The Dividend Cafe - The Dividend Cafe Monday - November 11, 2024

Episode Date: November 11, 2024

Today's Post - https://bahnsen.co/3YHm5qE Market Insights on Veterans Day: Stock Movements, Credit Confidence, and Policy Updates In this Monday edition of Dividend Cafe, recorded at the New York office, David discusses the unique market conditions on Veterans Day, where stock markets are open, but bond markets and banks are closed. Key topics include the stock market performance, with the Dow rising by over 300 points while big tech sectors fell. The conversation touches on the ongoing market breadth, low volatility as indicated by the VIX, and tightening credit spreads, suggesting both bullish indicators and potential market complacency. Additionally, upcoming policy changes under the new administration are reviewed, along with oil price fluctuations and potential long-term debt issuance by the Treasury. The episode concludes with a note on upcoming meetings between Presidents Biden and Trump and encourages the audience to send their questions to be addressed in future episodes. 00:00 Introduction and Market Overview 01:04 Stock Market Performance on Veterans Day 01:28 Sector Analysis and Market Breadth 03:00 Credit Markets and Economic Indicators 04:42 Valuations and Investment Strategies 06:56 Public Policy and Election Ramifications 09:19 Federal Reserve and Interest Rate Policy 12:32 Conclusion and Upcoming Topics 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 the Monday edition of Dividend Cafe. I am actually recording at my desk here in the New York office because we're having a few technical difficulties. But nevertheless, we have a fair amount of things to go through today. And it's one of those days where we had one of these about a month ago as well, where on Columbus Day, the stock market was open. The stock market was open today, Veterans Day, but the bond market was not and banking system was not. And there are only two days a year that are like that. And this is the second one. So I just want to quickly reiterate my comments that there are inefficiencies and

things that I think are suboptimal just based on the way asset allocators work and traders work, that when some of the activity you would normally expect for risk assets cannot also be accompanied by issues in the cash markets, in currency, and certainly even in fixed income, it does theoretically throw things off a bit. Now, the stock market opened today up the Dow up over 300 points, even as the NASDAQ and the S&P were down. And it got up near 500 points at one point. It closed up 300. It gave some of that back. But again, the rally was not really focused in some of the big tech things, the bulk of which were actually down today. Technology was the worst performing sector, down almost 1%. And yet, consumer

discretionary was top up one and three quarters. But financials, industrials, some of these pro-cyclical sectors that rallied hard last week continued today. You look at oil right now, which was down about, let me make sure I want to give you the exact number, 3%, closing at just over $68 a barrel. And the midstream side of the market was up 9% last week. It's up over 40% on the year now. And that non-correlation between the pipelines and the energy infrastructure story and the price of the underlying commodities has continued to be quite a story. The big thing today, though, with the bond market not open and a lot of these sectors

continuing to go is just the ongoing breadth of the market, whereby that MAG-7 and the big tech has been less of a catalyst to ongoing market growth. That's a reasonably bullish indicator. You know, the VIX is down below 15 now. It was at 22 less than a week ago. So there was a fair amount of protection and expectation of volatility going into the election. All of that got taken out. And now you see a very low volatility profile and a very low cost of protection in the fear index. And all the while, market's doing real well. You look at credit spreads, which I have all this detail in Dividend Cafe today, but I'm going to give you the exact numbers. You're looking at bond spreads, again, using high yield over the comparable same duration treasuries that are right now 274 basis points.

So you're going to get 2.75% more in yield for junk bonds than you will for United States government bonds. That's pretty tight. The all time tight was about 250 back in 2007. So we're not really that far from that, but we're not there. But it had been at about 288 before the election. So it's tightened 14 basis points more in the last week. And it had been about 325 throughout the summer. The point I want to make is that there's a high degree of confidence in credit markets. There is very little default activity going on. That's fundamentally solid.

But the high confidence in credit and risk in economic conditions is both a bullish sign, but then from a contrarian indicator, a bearish sign. What I mean by that is fundamentally the backdrop is good. The overconfidence in that backdrop is where you start to get a bit concerned. Tight credit spreads can last for a while. Tight credit spreads sometimes can be expected in a good economy when the Fed is easing monetary conditions. But nevertheless, if the VIX gets low and stays low and gets too low while credit spreads stay tight and stay tight, at some point, you start to worry about some complacency. And that is in a backdrop of a market with, obviously, very rich valuations.

OK, what else do I want to cover from the market today? VIX, land, the underlying tension, it just continues to be a valuation versus fundamental backdrop. Profits are at all-time highs. Profits are growing. Margins are at all-time highs, profit margins. Profit margins have been growing. GDP has grown. Some of these economic details have done better than expected. All of that, you say, why wouldn't we expect markets to be higher? Well, you would. The question is, this much? For how long? You look at the magnitude of returns, and valuation becomes an issue, and it becomes important for people to be diversified, to lean into quality, and of course, to asset allocate. By the way, the Russell 2000,

you look at small cap, it's up now 50% from where it was just over a year ago. And it's just a couple points away from its all-time high itself, where it had been down for three years. It hit an all-time high in November of 2021, now coming within a whisker of that very number. All right. 18 all-time highs is the average that the S&P 500 hits in a year 18 times the S&P hits an all-time high it's hit at 50 this year and I for the life of me can't understand why people think that tells them anything every number of the markets ever been at was at one point an all-time high all-time highs are things you hit on your way to new all-time highs. Markets do go up and down, but it being at a high itself doesn't speak to whether or

not that is predictive of anything. Valuations are important, but I talk about that all the time. But price level highs, if you were to say, I can't really feel good about the market at all-time high, and you get 50 of them, I guess there were 49 other times that maybe that didn't pan out in one year. But the reality is, it's just a weird way to look at it to begin with, because it happens every year. So the issue is really whether or not one wants to be a risk asset investor or not. And then, of course, whether or not the investment strategy one's using is conducive to the valuation environment. So I've got to go into public policy a little bit, but Friday's Dividend

