The Dividend Cafe - The Dividend Cafe Monday - June 17, 2024

Episode Date: June 17, 2024

Today's Post - https://bahnsen.co/3KSk5VG Dividend Insights: Market Trends, Fed Influence, and Economic Policies In this episode of the Dividend Cafe, David provides a comprehensive commentary on the current market dynamics, including summaries on housing markets, federal policies, corporate taxes, and bond yields. Key topics include the performance of the Dow, S&P, and Nasdaq, the impact of public policies on elections, and an insightful analogy comparing market trends to Roger Federer's tennis career. Additional focus is given to European political stability, U.S. corporate tax rates, and commercial real estate metrics. The session concludes with observations on national vacancy rates, Fed rate predictions, and the law of conservation of outrage in human behavior. 00:00 Introduction to Dividend Cafe 00:41 Market Summary and Key Highlights 01:42 Stock and Bond Market Correlation 03:22 Market Breadth and Top Heaviness 08:10 Corporate Tax Rates and Economic Impact 11:02 Housing Market Insights 12:54 Commercial Real Estate and Office Vacancies 14:16 Federal Reserve and Oil Market Update 15:47 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 this Monday edition of Dividend Cafe. I am actually, you know it's summertime because I'm here recording at our house in East Hampton, although I fly back to the city early tomorrow morning, but nevertheless wrote most of today's Dividend Cafe from out here. And there's a lot of moving parts in the Dividend Cafe today, which I guess is appropriate because there's a lot of moving parts in my schedule this week as well. But let's just start off with the summary of today's market action. And then I want to get into a few other things about housing and the Fed

and our normal topics. And I'm even starting to delve into some of the public policy things that are going to be a big part of the election analysis that we're going to be doing later in the summer. The Dow today closed up 190 points, a half a percentage point. The S&P was up three quarters of a percent. The NASDAQ was up almost 1%. At one point, the Dow was down about 100 points. That lasted less than an hour and a half. And then it just steadily increased throughout the day, but nothing really dramatic. And in fact, you still had today utilities down over 1%, even though consumer discretionary was up over 1.4%. So there was a lot of divergence in results. The 10-year bond yield was up seven basis points today, but only to 4.28. So some will say, David, you've talked so much about this high correlation between stocks and

bonds, and yet we have days where the bond market is selling off quite a bit, stocks are doing just fine. And I think that that's true, that there are days that are exceptions, but they're often exceptions that prove the rule because when yields are low, like right now they've come down 50 basis points from where they were less than two months ago, then bond yields coming up a bit don't seem to impact things as much. But where we have had days that bond yields are moving higher from an already higher position, let's say something north of 450 on the 10-year, almost 100% of the time for the last two years, that has been a market sell-off. And inversely, from those levels, when yields have dropped and bonds have rallied, stocks have rallied along with it. So that correlation is still in place. I have

never believed it's going to last forever, but it has been such a strong condition of markets for a couple of years that I think it stays in effect until it doesn't. And the likely catalyst to when the correlation breaks apart is when we get on the other side of some Fed activity, whenever that may be. But again, this market rally that I've talked so much about the top heaviness of it, I think that I'm at risk of repeating myself too much. There being just too much redundancy when I keep talking about the top part of the market. In other words, all of the top heaviness illustrated from the top 10 companies or top three companies or what have you. But let's go to the bottom end of it to make a point. The amount of companies making

a new 90-day low, well, let's see, when do we want to start this period? A month ago, you had 8% of companies at a 90 day low, just 8%. Since then, it's more than doubled. There's now 17% of the S&P 500 at a 90 day low, yet the market is substantially higher. So more companies making short-term lows and yet the overall market growing. That's a textbook. I mean, textbook definition of low market breadth. They're not being a broad-based of market strength, but rather relying on a very small number of companies to carry the market. Another stat I just wanted to change because I read about it from Ben Carlson, whose blog I will read almost every day. And yet he is sort of quoting in his blog from Roger Federer

