The Dividend Cafe - The Dividend Cafe Monday - December 9, 2024

Episode Date: December 9, 2024

Today's Post - https://bahnsen.co/49t7mo8 Market Insights and Key Investment Principles - Monday Edition In this episode of Dividend Cafe, host David Bahnsen discusses recent market events, highlighting the impact of policy changes, geopolitical developments, and sector performances. He provides an analysis of stock and bond market movements with specific attention to the differing performances within the MAG7 stocks. David also elaborates on the importance of understanding market euphoria and valuations, offering tailored advice for clients and general insights for non-clients. Additionally, the episode covers significant news events, including the removal of Bashar al-Assad, economic updates such as job numbers and office leasing stats in NYC, and the evolving situation with the Federal Reserve and TikTok legislation. 00:00 Introduction and Market Overview 01:10 Market Performance and Sector Analysis 04:45 Investment Principles and Market Sentiment 08:05 Global News and Political Updates 12:40 Economic Indicators and Policy Insights 16:25 Energy Sector and Final Thoughts 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. Well, hello, welcome to the Monday edition of Dividend Cafe. I am your host, David Bonson, here to discuss all the things around the horn in today's market and actually touch on a few other key investment principles today. One in particular that I think is really quite important. There's a lot happening with policy. We know the new administration is continuing to make changes and make moves. We also know it's been an extremely eventful weekend around the world. I'm going to talk about some of those key things. A little less to say with the Fed and with housing, but a couple points we will hit and then with oil and energy as well. So we'll do the normal deal,

but let me just kind of jump into it here. First and foremost, I do want to point out we're back in the Newport studio. It is just so wintry to look out the window and see the summer beach weather here in Newport in the middle of December. But it's lovely to be back in Newport. Have not been here in a couple months. And Diveny Cafe will be recorded here this week as well. So that'd be kind of fun. Listen, the market today, we'll get the boring stuff out of the way, opened up 70 points and it closed down to 40. So this is a half of a

percentage point on the Dow. The S&P was down a little more than that, down 61 basis points, the NASDAQ down 62. Both the NASDAQ and S&P were down from the very beginning, but that kind of all three indices took on a little additional leg down in the last hour or so. The top performing sector today was healthcare. It was up 22 basis points. I think the only other positive sector was real estate. Utilities might've been as well, but it was definitely a very defensives-oriented day. Financials were the worst performer, down 1.41%. The 10-year bond yield closed at 4.20, so up 4.6 basis points. So that may have been some of the stuff going on within the Dow was just the pressure in the bond market with yields moving higher. Definitely on the NASDAQ side, we know some part of it was that China announced an investigation

they're doing with some issues with NVIDIA, and that had their stock down a little bit. But one of the points I wanted to bring up was that since the election, NVIDIA was up 1.8%. It's probably negative now because I think it was down 2% or 3% today. But going into today, when I was writing this at 4 o'clock this morning, NVIDIA was only up 1.8% since the election. Tesla's up 54% since the election. The MAG-7 just cannot be talked about monolithically anymore, when in a month of time, you have one stock up 1%, another stock up 50% in the same kind of grouping, the market is up over 5%. So you should actually take this very optimistically that the market has shown a greater resilience

where NVIDIA is not pulling it along and other things are going better. And that is not something that most would predict, that NVIDIA would be lagging and the market would still be doing quite well. But more important than that is just the fact that the Mag 7 itself does not and will not and has not acted in an equal or monolithic fashion, and I don't expect it to going forward. I guess that kind of covers the most of what we're going to say today. A little down day for bonds, a little down day for stocks. But the back of napkin math here real quick, and this is actually very, very close, but I do think it's relevant. Technology and healthcare are estimated to represent 50% of the year-over-year

earnings growth in the S&P next year. So in other words, the S&P has kicked off about $2 trillion of profits for 2024. That includes what we are expecting to come in for this fourth quarter that obviously hasn't reported yet. And the earnings expectations right now are for about $2.3 trillion of corporate profits next year. So something close to about 15% in corporate profits next year growth. Well, $100 billion of that $300 billion additional growth is expected to come from tech, $50 billion of that from healthcare. So in just two sectors. And yet one of them being the big frothy, expensive, high performing sector of tech, the other being the lowest performing sector of the year in healthcare. So do with that what you please. And this brings me to kind of a

