The Dividend Cafe - The DC Today - Thursday October 20, 2022

Episode Date: October 20, 2022

Trevor Cummings here, and I am honored to be joining you for the third day in a row.  As mentioned yesterday, David Bahnsen will be back tomorrow with his weekly commentary – Dividend Cafe.  Additionally, I invite you to subscribe to my weekly writings at thoughtsonmoney.com. Now, off to the updates from this busy Thursday market day… Dow: -91.01 (0.30%) S&P: -0.80% Nasdaq: -0.61% 10-Year Treasury Yield: 4.232% (+10.3 basis points) Top-performing sector: Communication Services (+0.36%) Bottom-performing sector: Utilities (- 2.51%) WTI Crude Oil: $85.71/barrel (+0.19%) Key Economic Points of the Day: • Liz Truss has resigned as U.K. Prime Minister ◦ This was the shortest tenure in British history ◦ Note, her Finance Minister was dismissed from his post after just 38 days • Jobless claims came in at 214,000 on an expectation of 230,000 ◦ The impacts of Hurricane Ian on the data looked to be much lighter this week ◦ The total number of people collecting unemployment benefits sits at 1.39 million, near a 50-year low ◦ In simple terms, the labor market remains tight • As to be expected, U.S. existing-home sales were down ◦ The figures came in at 4.7 million, nearly on the dot with expectations ◦ This is eight consecutive months of decline and, when compared to September 2021, a slide of 23.8% ◦ Reminder, mortgage interest rates are skyrocketing, the general population is on edge regarding inflation and recession, and this combination of anxiety and affordability is slowing down activity • The Philadelphia Fed manufacturing index published today ◦ This regional look is meant to give a sneak peek at what the national ISM data might look like next month ◦ the numbers came in at -8.7 on an expectation of -5 (note, any number below 0 represents declining business conditions) TheDCToday.com 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. Hello and welcome to DC Today. I've been with you three days in a row and it has been an honor. I just want to thank everyone for their kindness. I've gotten more emails than I can imagine of just super encouraging words. So I appreciate that. You will have David Bonson back tomorrow. He's written his weekly Dividend Cafe. So hopefully you enjoy that. And I'm sure I'll be filling in in the future. lot of data points to go over, but I got a really good question. I think it was last week or maybe the week before where somebody, and I love these types of questions because they're so simple. They're so direct and you have to slow down and think, okay, what's the right answer? I guess. So the question was this, it's like, Hey, if you guys are really long-term investors, why are you so interested or so passionate about current events and what's happening every day? And I was like, wow, that's an incredible question. And I could see how

somebody at first glance would think that those things are at odds and there would be some sort of tension between them. But let me kind of help you out. So I think what our responsibility is to have a pulse on what's going on in the markets, partly just so we can inform our clients so that they have some sort of, what word would you use? Faith or confidence that we're engaged, we understand what's going on. I've seen both sides of it. I've seen where folks dive too deep into the granular and there's not a lot of application, but I've also seen the other side where I find financial advisors just say, hey, it's all going to be good in the long run. Hope for the best. And we're long-term investors, so we're good to go. We try to sit in the tension. We look at what's happening daily. And here's where I think you definitely need to understand

is not every data point is going to be something that's actionable. And that's just a reality. But I can take you through the history of our own practice and kind of highlight areas where we dug in, we saw something and it materially changed the way that we manage clients' assets. I give you an example of during the COVID moment where treasury yields came down to next to nothing. And we had to sit down and say, hey, when we looked at owning treasuries historically, what did we see as the benefits? And we walked through kind of three key benefits, that it would be a way to create some form of income, that if things got ugly, there'd be a flight to safety where there'd be a bid up,

and there's some liquidity there. And we had to go and say, do all three of those things still exist? And some of them didn't. So again, that materially changed how we advise clients, how we built portfolios. And as David wrote in his annual letter, how we grew our allocation on alternatives. Now that's one small example, but I want clients to be thoughtful of that because again, I'll say it again, not every piece of information is going to be actionable. But what I was thinking about before I started recording today was thinking about a surgeon. How much do they study? How much do they practice to make one small cut? And I started to think it's kind of like an informed precision that you educate yourself. You'd understand what's going on in the world for those informed precision that you'd educate yourself, you'd understand

what's going on in the world. For those few cuts that you'd have to make, there'd be a high level precision because you're informed. So as we go through that data, I want you to be thoughtful about that because I know there can be a lot of anxiety out there. I know that anxiety could lead to folks wanting to always just take action. And that's not always going to be the case. The other thing that I'll add to that is some of these things will give us opportunities to peel back or pull the thread and understand, is there a financial truth we can grab from here? So again, we'll start off with just the numbers. Markets were down today, but nothing too exciting. The Dow was down 91 points. That's down 0.3%. S&P was down 0.8%. NASDAQ was down 0.6%.

The 10-year treasury, that's where all the focus is right now, is up 10 basis points. So again, it's pushing against 15-year all-time highs. And that's that tension point between what the Fed is doing, what the market thinks the Fed is going to do, and where that interest rate is going to sit. So this is the most volatility that I've ever seen in treasury yields. Not saying that statistically, I'm just saying that from memory. If you look at the top performing sector today, it was communication services. They were up 0.36%. Utilities had a rough day down 2.5%. Utilities had a rough day down 2.5%, and crude oil was up 0.19%, which brought that to $85.71 a barrel. What I wanted to highlight was kind of the key things, the key data points that you got today.