in a speech he gave as the commencement speaker at Dartmouth University this weekend. in a speech he gave as the commencement speaker at Dartmouth University this weekend, Federer was commenting on how he won 80% of his tennis matches throughout his career, but only won 54% of the points that he played. And I suspect that there's something very common in that for most successful tennis players, that they lose a lot more points than they do rounds, but ultimately they win a lot more rounds because, of course, they're successful tennis players. But what Ben pointed out that I think is utterly fascinating is how this is almost identical to markets when you look at years versus days. markets when you look at years versus days. 79% of the years in the market are up, but only 52.5% of days. So just like Federer as one of the most successful athletes of all time, the shorter the

time horizon, the less success, the longer the time horizon, the more success. And that principle is extremely important when we think about investor behavior, investor expectation, investor timelines. We have 100% of seven-year periods being up periods in the market, 98% of six-year periods, 88% of two-year periods, et cetera. It goes down over time all the way to only being 52% of days. But much like Federer, for a longer-term perspective, a lot of success comes. And I think that analogy was clever. And so I am not above borrowing someone else's work, albeit with attribution. So the 10-year close today at 4.28. We talked about consumer discretionary and utilities. One other quick note. I've got a couple of comments about France, Italy, Germany,

bond yields coming up. They're up about 50 basis points apiece. And speaking of the 10-year, in the last six months, they did move a bit in the result of the elections from a week ago and people being a little more concerned about stability in France and Macron calling the special election and all that. I'm not going to get into geopolitics here. I'm certainly not going to get into history, but this is something I've studied quite a bit. European dysfunction in politics is not news. Okay, it just isn't. And markets know that. But if I wanted to be surprised at something, it would be that people are still surprised at how the debt to GDP in these domiciles works. France had a 10-year bond yield at 7% or 8% 30 years ago. And debt to GDP was half of what it is now.

Their debt to GDP has doubled in what is essentially my adult lifetime. I'm 50 now, I was 20 then, and their debt to GDP has doubled. And yet we're talking about their bond market being between 2.5% or 3%. This is the Japanese way. This is the American way. This is the European way. Here is where you could be a real globalist. Higher debt to GDP puts downward pressure on bond yields, no matter how counterintuitive it is. It just is. I don't think it's counterintuitive, having studied why it is and written so much in Dividend Cafe about Japanification, but that it is is not up for debate. France's case in point. Current U.S. corporate tax rate, 21%. There is a fair amount of question about what could happen to that after the election. Please note, there's a number of

things in the Trump tax cuts from 2017 that are set to sunset at the end of 2025. And there's debate as to what a Biden administration would allow to sunset, what a Trump administration would do to extend. But the corporate tax rate is not going to change no matter what, apart from an act of Congress. The 21% corporate tax rate down from 35% is not sunsetting. And I think there's a lot of people who are forgetting that or maybe just benefit from being reminded. So I'm going to do that. Now, the Biden administration has said they want a 28% corporate tax rate. President Trump said last week he wanted 20. There's a good constituency in the House GOP that wants 15, no matter what it would take an act of Congress.

So that's just where we are. That's just where we are. There is some debate right now about does the share of corporate tax revenue in the United States economy represent a number far lower than international counterparts? And is there a lot of room to increase that rate? That is regardless of what you think it ought to be and where there's a number of arguments that could be made about where corporate tax policy ought to be, I won't surprise you to know I favor lower corporate tax policy as a means of driving higher wages and employment and economic activity. But regardless of my own opinions there, that argument itself is very disingenuous because the United States has a gazillion of what are called pass-through entities. So much of our business tax revenue comes on personal tax returns because

we receive it in the form of LLCs and S-corps that K-1 the business profit and the taxes that would come from that to a personal return of the owners and not captured at a corporate level. So our percentage of total tax revenue that comes from corporate returns is different. We're comparing apples to oranges to try to look at that relative to other international comparisons. By the way, how many U.S. companies have done what we used to call tax inversions since the new tax code in 2017? Were U.S.-based companies that re-domiciled elsewhere to take advantage of a lower rate? Zero.

