The Dividend Cafe - The Dividend Cafe Monday - July 22, 2024

Episode Date: July 22, 2024

Today's Post - https://bahnsen.co/3y4VVVt Impact of Biden's Withdrawal on Market Volatility and Political Projections In this episode of Dividend Cafe, David explores the significant impact of President Joe Biden's unexpected withdrawal from the 2024 re-election campaign on the market and political landscape. The discussion examines historical parallels, potential outcomes of a Trump vs. Kamala Harris presidential race, and implications for Senate and House races. The episode also delves into the potential market volatility anticipated during the uncertain political period leading up to the election, and its potential effects on fiscal, trade, and regulatory policies impacting investors. 00:00 Introduction to Dividend Cafe 00:12 Special Monday Edition: Political and Economic Insights 01:55 Historical Context: Biden's Withdrawal and Market Implications 05:08 Senate Races and Political Dynamics 08:15 Market Volatility and Election Predictions 10:45 In-Depth Political Analysis and Predictions 22:13 Conclusion 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 and welcome to a very special Monday Dividend Cafe, where normally on Mondays we go around the horn with, of course, market action, but also public policy, oil and energy, the Fed, housing, a number of different categories, the big economic data of the day and the week. And we're going to do a lot of that still this week, but that sort of public policy category, which is where we usually incubate some of the political discussion, various things happening in the Beltway that might be pertinent to what's happening in the economy, in our portfolios. It's interesting that an earlier iteration of this very weekly material podcast, the writing, the video, we actually called the DC Today on purpose because Dividend Cafe has been our

longtime investment vehicle for writing weekly commentary. And the DC Today was meant to be a sort of play on Dividend Cafe combined with the kind of Beltway activity, Washington, D.C. And so there's always been a juxtaposition in my writing and my thinking between the political policy, governmental sphere, and what's happening in the economy, markets, and all of it to some takeaway that's relevant to investors. and all of it to some takeaway that's relevant to investors. It just is kind of particularly noteworthy today for the very obvious reason that one of the most significant events in American political history did formally take place yesterday. And that, of course, was the removal of himself, of President Joe Biden, from the reelection effort. We have gone through a

whole primary. He was essentially uncontested in the primary and owns all of the delegates. A little fun fact trivia that I promise you will come up in some trivial pursuit game or family contest or maybe just bar bragging rights in 30 years. He actually did have one area there. He did not win the delegates, lost to somebody else in this 2024 primary. And it was not to another Democratic opponent that you would have heard of. And it was not in the U.S. state, but in, I believe, Guam. There was someone, I want to say it was Jason. Even I'm forgetting his last name, but it wasn't a real candidate. He actually won a few delegates.

But all that to say, President Biden dropping out with the nomination that was going to be his at the convention. We haven't had something like this happen since 1968 when Lyndon Johnson, who was also an incumbent Democrat president, withdrew. The market implications here are significant in the sense that we have a weird dynamic that the person running for the Republican, who has the Republican nomination formally secured through the convention last week, was president a number of years ago in very recent history, Donald Trump, obviously. And so there is some understanding already of what his agenda might be, of what some of the economic policies may be. It isn't necessarily the exact same as when you have a challenger who is somewhat unknown or there's

some degree of speculation as to what they may stand for or want to do economically, etc. Donald Trump is meaningfully ahead in the polls over Joe Biden. I happen to have seen some private polls that were internal in the Democrat Party that are worse for Joe Biden than a lot of the public polls. Private polls, public polls, battleground state, registered voter, likely voter, even popular vote, all of this together contributed to a narrative that this was either already past the point of no return of the ability of Joe Biden to win the race or that the odds were very low. And at that point, similar to Republican fears in 1996 with Bob Dole running against Bill Clinton, that there was a sense in which it could start to undermine

various Senate races and congressional races as well. My own theory of the case has been for some time, there are about six or seven contested Senate races. And in West Virginia, the Republicans are going to pick up a seat basically for sure. The current governor is running. West Virginia is a largely Republican state that just happened to have had a very well-known former governor who was technically registered as a Democrat, who's now registered independent named Joe Manchin. So technically there was a Democrat seat there. He is retiring and about to be replaced by the current governor who will win that race going away. So there's one pickup there. I would imagine the state of Montana is going to be a close race. Montana is a very largely