very long point. It's very rare in the Monday Div Cafe I write something this extensive, but I kind of want to make my point to you on the podcast and video that I have a lot to say frequently about market euphoria being overstretched, that the market sentiment when everybody's very bullish and we're like a couple standard deviations above normal level of bullishness. And there's this thing that we'll use called the Citi Euphoria Panic Indicator. They measure a bunch of things, kind of index it. And it's been very reliable. I am not backing away at all from what I've always said,

that when you look at a very low VIX, when you look at very low credit spreads, when you look at a very high Euphoria Indicator, when you look at very low credit spreads, when you look at a very high euphoria indicator, when you look at a very high P.E. ratio, when you look at very low put call ratio. These are different measurements that indicate a certain complacency around risk. And these things are wonderful contrarian indicators, terrible timing indicators, and yet I can talk about it until I'm blue in the face. What is it that I'm suggesting someone's supposed to do about it? And this is where you have to understand the dividend cafe. There are two audiences.

It is an entirely different message for clients than it is for non-clients. And all I mean by that is what should be done about it for clients has been done. That we are always baking into our asset allocation, baking into the way we have constructed the portfolio, what it is we believe about the potential up-down movements in various asset classes relative on a very customized basis to each client's appetite for volatility, liquidity needs, income generation, age and risk and things, but also just the big picture of what we're trying to accomplish in that client portfolio. So the fact that things can be overvalued and stay overvalued for a long time is a part of the calculus and the fact that things can be undervalued and stay undervalued for a period of time. So why do I bring it up for non-clients and why is it not easy for me to answer what a non-client ought to do?

Because I don't have any idea what has already been done. I do not believe that every non-client is necessarily in need of doing anything. So I think that when you're talking about valuations being stretched, if you are excessively allocated to the things that have the most stretched valuations, it's entirely possible you want to look at rebalancing. It's entirely possible you want to look at trimming. That's up to you and your advisor, or if you are your own advisor, it's none of my business. But Dividend Cafe is a source of investment commentary and information to a much wider audience and our own client base.

And I think this is very relevant material. And to our own clients, the application of the material is already done because that's what we're being paid to do. All right. I'm sure there's more I said about it in the written Div Cafe, but I'll leave it there. Hopefully you understand my point. So, yeah, the big news events I alluded to, certainly the removal of Bashar al-Assad, who was a terrible, wretch of a human being, who apparently is now safely in asylum or exile in Moscow, who did get forced out of Damascus over the weekend, who has been the Syrian dictator and his family been in power for about 50 years, if you count the generation before him. the rebel forces have removed him. And so

this is a positive event to have him removed. What is going to be happening in its stead is very unknown. I'm totally sure that there will be enhanced uncertainty right now. I do not know that anybody should be all that excited about who's coming in. That's not my point. To say that one bad actor's been removed is a matter of moral clarity. To acknowledge ambiguity about the actor coming in is a matter of pragmatic clarity. Just a couple other quick news things. I would have guessed Wednesday of last week that the Trump administration's nominee for Defense Secretary Pete Hegseth was dead. It's Wednesday of last week that the Trump administration's nominee for defense secretary,

Pete Hegseth, was dead. And I would guess right now, today, four or five days later, that it's very much back on. There's been quite a kind of resurgence around those odds. Still a moving target, but it looks like it's headed to a confirmation hearing. To get to confirmation hearing, I'm much more confident that that ends up getting done and people can have their own opinions about it, but I'm just sharing it for what it is. Then it may seem like a local story, but I think it's captivated much of the country. But the police did just hours ago arrest the prime

suspect in the murder of the UnitedHealthcare CEO last week, which took place across the street from our midtown Manhattan office at the big, huge Hilton Hotel there at 645 in the morning as this lunatic has now been apprehended by police in what's been a four or five day manhunt. And a pretty fascinating, I've tried to follow it pretty closely, pretty fascinating combination of technology, of detective work, of policing combined with public input. And I would just say, I should have put this as against doomsdayism. Thank God it's much harder to get away with murder these days and be on a manhunt. So there you go.