Just saying. Grand total is zero. All right, look at dividendcafe.com today for a chart. We are at a new high of home prices divided by median household income. Basically back to the 2007 levels pre-financial crisis. Household incomes go up and down. And so when we just look at overall price levels on an absolute basis, it's entirely possible that prices move higher, but that doesn't tell us the story compared to a past point in time. We have to have something to compare it to.

And because people use their incomes to pay their house payment, house prices divided by average income is, I think, a very valid statistical data point. And we are at a high we've never seen before. And that chart will be quite beneficial. There's a number of other housing and mortgage-related type points. 38% of mortgages in 2019 had a rate below 4%. It's over 63% now. That's a huge reason why high mortgage rates have not impacted the economy,

because we have so many people paying a lower mortgage rate than they were pre-COVID, obviously because of the vast amount of people that bought homes from 2020 to 22, but even more so the vast amount who refinanced homes in that period. It is only 12% of mortgages right now that are above 6%. And when you look at the 63% that are below 4%, that number had been 75%. So how do we have that number even moving? You still have a small number of people who have taken on a new mortgage since the Fed began tightening, but it's very small. And that speaks to the very low level of activity going on in the mortgage market. One other stat I just wanted to bring up, because I've been talking more in Dividend Cafe about commercial real estate. The national office vacancy is right now, let's call it 20%.

It's a little bit less than that. It was, after the financial crisis, 18%. It stayed between 16 and 18 for 15 years. Between 16 and 18 for 15 years. Right now at around 20, it's about 2% higher than it's been for basically the last 15 years. The level of vacancies in Class A office is below historical average. The level of vacancies in Class B office is above historical average. But different cities have entirely different metrics. And certainly different office product have entirely different metrics. And certainly,

different office product has totally different metrics. But the no one is ever going to the office camp again, no one has ever went to the office again camp, probably would be surprised to know that vacancies are one or two percentage points above where they were for the last 15 years. And I think it's relevant to why many are surprised and how this is shaken out. By the way, national vacancy rate for retail 10, 12, 13 years ago was 11%. It's 10% now. It's actually improved. So certainly the no one is ever going to shop again camp has also been in for a rude awakening. 2% chance of no Fed cut in July. It will be 100% soon.

But then we're looking at about a 60% chance in the futures market. 61 to be precise of a rate cut in September. I still am skeptical about that. And then we are at a 76% chance of a rate cut by November. And a 93% chance by one or two rate cuts by December. So I think late year is still what my expectation is, but I'm just reporting to you the update in Fed Funds futures. Oil, a big move higher. It's up 10% from where it was less than two weeks ago. It was up two and three quarters percent today alone, back up above $80 a barrel. That is that. Please

read against doomsdayism. We're on our fourth law of pessimism today, borrowed from the great Martin Boudry. The fourth law of pessimism is the law of conservation of outrage. No matter how much progress the world is achieving, the total amount of outrage remains constant. This is human nature. We get conditioned to certain things, changes, circumstances, real stimuli change, but the level of outrage we need to feel stays the same. We can move the goalpost around it. This is a kind of basic human psychology, but when applied to pessimism, it makes a lot of sense. I'm going to leave it there. We've covered a lot of ground today. I will give you a quick market update this week. And then, of course, the broader Dividend Cafe on Friday. Brian and I will both

be with you. We're moving and shaking different places, a lot of different meetings in different states between now and the rest of the week. And between the two of us, we'll have you covered. Reach out with any questions as always. And thank you for listening to the Monday edition of the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisurities LLC, member FINRA and SIPC, 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 investment process is free of risk. There is no guarantee

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