The Dividend Cafe - The Dividend Cafe Wednesday - August 7, 2024

Episode Date: August 7, 2024

Market Volatility and Economic Indicators Update - August 7th In today's episode of Dividend Cafe, Brian Szytel discusses the market's downward trend following a previous day's uptick, with the VIX closing at 28. He provides an analysis of key indices, including the Dow, S&P, and NASDAQ, and gives insights into the bond market, highlighting the yield curve and credit spreads. Additionally, Seitel touches on the impacts of election cycles on market volatility, shares his views on option income strategies, and discusses recent consumer credit and trade deficit data. The episode emphasizes the importance of understanding market swings and maintaining a balanced investment approach. 00:00 Introduction and Market Overview 00:45 Market Volatility and Historical Context 01:41 Bond Market Movements 02:18 Credit Spreads and Market Health 02:50 Election Impact on Volatility 03:39 Option Strategies and Portfolio Management 04:20 Consumer Credit and Trade Deficit 04:39 Conclusion and Sign Off 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. Welcome to Dividend Cafe. This is Wednesday, August the 7th, and Brian Seitel with you here today on a down day in markets after yesterday's move higher. So we failed to continue on with some momentum, although yesterday's advanced decline ratio at 2.6 to 1 didn't have a whole lot of conviction to it, frankly, that we were out of the weeds completely. And the VIX closed today at 28. So high 20s on the volatility index means that we still have some more ups and downs here as we work through things in markets. The Dow closed down 234 points on the

day. The S&P was down about 0.77%. The NASDAQ closed a little lower than 1% on the day. The 10-year closed at 396, which was up five basis points on the day. Look, as an equity investor, you're taking on a higher level of volatility and risk for the higher rate of return that you're getting, call it double digits over time. And so some of this stuff is really par for the course. On average, the market drawdown over 50 years has been about 15% a year, about 14.7. So that's on average every year. We're supposed to have this mid-year drawdown of something around there. We're supposed to have around 5% pullbacks about three different times a year. So I think some of these years we've gotten a little desensitized to some of this, but this is

actually normal. Monday's move put us down about 8% on the S&P. We're down about 14% at the low on Monday on the NASDAQ. So in line, and frankly, I assume more to come. And as a dividend investor, I'm not sure that's necessarily a terrible thing because there's dividends being earned. And as cash flows get credited to the account, they get reinvested at lower share prices and you get a positive compounding effect over time. The bond market move has actually been probably more dramatic, at least in my view. The rally on both twos and tens to 360s, 367 or so, back up to now 4%. It's quite a round trip. The yield curve, by the way, closed today, inverted by the least at just three basis points, frankly, than I can remember at this point over a year, at least, since it's been basically completely flat. The difference

between two-year, five-year, seven-year, 10-year, and 30-year treasuries is basically negligible at this point. It's a very flat yield curve at essentially 4%, give or take a couple basis points. We did talk about credit spreads really nicely yesterday. David had a great piece in it. So I won't go over that again. I'll just tell you that what I view those spreads telling us is what lies beneath the surface. I view the equity market as what's going on front and center on the surface, and that credit market is what lies beneath, one being bigger than the other as far as overall market meaningfulness. Credit spreads moved out in this thing, but not enough to warrant anything major, and they came in a little bit today, not a lot. So I just view the credit market as still overall pretty healthy here, which is a positive sign. I made a little comment on the election

just because it's front of mind for all of us as we head into election months here. The volatility index peaking in July and August. So when we get a spike in volatility and a downturn in markets in July and August, we tend to favor the incumbent, at least in elections in the past. That was 96, 04, and 12. And then you look at the opposite, which is volatility ends up peaking closer to the election, call it September or October, than it favors the opposition. So 92, 2000, 2008, 2016, and 2020. Of course, history isn't a perfect example of what will go in the future. And of course, we don't know volatility will pick up from now until the election. But that all said, it may just alter your tolerance for the way you're looking at volatility,

depending on which way you're leaning politically. There was a question in there on option strategies, option income strategies, if they're a good idea for a portion of a portfolio. It's not something that we employ at TBG. I frankly am not a fan of them. I think that the income that you earn from selling index options against holdings is all taxed at ordinary income tax rates, and that's not very favorable to high tax clients, tax rate clients. And then I don't think you neuter any volatility at all. In fact, I think you pick up some in different periods of time, particularly when markets tend to decline steadily over a consistent period of time, like we saw in 2000 to 2003. So with that, I think just a balanced

approach is a better way to earn income in a portfolio. We had consumer credit come out basically a little less than expected and revolving credit less. Those are just some signs of a little weaker consumption number. And then the trade deficit number was a little bit lower, albeit still negative $73 billion for the month of June. But we had some increase in oil export and some aircraft shippings. So with that, I shall let you go. I'll be back with you tomorrow on Dividend Cafe. And please reach out with your questions as always. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC,

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