The Dividend Cafe - The Market Bloodbath Explained

Episode Date: December 6, 2018

Topics discussed: That Pesky Yield Curve The Good and Bad of Volatility Connecting the Dots on FedSpeak Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. Cafe podcast this week. So we welcome both those of you who are viewing and those of you who are listening on the podcast. And I am recording from the New York office. It's in the middle of the day on Thursday. I got about nine screens going on at once. The market is presently down 460 points middle of the day on Thursday. It has been down almost as much as 800. It opened down 400. So, hey, you could look at it like we're up 300 points, right? That was just a joke in case you're wondering. The market was down 800 points on Tuesday. We were up almost 300 on Monday. And then we were closed on Wednesday because they closed the markets in a day of mourning and memory for President Herbert, George Herbert Walker Bush. So it's been

an odd week in terms of markets. And now we're going to probably end the week. I don't know what will happen in the next couple hours today and what will happen on Friday, but it appears we're likely to close the week down over a thousand points. We were up over a thousand points the week prior. We were down a thousand points the week before that. So this 1,000 point move up and down week by week is really quite something. And I'm going to kind of get into a little bit as to what's going on. I will say, if those of you are interested in a deeper dive on the trade issue, and you're going to see in a moment, there's no point in talking about this market and this volatility and this distress in risk assets without understanding the role that tariffs and and fears or uncertainty around the global trade war what those represent uh that that that is such

an integral story to what's happening in the market right now so at our advice and insights podcast i did a kind of deeper dive it's about 15 minutes just exclusively on that issue. My comments here are going to go into a few other arenas. I'll read for you, though, word for word, the tweet that President Trump sent on Tuesday about mid-morning. I am a tariff man. When people or countries come in to raid the great wealth of our nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power.

We are right now taking in billions in tariffs to make America rich again. I literally actually can barely read it because there are so many problems with that tweet. But for our purposes, I will just focus on what happened in terms of the markets this week. We were up 300 Monday, as you really did have a pretty positive meeting in Argentina, but between U.S. and China leadership last weekend. The response was more or less verbatim what we had forecasted in last week's Dividend Cafe, which was that there would be a sort of truce, a little ceasefire, a pause in an escalation of the trade war,

and some rhetoric around improving circumstances, continuing to converse at the negotiating table, which is exactly what I think is going on. And I still remain somewhat optimistic they're going to get to a point of a solution. But the point I'm making is that we have a market that has very little tolerance for uncertainty, and there remains a tremendous amount of uncertainty. And when you have the President of the United States tweeting out, I am tax man, which is synonymous with tariff man, because a tariff is a tax. I don't believe he means it, or I tell myself that, because I really do understand the argument that it's jockeying and positioning and negotiating but there is a significant

amount a global capital on the line and the idea that we would you know this type of language I think is is really interesting interesting and you see the impact into the markets. So let me explain something. I'm going to read what I wrote in Dividend Cafe this week, which I don't often do on the video. I like to just sort of talk off the cuff, but I think that this is a nice succinct little summary. But I think that this is a nice, succinct little summary.

Elevated volatility is the era in which we find ourselves, with the market going up or down over 1 and modestly helped over the last week, enough uncertainty exists to continue exacerbating market volatility. The economy is strong, but the bond market is signaling fear about its ability to stay strong. As short-term rates have gone higher and long-term rates lower, an implicit message of, we think you're good now, but it won't stay good. That's essentially what the bond market is saying to the economy. The Fed has played into that because they're necessarily raising short-term interest rates. So absent a steepening of the yield curve, the message will be that economic growth is going to shrink. And that will call into question the corporate profit expansion that has driven the market higher this year. A positive and unambiguous resolution to the trade war uncertainty

would go a long way towards satisfying markets about longer-term economic growth. And this bull market's expansion requires sustained profit growth. Don't make any mistake about that. That will come from greater productivity, and that greater productivity will come from increased business investment, what we call capital expenditures, which are currently drying up because of fear over tariffs. up because of fear over tariffs. So an incredible amount of progress was made in business investment,

capital spending, durable goods towards what I think is productive economic behavior. That progress was largely driven by a friendlier, more competitive tax code and a deregulatory environment that the business community loved. That advantage has been completely offset now by fears, tensions, and not to mention the basic economics, de-stimuli fiscally of the trade war. Now, do I know how this will play out? I do not, but I do know that the volatility seems to me to be very unlikely to end until it will play out. I do not. But I do know that the volatility seems to me to be very unlikely to end until it does play out. As of now, I still kind of hold to my bandwidth that we look at maybe 24,000 on the lower end and 26 on the higher end, and that we are unlikely to go lower or higher than those numbers with a lot of bouncing in between. And that 2,000 points is enough bandwidth that it can still feel quite volatile.

