The Dividend Cafe - The Dividend Cafe Monday - August 5, 2024

Episode Date: August 5, 2024

Today's Post - https://bahnsen.co/3yu2UHE In this special Monday edition of Dividend Cafe, David discusses the extraordinary market volatility and the factors driving it. He dives into the unwinding of the yen carry trade, U.S. market valuation concerns, and the economic fundamentals at play. David also highlights the impacts on major tech stocks, the bond market's reaction, and other key financial insights. 00:00 Introduction 00:27 Market Overview and Recent Volatility 01:48 Global Market Influences 03:13 Three Key Issues Impacting the Market 05:21 Economic Fundamentals and Market Reactions 09:02 Asset Allocation Insights 10:47 Market Tidbits and Final Thoughts 12:30 Conclusion and Encouragement 14:52 Disclaimer and Legal Information Links mentioned in this episode: 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 the Monday edition of Dividend Cafe. Yes, it is a special edition. I like to say that all the time. But when you're talking about these kind of markets, I think that it becomes a bit more special. It certainly becomes more important. Let's never forget that the Dividend Cafe started because of these days that create extraordinary market volatility and warrant some degree of additional commentary. And there's a number of things I want to say about the market. First of all, let's just set the table as to what has gone on and then talk about what has caused it.

I'm going to go through most of the normal things we cover in Dividend Cafe today, but there's a need to give the overall context behind what's happened in the markets. Those who were paying attention to futures on Sunday night and certainly early morning Monday, which hopefully is almost none of you, but obviously was me, saw that the market was set to drop over a thousand points. At the open today, it had been down over a thousand points Thursday, Friday, and there had been a significant sell-off in a lot of the tech space here in the States. That had really started July, about the second week of July or so. And yet it accelerated last week and there were some fundamental things behind it.

And then just that, as I wrote about Dividend Cafe on Friday, that valuation story catching up where a lot of these overvalued things were getting hit. When you wake up to the words of the Nikkei, to the announcement of the Nikkei, the Japanese stock market being down 12.5% in one day, that is not just simply a U.S. valuation correction. Initially, the Nikkei opening down on Sunday night, our time Sunday or Monday morning in Tokyo, that could be perceived as, okay, there's a kind of knock-on effect to what had happened in U.S. markets on Thursday and Friday. But obviously, 12.5% representative violence, Taiwan was down double digits as well. It was very unique to Japan. And so this then really starts to become the driver of concerns in U.S. markets, not the consequence of concerns in U.S. markets. And the consequence of concerns in U.S. markets.

And so I want to suggest it real quickly for those who are not going to make it through the whole recording. There's three issues going on. I'm sure you could find subcategories of a fourth, fifth, sixth. A lot of times people love it when I just say one thing, but this really is three different things that have some overlap in a hypothetical Venn diagram, but really represent three stories that I think played into today's market. And number one is this unwinding of a yen carry trade. It's the most technical and perhaps for some of you the most boring, but thekei was the the japanese actors were obviously so over levered in borrowing in yen which had been very cheap the yen has violently rallied against

the dollar over the last several weeks and accelerated in that rally over the last several days and essentially you have an unwinding of a levered trade that absolutely ripped the faces off of traders in some of the Asian countries last night and that has carried through into U.S. markets. So the unwinding of a yen carry, the short covering of the yen itself, which has been rallying against the dollar, these things now complicate the picture of number two, which is the just overvaluation in U.S. big cap growth. You take overvaluation and then see the concerns we had last week of Microsoft's results. Questions about whether or not some of the big orders for AI chips are slowing, whether or not the revenues from AI are materializing, whether or not the opportunity set out of AI is even coherent. And then the unrelated issues today, Google losing an

antitrust case in the Department of Justice. The word over the weekend that Warren Buffett, Berkshire Hathaway had unloaded a big portion of their Apple stake, which is still a gigantic stake in Apple, but nevertheless accelerated a sell-off there. So you have some very large companies that are very largely owned in index funds. And the big sell-offs there have exacerbated the volatility and not exactly come remotely close to touching an attractive valuation. That's number two. Number one, yen carry trade unwind. Number two, U.S. valuation excess. And then number three is this question about the fundamentals of the U.S. economy. And this is where I have to remind people that the norm is for markets to sell off when the Fed begins

cutting rates. That is not the exception. The market is almost always down nine months to a year later when the Fed begins cutting rates. There are exceptions, but the notion that, oh, the market didn't know the Fed was going to be cutting rates, and now the Fed announced and pretty much told us it's going to cut rates. So I would think the market now is going to go up because of that. When the market was up 15% when the Fed wasn't cutting rates over the last nine months. This is the issue I spend so much of my time trying to help people understand, but it's very hard because it's somewhat counterintuitive. It isn't totally natural, but it is most certainly consistent. Markets are discounting mechanisms, and they price in things today that they believe about the future and humans don't think that way humans are dealing with what's going on today markets are able to

price in especially things that they know to be the case it's always harder to price in things you don't know, but you price in a certain probability. This is the norm in market history. When I bring up economic fundamentals, viability, you see the jobs report that was indicating on Friday, much less job growth than had been anticipated. There are the unemployment rate hitting up to 4.3%. There are questions about whether or not the recession that didn't happen in 2022, that didn't happen in 2023, is potentially going to come back around into 2025. I would be shocked if it were on the table for this year. But again, is there some concern about a recession going in next year? And let's say there isn't. Is there concern, though, about declining expectations for growth? That even if you don't get to recession,

