is registered with Hightower Securities LLC, member FINRA and SIPC, to the Dividend Cafe. Financial food for thought. 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 contained in this research is provided as general market commentary and does not constitute investment advice. The team and

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