Republican state. It happens to have had a Democrat incumbent, John Tester, for some time. It's hard to poll the state for kind of obvious reasons, but there are polls that indicate that Tester could lose. There's polls that indicate it could be very close. But we could add that one as, OK, that could go Republican. But the other races that Republicans have a chance to pick up a seat, they have another Republican senator and President Trump won by a large margin in Ohio. And yet that race is, I think, overwhelmingly favoring in the polls the incumbent Democrat. Michigan does not look particularly close. Arizona, the Republicans nominated for

Senate the candidate who just lost by a few points for governor a couple years ago. And it looks like the seat that was given up by Kyrsten Sinema is, according to the polls, about to be filled by a new Democrat challenger running from another congressional district for the U.S. Senate position there. I can go into all the different states. My point is that when you look at the polls in these other races, you don't see a clear Republican plus four, Republican plus seven, Republican plus three. Trump was doing that in all of these states with Biden, which to me allows for a political deduction that the challenge was Biden. It wasn't necessarily a red wave.

And so that theory will be tested. If the polls don't move at all with this change, then it might very well indicate that November is headed towards greater electoral success for Republicans. Democrats are dealing with because of the age and concerns of health and well-being of the incumbent president and some of the political issues as well around inflation and immigration and whatnot. But with that removed, I think that the race will tighten a lot. And you go, OK, David, that's great for all your political opinion, but what's this mean for my portfolio? Well, I do think that when you go from something that had the appearance of about to being not a very close election or not a very mysterious or uncertain one as far as the final outcome to one that I think is very likely going to go back to what I

had expected all along, which was a more unpredictable outcome, then I think you can expect it to add to volatility. And so one of the things I would suggest when we start looking at the possibility of a three and a half month runoff between former President Donald Trump and current Vice President Kamala Harris is that there will end up being kind of a lot of sideways action because of the impossibility of pricing in, having two-way risk around some of these issues that may very well matter. My friend Renee Ananow, strategist at Corbu, put it this way, and I think this is very helpful. You're basically talking about trade policy, fiscal policy, and regulatory policy, policy, fiscal policy, and regulatory policy. And that there is now two-way risk on each of these fronts could go either way. And that the best thing to bet on out of this, at least for the

next few months, is sideways price action. And I think that's largely correct. I spent almost all Sunday afternoon and Sunday night in a slew of different calls. I've talked about this before. I happen to be cursed or blessed, depending on how you want to look at it, with a reasonably deep Rolodex of political strategists, consultants, insiders, people who work in actually both campaigns, former strategists and media people and this, that, and the other. And some of them know what they're talking about. And some sometimes do not. Some of them, I think, are wonderful people. Some of them, I wouldn't dare loan them money as I joke in Dividend Cafe. But all that to say that you try to gather as much information as you can for the purpose

of sharing it with you all and applying it to what we're doing in terms of positioning our portfolios. I stand by the most important takeaway I've had all year, which is that it will be a close election and that knowing the presidential outcome doesn't necessarily help investors. Let's say that the presidential outcome is now going to end up being President Kamala Harris, that she picks a vice president who puts a state back in play that is not currently in play, and that she's able to define herself before the Trump campaign defines her and put daylight between her and President Biden on some of these issues that are problematic with immigration and inflation being the most obvious.