you get less growth than had been expected. It doesn't quite qualify as contraction, but by lowering growth expectations, you have to lower corporate profit expectations. And corporate profit expectations have been rallying higher, pushing markets higher. And if you're in for several months of downward revisions of 2025 corporate profit expectations, then you're very likely in for ongoing sell-off in markets as that gets priced through. So the viability of this economic fundamental position is called into question. There's plenty of things that are hanging in there. The ISM services came out today. They were back in expansion mode. They had been in contraction last month. There are other things, you know, that even the labor market, it was not a good month. It was not a good month before either by the standards we've been used to, but it wasn't

terrible. It just was slowing. And I think that wondering if some of these things are going to hold how they had held in 2023 is very reasonable. So to recap, you have yen concerns, which is by definition short-lived, as a lot of that leverage gets unwound. You have valuation concerns, which play out how they play out and usually have rallies and gyrations along the way, pump fakes, things of that nature. And then you have the economic fundamental story. Now, let's talk about some good news. For asset allocators, 2022 was a very difficult year in the sense that the broad stock market for index investors got killed and the broad bond market for index investors got killed. And so that kind of 60-40 portfolio did something it hadn't done in 100 years, and it gave a double-digit negative return on both stocks and bonds.

Right now, the correlation between stocks and bonds has totally fallen apart. It had been heavy. It had been historically strong for a long time. That is a negative. I don't like stocks and bonds having a high correlation. But now, bonds have rallied violently as stocks have sold off. The 10-year today getting down to 3.78%. It actually got to 3.66%. And then it did reverse a bit. But again, you're talking about more or less 100 basis points off of the 10-year in the last few

months. But the point I want to make about the bond market is the two-year, where when you see 3.85 in the two-year and the Fed funds rate still at 550, that 165 basis point delta between the Fed funds rate that the Fed controls and the two-year that the market controls. That's the highest I've ever seen in my career, and I would reckon it's the highest it's ever been. This is the bond market telling the Fed, you're behind. And that inability of the Fed to have gotten in front of this, which was obviously very predictable, now has to work its way through markets. In the interest of time, I'll just wrap up a few other tidbits. Bitcoin was down 15% at one point today. It's down 21% in the last week. The MAG7 at one point today, I think it

got a little bit better at some point throughout the day. But at one point, the aggregate MAG-7 names were down over $1 trillion in market cap. The VIX, which started the day at $23, which it had been somewhere between $13 and $15 for months, the price that people are paying for protection on the S&P, the so-called fear index, at one point hit $65, up 180%, closed closed at 38, which was still up 60% on the day. That, by the way, is a kind of bullish indicator because all the people overpaying for that protection are usually very contrarian indicators. So there's just a lot of idiosyncratic things taking place within markets. I hope those explanations of the three major factors are useful. The news cycle, we know that there is the report that they were going to give life in prison to the people who killed 3,000 Americans on 9-11, and then the

Defense Department took that deal away and has regained control of it. And that plea bargain is not on the table. There's a lot of talk about whether or not there could be an Iranian attack on Israel in the next 24 hours. Intelligence reports indicating such. You could read in dividendcafe.com for some of the more granular things from public policy that I cover, as well as Fed updates, some of the economic data. But I just felt that this podcast and video should be committed today to the lay of the land in the market and what we are doing about it. I am very pleased with how Core Dividend is holding up the dividend growth space. When you get sell-offs like this, everything comes down to some degree, but just not even in the same

stratosphere of the NASDAQ, which is now down 13% or 14% from its high a few weeks ago. The S&P is now down 8.5%. But even those drops, they could get a lot worse, but they're not that bad at all relative to history. And yet, whether you're talking about dividend growth, which is hanging in there pretty well, and then you're talking about the NASDAQ, which has gotten hit harder, or some of these big mag seven names, which have gotten hit a lot harder, regardless of what it is you're looking at and what one may say about how these things go up and down and all that. I recognize it's very challenging for many of you, that it can be unnerving. I don't take that lightly. My professional ability to not be rattled by markets

is not a sign of low empathy for what any of you may be feeling. On the other hand, my empathy for those who feel nervous or concerned cannot allow us to make mistakes or facilitate mistakes. These are things that are supposed to happen in markets that are guaranteed to happen in risk markets. And we have an obligation to see these things through and be consistent and diligent in how we apply what we believe in. And I do not get rattled, first of all, because I've gone through it so many times I cannot count. But more than that, I'm very aware of the benefits to the way we've constructed portfolios and what immunity we think exists around times such as these. Those things produce not only an intellectual but an emotional fortification against what's happening.

And I hope you feel the same. And I hope you'll talk to your advisor if you're not. And we will continue bringing you information all week, all of our perspective. It's why we come out with our best content ideas and thoughts every day. And you'll be hearing from me again tomorrow. Thanks for listening, thanks for watching, and thank you for reading The Dividend Cafe. Please send this to anyone who would benefit more from a Dividend Cafe than a Xanax. Thanks so much. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor

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