The Dividend Cafe - The Dividend Cafe Monday - October 7, 2024

Episode Date: October 7, 2024

Today's Post - https://bahnsen.co/4dAvbL5 Dividend Cafe: Market Insights and Global Events Impact On this Monday edition of Dividend Cafe, David Bahnsen, Chief Investment Officer of the Bahnsen Group, discusses significant market trends and global events affecting the economy. He covers various topics including the recent jobs report, market performance, especially in tech stocks and IPO activity, and the dynamics of monetary policy with a focus on upcoming Fed rate decisions. The episode delves into dividend growth investing, highlighting the evolving role of dividends and stock buybacks in total returns and dives into geopolitical tensions, particularly the aftermath of the Hamas attack on Israel. The discussion ends with notable economic stories such as Argentina's public policy shift on rent control. Bahnsen invites financial advisors to engage directly with him for specialized content and closes by promoting additional content available on the Dividend Cafe platform. 00:00 Welcome to Dividend Cafe 00:44 Housekeeping and Announcements 03:27 Market Recap and Analysis 10:06 Geopolitical Tensions and Impacts 12:32 Economic Data and Housing Market 15:02 Energy Sector Insights 16:07 Final Thoughts and Upcoming Content 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. My name is David Bonson. I am the Chief Investment Officer and Managing Partner of the Bonson Group, and it is my great privilege every Monday to bring this extended edition whereby we try to walk through a number of different issues going on in the world related to markets, public policy, the Fed, housing, economic data, energy markets, and so forth and so on. This was one of those weekends that I truly enjoy

prepping this Monday edition. A little extra time for reading, which means a little extra time for writing. And there's a few things that I think are quite important to share today. Let me do a couple quick housekeeping things, if you don't mind. For those watching the video or listening, we would love it at our YouTube page. If you're watching the video, if you don't mind. For those watching the video or listening, we would love it at our YouTube page. If you're watching the video, if you'd subscribe, I mean, you can always hit a little like too, but you know, I can live without those. The subscribe though just really helps to kind of generate some better results in the algorithm and get more convenient delivery notifications or consistency for you all. And so if you hit subscribe, that'd be great on

the video. We also have a whole inventory of our regular videos that we do, including the various media appearances, such as today's where I was on Fox Business on the Big Money Show at the top of the show, talking about different things with candidate Harris's economic policy, talking about the state of the economy. On Friday morning, I was on the Stuart Varney show, although not with Stuart Varney. He was out sick on Friday. But I tend to do an hour on set with Stuart about once a week. I was on Friday morning as well. And my team always puts together a highlight reel. I was on Friday morning as well, and my team always puts together a highlight reel. And so that's on the YouTube page as well.

And interestingly, on Friday morning, I made the comment on the show about the jobs report being very strong and the anchor filling in for Stuart Ash Webster, who's a longtime fixture at Fox News. He commented about it being a good jobs report. Seems rather uncontroversial. And the Kamala Harris official campaign account tweeted out the video of our clip as if we were saying something endorsing the campaign really by commenting on a strong jobs report. And last time I looked, I haven't looked in a little while, it had gotten over a million views. So thank you

to the Harris campaign for that free push. And of course, there's always some content that you might be interested in. The final housekeeping thing is targeted of the audience that reads, listens, or watches Dividend Cafe. There is a number of you that are in the financial advisory profession or in some element of wealth management or investment management. And I'd love it if you'd shoot me an email because there's something I want to ask just you that we don't have a way to know, you know, of all the subscribers who might be kind of inside the investment world. But those who are, there's a question I want to be able to ask. And if you'd send me a note, we have something we might want to do targeted to you all, but we want to get some feedback first. So if you'd send me an email, it's in dividendcafe.com today, I'd greatly appreciate it. Okay, that's about it. Let's move on. The Friday Dividend Cafe on China has gotten

a lot of feedback, a lot of discussion. I encourage you to check that out. Markets are up a lot Friday and then they were down today. It opened down 200 and closed down 400. Again, that's less than 1%. It's such a high denominator. Markets still closed basically right around 42,000. The S&P was down pretty much the exact same as the Dow and the NASDAQ was a bit worse, down 1.18%. The tech sector is interesting right now in the sense that 60% of its positions are above the 200-day moving average. And so when you're sitting there at these high levels and only 60% are above 200-day, It had been 80% of the positions within the NASDAQ that were above their 200-day moving average for most of the year. And now at 60, the breadth is