Cafe went deep into a lot of the ramifications from the election, post-election results, expectations, certain policies as we prepare for second Trump administration. I mentioned Friday, they've announced Susie Wiles as campaign manager to be the chief of staff. Today they announced Stephen Miller will be the deputy White House chief of staff of policy. Miller was a speechwriter, but really a senior advisor in the first term. He's very much an immigration hawk, but a guy who's connected to a lot of elements of Trump's policy platform. Who else did they announce today? So Tom Holman was the former ICE director that they've now announced to be a sort of border czar. And I think that's going to be a very popular pick

for a number of reasons. Elise Stefanik is a congresswoman out here in New York that he's nominated to be the UN ambassador. This will require Senate approval. And then Lee Zeldin, who is also a former New York congressman, to be the head of the EPA, the Environmental Protection Agency. So we're starting to get more of these picks, and none of them have really bothered me a lot yet or concerned me, or concerned markets. But as we get deeper into some of the bigger economic names, we'll have more commentary. I'm going to devote this Friday's Dividend Cafe to an update around a lot of the issues of policy as we prepare for the new administration. Some questions have come in about social security,

about health care. I want to address those questions, take more questions throughout the week, questions at thebonsongroup.com. And then I want to, by the end of the week, hopefully have a more updated personnel assessment that I can provide some market commentary on. I'll leave it there for now. The GOP Senate issue, you know, talking about personnel, the president doesn't directly pick this. And so far, he's shown that he may not come in. I mean, if he does end up putting his thumb on the scale, I got to think that's going to end up going the way he wants it to. But so far, I think he's letting this sort of play out a bit and it's getting a little ugly between John Thune, John Cornyn and Rick Scott. I suspect it'll end up consolidating between one of the Johns and then

Rick Scott. But that kind of matters a little bit too, but I don't want to get into it yet. I'll wait and see how it plays out and explain why it matters then. That's a better way to do this. So the Fed has cut rates three quarters of a point now, a quarter last week, half a point in September. The market expectations are at 68% implied probability of another quarter point cut next month. It's not until the third week of December. So there's a lot of data that will come between now and then. But 68% means 32% odds of no cut at all, no hike, just level set. I will say this.

There's more talk because Senator Mike Lee chimed in this week that the Fed should be under the executive branch and implying the president would have a role in setting interest rate policy. And I just want to say that I think every president would love to set interest rate policy. And I think every president would want to set it low. That's all I'm going to say. I mentioned oil. I mentioned midstream. Against Doomsdayism has a link in dividendcafe.com this week to an article in Human Progress about the way in which some of us who aren't billionaires are sort of billionaires in that we can pay $500 for a phone that other people put billions of dollars into prepping for us, or we can pay $10 a month for streaming to watch movies that other people put billions of dollars into prepping for us, or we can pay

10 bucks a month for streaming to watch movies that other people paid hundreds of millions to make. And it's a fascinating article. And this entire concept of marginal economics and the beauty it represents, whereby we benefit and the people paying a lot more money than we pay out benefit all at once. This is against doomsday. Somebody asked if the Treasury Department will look to issue longer, like ultra long-term debt this time around, 50-year, 100-year. I don't imagine they will, but I think they'd love to if they got another chance. But when they had a chance before, you were in the zero interest rate environment on the front end of the curve.

And you could have issued 50% or 100% of your debt of maybe 3% or some premium on top of 3%, where now, obviously, rates are higher. But I do want to say that one of the reasons they couldn't get done before is while there was demand, and they would have sold out a subscription of that, it would have been maybe in the tens of billions, not trillions, and probably not even hundreds of billions. And so the resources, time, effort, et cetera, to go do it for something that is such a small amount of debt issuance was not worth it at the time to them.

Now, the benefits to investors are large to be able to go buy a large deflation hedge that actually pays you instead of you paying a carry cost. I like it for those reasons. And obviously, in hindsight, it would have locked a lot of debt and produced a lot of stability in the term structure of the treasury curve. But yeah, I mean, you only know those things in hindsight. And I don't know that they'll get another chance at it. You either want to do it when the yield curve is severely inverted, which it's now uninverted, or when you're at ZERP, zero interest rate policy.

Those two environments give you a chance to do it opportunistically. We'll see what circumstances play out for Treasury into the future. I'm going to leave it opportunistically. We'll see what circumstances play out for Treasury into the future. I'm going to leave it there. President Biden and President Trump meet elect. President Biden and President elect Trump. It's confusing with this Grover Cleveland situation. We'll meet at the White House in person on Wednesday. We'll pray for a drama-free conversation there. And then my Divin Cafe Friday is going to be chock full of media election commentary. I'll leave it there. And then my Dividend Cafe Friday is going to be chock full of media election commentary. I'll leave it there. We're open for questions all week at questions at thebondsongroup.com. Thank you for listening. Thank you for watching. Thank you for reading the Dividend Cafe. Have a wonderful week and happy Veterans Day. The Bondson Group is a group of investment professionals

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