The Dividend Cafe - Recapping Q1 2018 & March's Market Movers

Episode Date: March 29, 2018

This week, Chief Investment Officer David L. Bahnsen covers the increased volatility in the markets, and what investors should expect going forward. Links mentioned in this episode: www.DividendCafe.com

Welcome to the Dividend Cafe, financial food for thought. for a number of different reasons. It's been an utterly crazy week. We are sending it early again. As you can see, I'm here in our Newport Beach office, but the market is closed on Friday, in observance of Good Friday. Wish everyone a happy Easter weekend and all that good stuff. But it's a short week, but a pretty eventful week, meaning on Thursday and Friday of last week, which of course all of this happened after I recorded last week's podcast on YouTube, week, which of course all of this happened after I recorded last week's podcast on YouTube. Market went down 1,200 points in a day and a half. The calendar week represented the worst week in the market in over two years. And then on Monday of this week, the market was up just shy of 700 points and that represented on a point basis, the third highest day in the history of the market. On a percentage basis, it was the 349th biggest day in the history of the market. So you can decide how big of a deal that really is.

But however, when you go up 700, excuse me, when you go down 700 points in a day and then down 400 in a day, then up 700 in a day, then down 300 in a day, and that's been the up and down volatility the last three, four, five days. I'm giving you an idea of what we're in now. So believe me, our projection about higher volatility in 2018 was very much spot on. But our projection was never that there would be this degree of perpetual volatility. I certainly acknowledge this is outside the norm. But the fact of the matter is this. What's causing the volatility right now is an underlying foundation of some degree of uncertainty about where we are with monetary policy, how aggressive the Fed will or will not be, driven by how inflationary the data will or will not be, and whether or not we are still fighting a deflation war or moving to an inflation war, there's a kind of foundational uncertainty that serves as the kind of paradigm

we're in. Then you're putting on top of that two things, strong fundamentals of a strong earnings environment driven by great corporate profits out of a wonderful corporate tax reform package, along with really potentially dangerous trade and tariff policy. So it's the combination of that latter point with this foundation that I think is driving uncertainty. We don't have bad news for the market to price in. We have uncertainty. Markets would far rather deal with bad news than uncertain news.

So that's what we're dealing with now as investors. And I have absolutely no basis to tell you it's about to end. So I can certainly tell you it would be crazy to be trying to trade around it day by day. But the fact of the matter is that if one believes, as I tend to, that the right way to invest is in line with fundamentals and earnings growth, then that would certainly lend itself to a very bullish feeling around the trajectory of corporate profits and free cash flows that will come back to us as investors through dividend payments. It speaks very highly to the global growth environment that we're in, particularly emerging

markets that have still not come close to realizing the valuations they had three, four years ago. So we think you have a great growth opportunity in emerging markets, great value opportunity in U.S. dividend equity. And yet, to go participate in that, you have to invite the volatility driven by a tweet that could come about a trade war with China tomorrow, followed by a complete retreat from that tweet the next day, followed by a complete retreat from that tweet the next day, followed by the more serious issue as to what exactly a new NAFTA agreement may look like or not look like or what China will do or

what we will do. So there is meat on the bone to the fear about trade and tariff. I'm more and more of the opinion that the real fear is going to be a lot more bark and threats and rhetoric. that the real fear is going to be a lot more bark and threats and rhetoric. However, I am more skeptical than I've been that we're going to get to a place that actually leads to a real trade war. The way the steel and aluminum stuff have played out, it effectively has meant nothing. Nothing has really happened. No countries are actually really penalized.

There's really no benefit to the U.S. steel or aluminum industry. We kind of had much to do about nothing for a month. And when all is said and done, everyone who actually does send steel into our country is excluded from the deal. However, a significant optical benefit took place in the idea of the steel workers going to the White House and saying thank you and all this type of stuff. That's what I am envisioning happening is that there is policy making driven by the sort of apparent desire for cosmetics of a firmer stance. I think there will get some policy concessions. I think there will be some kind of victory that can come out of the banter with China. And yet, as far as the markets go, I don't believe it will fall into the full-blown trade war route.

But if it does, I think that would be very bearish for markets. And I don't think the markets have any basis for being certain that it won't happen, if you follow me. You package all that on top of the environment we're in with the Fed right now. you follow me. You package all that on top of the environment we're in with the Fed right now. The market is reasonably sure that the Fed's going to continue to sort of increase rates at a very slow pace, continue to decrease their balance sheet at a very slow pace. And that's exactly what our position is. Our position is rather firmly convicted on the side that the Fed will not be doing anything that surprises the markets. But even then, what the Fed is doing is slowly but surely taking away a little bit of the juice it's been providing.

So I can't tell you, you see the action this week in the market, by far the biggest differentiation we've had in years between high growth, high octane, high momentum, new tech, big tech type companies. You've seen certain electric car vehicle companies get pummeled this week. You've seen a lot of the biggest valuation stocks that were up 100% over the last year have dropped 25, 30%. That's the type of stuff that we have seen this week. And at the same time, a lot of good value stocks, a lot of dividend-oriented stuff has actually performed very well in the height of this volatility. This, to me, is the rotation that we believed was coming.

I don't know that it's fully here, but this was a big week in terms of seeing a lot of high-growth stuff fall off and yet a lot of other stuff not fall off. It bodes watching. I assure you, nobody's watching it closer than we are. I'm going to leave it there for the week. I really do hope you'll enjoy the extended weekend. I hope that your Easter Sunday is a memorable one. And I also hope that you get to watch a little Final Four on Saturday. Please reach out with any questions, any comments. Quarter one of 2018 is done. And now we move into quarter two. And there will be a new earnings season, new sets of fundamentals, driving markets. And that's what we're here to monitor

on your behalf. To the extent you have any anxiety about this volatility and you're a client of the Bonson Group, please reach out. Talk to us about it. We'll walk you through it. To the extent you have anxiety about this and you're not a client of the Bonson Group, maybe you should rethink that. Have a wonderful weekend. Thank you for listening to The Dividend Cafe. Financial food for thought. LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there's 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

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