The Dividend Cafe - Sell in May or Hold Today?

Episode Date: May 4, 2017

Sell in May or Hold Today? by The Bahnsen Group

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer of the Bonson Group. And we're excited to be into the month of May. And we kind of want to cover all the things impacting markets this week and deal with that old adage, sell in May and go away, because it didn't work out real well in 2016. And frankly, it's always really been more of a nursery rhyme than coherent investment advice. So here what we have to say today, and let's see if we can't provide you something worthwhile here at Dividend Cafe. What we have here is not a failure to communicate. The Bonson Group cares more than your average bear about investor education.

It's one of the reasons we do these podcasts, for example. We communicate with our clients relentlessly about what is happening in their portfolios, what we are doing, why we are doing it and more. We write the weekly dividend cafe and do the YouTubes and podcasts and different forms of content creation because it's always been our view that more informed clients will equal more trusting clients, trusting in the process and philosophy by which their money is being managed. I personally accept media requests from time to time to share our outlook on markets and the most optimal ways to manage capital because we believe in the merits of disseminating our investment worldview. However, and this is just vitally important, the studies are painfully clear

that the primary need most investors have is not intellectual, but temperamental. The biggest determinant of outcomes is not information, but behavior. We see both pieces as a key part of how we earn our fee, but should we ever have to pick between offering one or the other and we don't have to pick? We would opt for proper guidance and direction in client behaviors any day over our vast efforts to inform and educate. That's how important this issue

is. April showers bring May flowers. Markets created positive returns in the first month of q2 as april saw an s&p 500 go up nearly one percent and a dow up just over one percent emerging markets continued their upward climb rising 1.7 percent in april now over 14 percent year to date. Oil dropped two and a half percent per in April was down 10 percent at one point. MLPs were slightly down on the month. Earnings season has gone well for the most part and equities remain off their all-time highs set in early March yet up meaningfully on the year. The story getting little airtime is bond markets. As each and every fixed income class we're invested in has posted a positive total return year to date, whether it be credit sensitive or duration sensitive, meaning interest rate oriented bonds. Rates are off their

highs. The credit environment has been positive. Merging market bonds have been the leader. So yes, eyes remain on global growth, tax reform, and company earnings. But April did continue the rally of 2017. It's what the Fed didn't do. It's what they did say. As expected, the Fed left interest rates alone on wednesday at their may meeting however they did give more color on their balance sheet plans and we think investors ignore this at their own peril the fed essentially has built up a four trillion dollar balance sheet since the financial crisis buying treasury bonds and mortgage-backed securities with money that did not exist. Very few people expect the Fed to actually begin selling assets,

a form of tightening that would reduce their balance sheet and express a very hawkish bias. I don't expect them to ever do that. But since QE3 ended, the Fed has been reinvesting maturing securities on their balance sheet, meaning their balance sheet has not been allowed to come down, even though they stopped building it up when they ended quantitative easing. In short, they've been running in place. The expectation has been for roll-off, whereby the Fed lets maturing securities roll off, does not reinvest the proceeds, so it's a soft, passive way of reducing the balance sheet. This is what we believe the Fed will do, but we don't see them beginning it until later in the year. There is a chart at dividendcafe.com that you really have to look at to appreciate

how interesting this conversation is about being in a quote-unquote rising rate environment. It shows you the historical levels of the federal funds rate and where we are now and puts in perspective how far we have to go to really be considered a risen rate environment. Our three themes in the bond market, believing that overall there's very unattractive risk reward in traditional bonds, yet still believing in the need to diversify equity market risk and maintain a balanced portfolio. Three themes are we want shorter duration all things being equal we favor spread product spread strategies meaning those

that derive the return from their credit risk that gives them a spread and yield over commiserate Treasury type bonds. So we think of high yield, floating rate bank, corporate credit, emerging market debt, things of that nature. And speaking of emerging market debt, point number three, that space we think has a lot of tailwinds, done very well there so far this year and remained bullish in that space. Consumer confidence is often held up as a big factor in what one may think about markets, but we have to say that we really do believe with consumer confidence at a 30-year plus high, it's more of a lagging indicator than a leading indicator. The last time consumer confidence was close to these levels, it actually is now above and beyond, but 2007, and that did not exactly prove

to matter as we went into 2008 and so forth, just like the very low consumer confidence level in early 2009 didn't stop the market from then going into a massive multi-year bull market run. So history has not been on the side of those who believe consumer confidence is a great leading indicator. The data does have various periods over the years that could be somewhat incoherent, but the point is consumer psychology, which is what consumer competence really measures, it's often confused and would not be something we would set investment policy around. There is some really interesting stuff at DividendCafe.com this week about oil prices. We're frankly surprised that with oil dropping the way it has this week, the stock market prices didn't drop more with it.

But we maintain our position that Saudi Arabia has a big motivation to keep oil prices stable as they prepare to sell off their nationalized oil business into the capital markets, into public capital markets. We believe that there is a real overestimating of the supply capacity and a very underestimating of the global demand as we look out several years and ultimately this idea that it's U.S. shale producers that are offsetting OPEC's desire to curb production and therefore continuing excess supply issues. To us, if indeed that is true, then it must surely mean that the MLPs would be benefiting because there would be increased volumes coming about. So all things considered, perspective on oil worth considering.

We're going to go ahead and leave it there for the week. We do encourage you to check out marketepicurian.com, a brand new web property we started this week that will focus on a single topic. We may do it weekly. It may be less than that. But the point will be to do kind of a deeper dive, a little more high-end vocabulary and investment sophistication more complex topics getting a more complex treatment but again we think hopefully adding value to those of you that want to learn in that deeper end of the pool market epicurean.com our initial issue went up this week and of course dividend cafe what you're listening to here on this podcast and what we do on our website there for many, many years continues to be our very core offering. And we hope you continue to get

value from that. Have a wonderful weekend. Thank you for listening. Dividend Cafe podcast. Thank you for listening to the Dividend Cafe. financial food for thought. The Bonson Group is registered with Hightower Securities LLC, member FINRA, MSRB, and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No

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