And so she ends up winning. And yet Republicans flip the Senate seat in West Virginia and Montana. You can throw in one more if you want to be nice. But as I mentioned, Nevada, Michigan, Ohio, Arizona, they're not, none of those are looking good. Pennsylvania, not looking good either in the Senate seats. And of course, they're running against incumbents. The Republicans are running against incumbents, most of them, not in Arizona, as I mentioned. But my point being, it's always tougher to run against an incumbent. But the Republicans were hoping to try to flip four, five, six seats.

They may flip two, they may flip one, but let's say they flip and it's 51-49 Republican advantage in the Senate and you have a President Harris. Now, how does one go about predicting what that means legislatively? Well, I'll give you one prediction. There's not going to be a lot passed. There's not going to be a lot signed into law. Get the executive orders here and there. Those don't mean anything. They don't mean anything when President Trump does them. They don't mean anything when President Biden does them. They reflect a certain state of intent, positioning in the country, but they don't have teeth. So let's say President Trump ends up winning, that even if Kamala Harris narrows the race, the polls are strong enough, there's enough angst over various factors, and we know there's a lot of enthusiasm in a lot of his base. Let's say he ends up winning the race.

And yet the Republicans, which just have two, three, four advantage in the House, tons of Republicans not running for re-election, new races. And let's say the Democrats win the House by five seats. It could be by one seat, but by five seats, they don't have to flip that many. And Hakeem Jeffries is the new Speaker of the House. So you have a President Trump with a Democrat majority house. You're not getting anything signed into law then either. So more or less, I do believe this presidential stuff matters with committees. It matters with the national mood. It matters with the bully pulpit. It obviously matters in terms of our own country, the commander in chief, the appointments of judges. There's a

lot of factors that play in. But market wise, when we talk about tax policy, trade policy, regulatory policy, what is going to happen with the president being this person or this person, if there is still divided government, which is what we've mostly had for a very long time. I would suggest that the bulk of my lifetime having divided government has a lot to do with the bulk of my lifetime being a pretty benign period for markets, that some of the bad ideas one party or another may have from time to time, get reasonably offset with the divided government in our separation of powers across the three branches, as well as just the structure of how a bill becomes a law. Let me give you a few other little nuggets, because so far I've just been

completely off script. You could consider this my impression of President Trump's speech on Thursday night, which I will have ended up being the latest I have stayed up in a long time because I do not generally go to bed that late. I'm here on East Coast time. And my understanding of the speech, the transcript, a copy of which was sent to me, is it was 2,200 words, which would be a short dividend cafe. My average dividend cafe is about 2,500 words each Friday. Sometimes it might be 2,000, sometimes it might be 3,000, but I'm usually about 2,500. And I believe that President Trump's speech was 2,500 words or 2,200 words. And then the real transcript

of what he actually delivered ended up being over 13,000 words, something like that. So basically, a speech that was supposed to be about the length of reading one dividend cafe went to being six dividend cafes. So anyways, the reason I bring that up was that it went long because he was off script quite a bit. And most of what I've said here so far has been as well. I think that a few nuggets I want to go through for you on the podcast and the video that are in the written dividend cafe today. I think that this race is unlikely to stay exactly where it is with Kamala Harris coming in, donors getting excited again, and just there being some sort of recharge of some energy and some hope on the Democrat side compared to what's been a very difficult month, obviously. I think that it

could narrow three to four points, or I think that the lead could expand three to four points. But I don't think it's very likely now to expand another three to four. I think that was a possibility 24 hours ago. And if there were going to be three or four significant, legitimate Democrats vying for it and creating some disunity and some chaos, I mean, you essentially are getting just an appointed, essentially are getting just an appointed, coronated candidate, but that is not technically appointed or coronated. And so the fact that Kamala Harris is going to have a pretty easy path to just taking over the nomination, yet without a civil war within the Democrat Party, is a very good thing for them politically. Had there been a fight over this, I think that that could have potentially expanded President Trump's lead. But again, I would imagine that it narrows and I don't have the foggiest idea

what happens from there. I'm well aware of what her vulnerabilities are as a candidate, and I'm aware of what the advantages are. Right now, the biggest advantage is that she isn't the same candidate who the Democrats had before, who was not doing well in polls and was suffering from the age and health related issues that he was. So all that to say, I expect this to be a roller coaster for the next few months. Wild. I don't know how well behaved everyone will be. I will say I happen to believe that Senator Mark Kelly in the great state of Arizona would be a very potent choice for Kamala Harris as her running mate. I don't have any inside information that she's going to pick him.