The first thing I'll say is we saw a resignation from the UK Prime Minister, Liz Truss, shortest tenure in British history. Again, so there's a little tidbit we could ask, hey, what does it have to do with my own financial plan? But think about that. What have we seen from the UK over the last few weeks? Investors want clarity. And what have they been getting? A high level of the exact opposite, uncertainty. When we're talking finance, uncertainty equals risk. So that's why you're seeing a huge amount of volatility when you go look at British bonds and things of that nature. It's because nobody knows what's going to happen tomorrow. And again, we will never have the crystal ball to figure out what is going to happen tomorrow. But when we feel like things get more and more foggy, that's when things get more risky.

And that's where we see a higher level of volatility. Now, in regards to published economic data today, you had jobless claims that came in at 214,000. The expectation was 230,000. Some of that is going to be the fading effect of Hurricane Ian as people got back to work. One interesting thing, if you look at actual total numbers on unemployment benefits, it's near a 50-year low. What's the truth you can grab from that? Labor markets are tight right now. And as labor markets continue to stay tight, it will force employers to have to raise wages. And as they raise wages and there's more money sloshing around,

that does have an impact on inflation. Again, you have to understand the domino effect of how all these things intertwine. This is a complex system. The next data point that came out was existing home sales. And I don't have to give you this data point because I'm guessing that you know exactly what happened. Existing home sales are going to continue to decline. Why? Because mortgage rates are skyrocketing. Folks are anxious about inflation. Folks are anxious about recession. When there's a high level of anxiety, people are not as likely to make big financial decisions. Buying a home is

a big financial decision. So what we've seen is those figures came in at 4.7 million, kind of on the dot with expectations, but that is eight consecutive months of decline in existing home sales. I don't know this exact data point, but I think that gets you back to something like 2007 or 2008 when you had eight consecutive months of declining. Again, shouldn't be a surprise. We've talked about the last few days that folks will be less likely to make big financial decisions when they are unsure or again, uncertain about what's going on. And there's not that feeling of clarity. Obviously, you'll never get perfect clarity, but the sentiment right now is a high level of uncertainty. Another data point, it's helpful. It's the Philadelphia Fed Manufacturing Index.

What you're really looking for there is it's a regional snapshot to give you an idea of what ISM data is going to look like that comes out early next month. So you saw a decline in that data point as well. The expectation was negative five, came in at negative 8.7. All that means is if it's below zero, you're seeing deteriorating business conditions. So that should give us a foreshadowing to what that's going to look like when we get that ISM data next month. Oh, there's a good question in Ask David at the end. It says, on why you prefer the Dow versus the S&P 500 for a representative index. A topic I haven't heard addressed yet is what your philosophy on market cap of equities in a portfolio might be. What

goals or factors go into deciding the balance of small cap, for example? Thank you, James, for your question. One of the first things he said is that in one sense, we're kind of agnostic to the capitalization sides of a company. We have a descriptor of the type things he said is that in one sense, we're kind of agnostic to the capitalization sides of a company. We have a descriptor of the type of companies we want to buy. We shared it yesterday. It's high quality companies. We define that as strong free cash flow and a management team that's interested in sharing

that free cash flow in the form of a dividend. And they have a history of growing that dividend. Again, we think that is insider information. When the management team decides to raise their dividend, we believe that's telling you something about the health of future profits. What James is asking here is, hey, what should that mix look like?

Do you guys take your fishing pole and go fish in small cap stocks or mid cap or large cap? Now, some might accuse us of having a bias towards large cap because that's where we think there's probably the majority of high quality that fits the things we're looking for. But that's not the filtering system we use. The finance industry has been a little bit misserved by this concept or this idea of style boxes. You may or may not have heard that before, but just imagine a box split into nine quadrants and they're looking at small and mid-size and large or reverse small, mid-size large, and then value or core or growth. That was

introduced some years ago. And what you've seen in the way that people design portfolios, they just want to be in all nine quadrants. And they feel like that is the definition of being diversified. We reject that idea. We don't use style box or try to fit some sort of criteria. We believe we want to own high quality companies and we absolutely believe in diversification. So we do look at the sensitivity towards maybe a certain commodity like oil, like an energy company, or the sensitivity to changing interest rates, like a financial, to build what we believe is a prudent portfolio. But just this idea of owning a little of everything and kind of that indexing approach is absolutely what we

reject. So James, thank you for your question. We encourage you to email in questions. If you would like to read more of the content that I produce, you can go to a really easy website, thoughtsonmoney.com. And that's where I share my thoughts on money. Try to do that weekly. Sometimes I have to skip. I'll probably skip this weekend as it was a little bit of a heavy week producing the content for DC Today. Again, thank you for your kind emails, David Bonson. I was honored to fill in for you. He will be back tomorrow with his weekly Dividend Cafe. And then as we produce on Monday, you'll have that full report. As he digests everything over the weekend, you'll get a really robust written Monday DC today. That's me signing off.

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