However, that bandwidth could be expanded. You could go lower and you could go higher and all that. So I'm going to leave the trade issue alone for now. I think I've made the point, and I don't think there's much controversy in what I'm saying. If someone believes it ought to happen, that's fine. I don't agree, but that's okay. That's a legitimate argument. Someone believes that the threats, the tariffs are all necessary to get to a better deal with China or to solve for some other policy

matter, whether it's manufacturing jobs or whether it's intellectual property theft. Those discussions exist. But I'm talking to you right now as an investment professional that the capital markets ramifications right now are largely being driven by the uncertainty around this issue. Now, let's talk for a moment here about the Fed, which is a little out of the headlines this week and has been since the conversation, or excuse me, the comments made last week from Chairman Powell, which were essentially that they thought they were pretty close to the neutral rate, whereas seven weeks prior, they really had kind of resolved that it needed to go quite a bit more, that they thought, look, we're not even really near to the neutral

rate so here here's what I would say there's a two-headed monster it's the Fed on one hand and you have a good outcome and a bad outcome for markets over a given period of time and then there's the trade war and you could have a good outcome or a bad outcome from markets so you can get two bads you can get two goods you can get one good and one bad. I don't know how it plays out. I do know that I am expecting ongoing volatility. And I'm not worried about that because I believe our clients are invested with an asset allocation that is intentionally and strategically and intelligently designed to absorb the volatility the market's enduring and to not breach acceptable tolerance of such. And in the meantime, for us to capitalize on

equity volatility around the reinvestment of dividends. Asset allocation is working right now. It had not worked earlier in the year when interest rates are rising but the bond portfolios are doing well as a lot of the longer term interest rates have come in and the alternatives are performing very well um so you you get kind of a zig and a zag the u.s equities being the core of a good portfolio we happen to be very underweight international which is good emerging markets is overweight they've done better the last couple months but about a very bad year Japan is struggling Europe is struggling immensely we're not really weighted there China is struggling we're not really weighted there so there's not a lot of good asset classes right now in

this particular period of time and that should not be a big surprise you have a lot of sentiment driving markets and what i will say i really want you to go to dividendcafe.com to look at the chart of the week see the point at which sentiment um an investor survey very professionally done we monitor it uh all the time i've been looking at it now for, I think, almost 20 years. Tells you the percentage of those identified as bulls, as optimistic about stocks, was 44% higher than those identified as bears. And that was at that very peak level in January. January. Right now, and this is before this week, where I can assure you it's only gotten worse, the number of people identifying as bears, negative on markets, identify 22% higher than bulls. So again, as a contrarian, these are attractive numbers to me, but not as timing

figures. They do not help us to time when things will change. That is our lay of the land. Buy on the sound of the cannon. Sell on the sound of the trumpets. Nathan Rothschild, I think you know the Rothschild family, handled their investments over the years. Look, there's so much more we could get into. I got to get back into what I'm doing here at my desk.

So I'll leave it there for both the podcast and the video. Definitely go to DividendCafe.com this week. Definitely listen to the Advice and Insights podcast. And please reach out to us with any questions on your portfolio, on your allocation, on how you're designed to endure through a period like this, the role of oil right now, oil prices in the markets, why CapEx is so important to us, and all that and more. Okay, thanks for listening to the Dividend Cafe, financial food for thought. investment advisor at 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 and there's no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance. This is not a guarantee. The investment opportunities

referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinion, news, research, analyses, prices, or other information contained in this research is provided as general market commentary. It does Thank you. Data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower Advisors LLC or any of its affiliates.