obviously lower. And we have to kind of see what that ends up meaning. There's a chart at divinitycafe.com that I find absolutely powerful and profound related to the multiple, the valuation, the PE ratio, quite literally, of the S&P 500 at past times of a first Fed cut, a rate cut after a period of Fed rate tightening, or if you want to mix the two words, period of Fed rate tightening. Or if you want to mix the two words, heikening, okay? Listen, this chart is basically giving you a historical reference because some would say, well, when the Fed begins cutting, that's a period of monetary accommodation, and then it really could be a great tailwind for stocks. And I think that that has happened several times when the Fed has begun cutting rates. Not always, but as you will see in the chart, the Fed's cutting of rates, beginning to

cut rates when the S&P is at 22 times earnings, forward 22 times earnings has never happened. Now, one time the S&P was at 21 times forward earnings. That was the year 2000. That did not go very well in the years that followed. So my view is that the don't fight the Fed mantra is absolutely true and yet has to be understood in the context of all other data, what the Fed's doing, why the Fed's doing it. And this is a unique and nuanced story. By the way, as a dividend growth guy, I talk a lot about how the S&P got about half its return forever and ever. I have a whole section in my book about dividend growth investing about this. And throughout the period of time, when we talk about the S&P averaging 9% or 10% a year, which is all true, that 4% or 5%, basically about half the return is coming from dividends.

But now the dividend is only 1.2%, the dividend yield. And so therefore, the total return is likely to be less mathematically, unless the price appreciation level is significantly higher than it's been in the past because the dividend contribution is much lower. And one of the prima facie acceptable counter arguments to my argument is that stock buybacks have changed the picture because companies are returning less to shareholders via dividends because they're returning more to shareholders now when previously this option didn't exist

via share buybacks. And that might even be a more tax efficient way to do it. Now, I have an investment argument as to why it's not the same thing, and that is not the superior way of affecting capital return to shareholders. But it does at least seem to address the issue as to whether or not there's just simply a lower portion of total return coming from capital return. However, the total combined yield of buybacks and dividends is right now only 3%, so still substantially lower than what a dividend focus yield would be of something hopefully closer to 4%, but then also its own historical average. So no matter what, even factoring in buybacks, the buyback plus dividend yield of the S&P remains significantly lower than history. All right. So the 10-year yield close today, a little over 4%. It was up four and a half basis points on the day.

And so the 10-year has moved from about 365 to 4%. So the Fed cuts rates, and it was at the time 370-something, came 360 something. Now it took a couple minutes and it's back up to four. Some of this is related to oil rates, dollar, all of those very correlated together right now. Only positive performing sector today, even with Dow down 400, we did not go 0 for 11 in sectors. We were one for 11 with energy up 35 basis points.

Utilities were down the most, over 2.3%. Quick final comment on markets, we'll move on. A gazillion companies in 2022 said, we're postponing our IPO. We're going to go public, but market conditions are terrible. NASDAQ was down 30%. The S&P was down 20%. We're holding tight. Well, then markets go on and have rallied violently since the end of 2022, coming up now on almost two years of recovery, new highs, significant market advance, and yet you still see a total collapse of IPO activity. It is simply not related to market conditions that IPOs have not happened. I think the non-existent IPO volume is related to the fact that, well, way less companies want to go public, first of all. Way less companies need to go public. Second of all, there are monetization options in private

markets for founders and early investors that do not require public capital. And then finally, a lot of the companies that had been going public that there was an appetite for, they were, shall we say, lower quality companies. Markets have been fine over the last year and a half, but the shiny object world has not. And since a lot of these IPO type companies fit there, it may just be a kind of exception that proves the rule. Conditions for that kind of stuff have not really gotten a lot better. And it's an important distinction. All right. We do know that today is the one year anniversary of the utterly horrific, unspeakable events, October 7th, 2023, when Hamas launched one of the largest terrorist attacks in history, murdering thousands