I do know that they're vetting him and that they have a list of candidates. And there's going to be pros and cons to any candidate, but I think that he would put Arizona back in play. And Arizona is right now not in play. President Trump's lead over Biden was really getting quite large there. Arizona coming back in play could be interesting. Now you could say, okay, but the Rust Belt holding the blue wall, either Wisconsin, Michigan, or Ohio, or excuse me, Pennsylvania, I'm not sure that any of the candidates that could be selected there would necessarily guarantee any of those particular states. And in Pennsylvania, there are some other vulnerabilities. That's where I was headed. I think Governor Josh Shapiro, who's a bit more moderate of a Democrat governor, was

an interesting possibility. But he's brand new as governor, hasn't even been there two years, has no foreign policy experience. Both he and Kamala Harris are former attorney generals, prosecutors. So you don't get a lot of diversification of skill set or background. And it's possible President Trump's already secured Pennsylvania. prosecutors, so you don't get a lot of diversification of skill set or background. And it's possible President Trump's already secured Pennsylvania. The assassination attempt took place there. His polling lead had expanded. That may be a dead end straight, so they may pursue a different avenue to try to block the Trump team from getting to 270, and Arizona may

be a place to do it. So we'll see where that goes. But what I am going to be focusing on quite a bit when I write my white paper after the Democrat convention is around where both candidates stand on trade policy, fiscal policy, regulatory policy. I don't believe that the recent moves where value has all of a sudden narrowed the path against growth. The Russell 2000 was up 8% or 9% relative to the NASDAQ over the last couple of weeks. Oil, the dollar, and everyone assuming that all these things happen in financial markets must be because of an expectation in the presidential race.

And the thing I wrote about here in Dividend Cafe I want to share with you guys is just to help you understand, first of all, how futile, non-falsifiable, non-provable things like that are. But second of all, the inerrant impossibility, because yes, you could argue the markets were pricing in what was becoming a greater likelihood of President Trump beating President Biden. Let's say President Trump was up to a 70% chance that he was going to beat Biden. Well, there was another thing happening too. The betting odds were also 70% that President Biden was going to be dropping out. So could the markets have been pricing that in? You see my point? I think people are trying to do a retroactive fitting in as an explanation of a prescriptive narrative. Why would President Trump be better for value than growth or better for small cap than NASDAQ? Or why would the dollar be down? Now, I could have arguments for some of those things, but I could have arguments for the other as well. for the other as well. I just think it's so hard in this politically idolatrous age for people to accept that sometimes markets are not responding to polls with three and a half months to go.

And you could, yeah, on a margin, I think this election was starting to get away. It was. But no, markets, look, they very well may end up deciding that something has changed in the outlook for this race. But that day was not today. There's going to need to be time for this whole thing to get organized, get settled. And we'll see more about the politics of it all in the days ahead. But we'll also see more about the markets of it. And I would suggest that's not in the days ahead, but the months ahead. That would be my prediction, which means sideways action. It means volatility. It means a little uncertainty. And that is a byproduct of having liquid financial markets in a large and complex country that is essentially a 48-48 country on how many of these big political issues go.

I'm going to leave it there. In case you want to know that market was up today, technology was up the most, energy the least, the bond market barely moved, blah, blah, blah. This was obviously a much more political discussion. If somehow anything I said offended any of you, let me know. I would find that almost impossible. This was me at my most behaved. There you go. Thanks for listening, watching, and of course, reading the Dividend Cafe. We'll see you soon.

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