On the policy side, the Federal Appeals Court, I think it was on Friday that they upheld this ban on TikTok. And many have said the Trump campaign said they were going to re-look at that. You got to remember, this was signed into law and it's supposed to go into law just before President Trump is re-inaugurated. I'm not totally sure there's much he can do about it. It may get appealed and then get kicked out to the Supreme Court. And that may be a way that President Trump doesn't have to deal with it. And that may be a way that President Trump doesn't have to deal with it. He may allow it to go into law, but then just pass some kind of order or instruct his own DOJ not to enforce the Apples and Googles that have the apps in their platform

from having it. So there's things he can do. But yeah, by the courts allowing this to go through, it does, if he's going to undo it, he's going to have to undo it. And so the TikTok divestment thing, it may not matter to you. I don't think any of you own private shares in ByteDance that own it, but it is a big story and we'll see where it goes. I also just for my own edification put in today a little data point and I've probably put it in before, but let's just put it back out there for you. The top 1% of income earners in our society earn 26% of all the income earned in society. So that might seem like it's pretty disparate. 1% of people earning 26% of pay, but they are paying 46% of the federal income taxes. And I would add, if you put in state numbers, it makes it even more severe in terms

of that disproportionality. The middle class, which I'm defining as those in the 50 to 75% of wage earners, earn about 18% of income, and they are paying 8.5% of all federal income taxes. So it's important to realize the progressive nature of the tax code when we think about things that need to happen in the tax code next year. And that will be a huge theme that I'm unpacking going into the end of the year and beginning of next year is some of the expected changes on the tax side. Economically, we got the jobs number on Friday, 227,000 jobs created for the month. That was a little bit above consensus, but right, pretty much in consensus. But then the revisions were higher for September, October, another 56,000 revised upwards. The unemployment rate, though, increased to 4.2% with the labor

participation force. And the hourly earnings were up 0.4%, so year over year, coming in at 4%. Again, the hurricane revisions and so forth, it was inevitable that there was some skew in a lot of the data. The other thing I point out is the civilian unemployment, where the only difference is really the methodology, how numbers are gotten, and then they include small business startups. That was down substantially, but that's a very lumpy and volatile number. Used car prices are dead flat year over year in the latest Mannheim Vehicle Index report. New York City, SL Green, one of the largest office landlords, expected to lease out two, no, they wanted to lease out two million square feet

of office space this year. That was their ambitious goal at the beginning of the year. They ended up leasing out three and a half million square feet, 75% above projection. Total across the city, 30 million square feet of office space has been leased out this year. It's the highest in a single year in six years. That is not to say everything is going great for all office buildings in New York. It is to say things are going phenomenally well compared to every other big city in the country. And things are going phenomenally well in New York for good office buildings,

for good locations and good product. For bad product, bad locations, it's certainly a different story with well over 10% vacancies, about 13% blended. People thought that was going to 20, 30 or higher. More and more companies back to work. There's a lot of financial sector in New York and the financial sector seems to have a lot more grownups than other sectors. And so you have a lot less people working in pajamas. All right, what I'm going through quickly. Federal Reserve. This is interesting to point out that the Fed Fund's future is still pricing in over 85% chance of a cut next week, but that the notion that the Fed may need to hike rates next year has come up from a couple economic reports I read over the weekend because the economy is just too darn strong. And they talked about the 2.8 percent annualized growth that we saw for GDP in Q3. And right now, the Atlanta Fed tracker suggesting over 3% in Q4

annualized, which again, that's like kind of right at a historical average. It's not even above a historical average. But saying that is just too high of a number and the Fed for inflationary reasons may end up having to hike. And this is a mistake that comes from one thing and one thing only, which is the utter idiocy of believing that economic growth is in and of itself inflationary. It is not. And I do not agree at all with the analysis. The Fed may end up cutting rates at a slower pace than some expect. They may use the cessation of quantitative tightening as a more

aggressive policy tool than the Fed funds rate. There's a lot of things the Fed can and might do. But hiking because the economy is growing is just something I would like you to get out of your mentality as much as you can for the simple reason, I'm not even worried about a bad investment application from it. I'm worried about what horrifically bad understanding of economics it captures. Oil was up about one and a half percent today, but still sitting in the 68th. Midstream got hit last week. I haven't said that many times at all this year. It's down about 3% in the week. Utilities were down four. Got a big midstream energy conference taking place in the city this week. And we'll see what kind of reports and projections we get from companies out of that.

I would reiterate, there was a large section about OPEC plus and about oil production and expectations for drill baby drill here in the United States. That has been reprinted in today's Monday Divin Cafe from the Friday Div Cafe for those who want to reread it. And I'm going to leave it there. There's an Ask TBG and Against Doomsdayism in the Dividend Cafe. We'll have, again, our daily recap each day this week, and I'll bring you another Dividend Cafe on Friday,

as always, same bat time, same bat channel. Haven't decided yet what topic I'm going to address, but I know it's going to be a fun one. I'll leave it there. Please reach out. Questions at thebonsongroup.com anytime. Thank you for listening. Thank you for watching.

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