of Israeli citizens and what has transpired since. I think that there has been just as disappointing as the violence of that day, so much of the response on the global stage, where there continues to be a persistence of anti-Semitism, but also a persistence of underrating Israel's ability to defend herself, her competence, her resilience and determination to not allow those who hate her to have their way. And my line in Dividend Cafe today was that her foes underestimate her resolve to their own peril. One year ago today, a date of infamy indeed. But of course, as this is playing out, there is a lot of heightened geopolitical tension. Israel is continuing to go after Hezbollah. Read a report

from my friends at Corbu Macro Intelligence over the weekend, very intertwined with the geopolitical strategic components of many conflicts around the world and this particular dynamic. They do not believe Israel is going to target Iran's nuclear facilities at this time, but rather is working heavily in Lebanon to significantly impede and further impede Hezbollah's missile capacity, where even though the Iron Dome of Israel continues to shoot down these horrific missile attacks that Iran and others have made at them, the fact of the matter is that Israel is focused on diminishing that missile capacity. Would Israel go after Iranian refineries, pipelines?

It is entirely possible. Iran does represent, as I talked about in the energy section at Dividend Cafe today, 12% of OPEC production now over the last several years since the Biden administration softened some of the sanctions from the Trump administration. They were only six percent. So they about doubled their output in the last several years. But there would be an international consequence from Israel doing that. And at this time, at least Corbu, macrointelligence, doesn't believe they will. It's something we're well aware of as a possibility out there. The big economic story was definitely the jobs were up 254,000 in the month of September. About 100,000 more than expected. Unemployment rate fell to 4.1%. And the past two months were revised higher, revised up by 72,000. So it was certainly a good month. Manufacturing, it still had month over

month job contraction. The one fly in the ointment I would say, I mean, obviously the long-term fly in the ointment for me is always the labor participation force not being high enough, but the hours worked went down to a 14-year low. And that's a little tough to square with some of the other data, but 34.2 hours worked, 0.1 less than the month before. We want to continue keeping an eye on that. All right. In housing, I put a chart in Dividend Cafe today that I think tells the whole story in need, which really comes down to when buyers and sellers, both equally, accept that mortgage rates are not going back to the absurdly low levels they were in 2020-21, and yet are coming off of the more elevated levels, 7% to 8% we'd had in 2023 and 2024. So if we're in the high sixes right now,

is there a querying number that unthaws the market, allows some activity to take place, but that meets in the middle, somewhere around 4%, 4.5%, 5%. I don't know what the number is, but I think that continues to be the big question in housing. Please check out the chart in dividendcafe.com. So expectations for the Fed changed dramatically in the last week. A half a point at each of the next two meetings of further cuts is pretty much off the table. There's still a small, I think it's 12% probability of the futures market. But the overwhelming expectation now is that there will be a quarter point cut at each of the next two meetings. That's somewhere around 80%.

There's a little tail possibility in the numbers that it will be less than that, tail possibility more than that, but really a quarter each meeting is the baseline case now. And there would have to be a really big job disappointment number or job outperformance number to change that. I think quarter point per meeting is very likely to be the case. By the way, that number I shared before about Iran and their percentage of OPEC production dropping and then coming back up, there's a chart of that in Dividend Cafe today as well. Energy stocks were up 7% last week. I mentioned that the oil sector up today. Obviously,

that's directly related to a lot of the move with oil, which by the way, was up another 4% today. Obviously, that's directly related to a lot of the move with oil, which, by the way, was up another 4% today. It was up 9% last week. It's still in the 70s, though. So that's the thing. It's up quite a bit, but it had been down into the high 60s. It's now at $77. Not exactly a brutal level on an absolute basis, especially when you look at some of the things we've been used to. So my against doomsdayism is very short. Argentina rental listings are up 184% and rent costs have dropped 40%. And these two very correlated feats happened. How?

From one person being elected and affecting one decision of public policy, the elimination of ghastly rent control. Sometimes things can get better because of policymaking and eliminating bad policy. And we've seen it in Argentina in spades. All right. I will leave you to thedivineycafe.com to read the Ask TBG for today. And I'll be with you Tuesday, Wednesday, Thursday. Brian will do the podcast and I will get caught up with a lot of the questions many of you asked. So you'll see me over the next three days with my What's on David's Mind section and the Ask TBG. Other than that, I'm going to leave it there. Thank you for listening. Thank you for watching. And thank you for reading the

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