The Dividend Cafe - The Thing Causing Tension For Investors

Episode Date: June 8, 2018

This week David highlights the push/pull between bullish economic news vs. bearish concerns around monetary policy ... Topics discussed: Health of US Economy Fed and short term interest rates Options for investors Links mentioned in this episode: TheBahnsenGroup.com

Welcome to the D here after we're done because we're flying back to our California office and California house and all that good stuff. And so I'm actually recording earlier in the week than normal because the meeting schedule, Thursday and Friday in California, I'm just worried I won't get it done. And I'm on a plane all day today. So here you are recording on a Wednesday morning, which I only say because I want to be clear about time you're listening to this. It's like extra time by which the markets could have done something to make obsolete what I'm saying now. We're not open yet here Wednesday morning, but futures are pointing to a very nice open in the stock market here on Wednesday. Who knows what happens not only by the end of the day Wednesday,

but by the end of this week when you're probably getting this video. So all of that to say that don't hold against me anything I say here in the next few minutes that may become obsolete in the next couple of days. So listen, there's one major thing that I really want to kind of highlight for you on the video today. And I think it's a helpful, succinct, basic summary. And I've gone through it already in the past, and I'm going to continue going through it

because there is room for a lot of noise in the conversation around what's happening in markets right now. And yet, I really do believe there's just kind of one thing to say about the fundamental underlying real tension or push-pull effect that is actually at play in driving the vast majority of what's moving markets right now. vast majority of what's moving markets right now. And that is the push-pull between the overwhelmingly optimistic, bullish, positive news in the economy and in the corporate profits story versus the headwinds or concerns or skittishness around monetary policy questions as to what the tightening and normalization effects of the Fed will produce. So on the bullish side, there is not a lot of room, in my estimation,

for legitimate discussion or debate as to whether or not the economy is as healthy as people are saying. The unemployment rate is remarkably low. The manufacturing data is on fire. The industrial production is very bullish. We expect next month when we get the second quarter GDP print as high as a 4% real GDP growth number. We certainly would expect something well into the threes. So you just have a very healthy economic backdrop that we have not had in the U.S. to this degree in quite some time.

So what's the problem? That just seems like it's all systems go. But see, that is up against the reality of a central bank that is necessarily normalizing monetary policy. So you have the valuation on these risk assets having to be remeasured or reweighed or repriced based on the fact that the interest rate in the economy has come up a bit on the short term, that there is money in the Federal Reserve balance sheet that they have put into circulation that they're extracting primarily through the form of excess bank reserves coming away. Let me not be fancy about this. It's simply a means of contracting credit.

It's very, very small. It's very underwhelming. But to the degree that there's legitimate questions about the impact of normalized monetary policy, on one hand, up against the effect or the reality of this very strong economy that has created this sort of neutralizing effect for risk assets in this short-term period. There isn't any question of the fact we do believe that whether it's in a month or a year or somewhere in between, we think risk assets are going to win out. We think that the economic strength and the profit growth story will at least lead, particularly if the business investment in CapEx surfaces the way we expect it to, we think it will lead to another extension of growth in the economy and then posture, the actions, and the forward guidance of the central bank, the Federal Reserve, as a range of monetary policy has a very real impact on how all these things are weighed, measured, and therefore what investor sentiment, investor pricing will allow for. So in the short term, I want to be clear.

We're not in a downward trend in the market. The market is completely flat for four months now. So the market had this huge January, came off in early February, and since then has had a lot of volatility, certainly a lot more than last year and so forth. But it has basically been directionless. We're right now in early June where we were in early February in the market. And that has largely come after up and down movements that are offsetting one another that I think directly play into the narrative I'm talking about. Positive economic news up against the monetary realities, interest rates moving. the monetary realities, interest rates moving, big first quarter profit growth up against these other headwinds, et cetera. So that's the singular story. Now, let's talk about this profit growth story for a second so you can see why I think there's a little more strength in that side

of the ledger. We know now that the first quarter profit growth in S&P 500 companies was year over year up 23%, a number I haven't seen in my career. But on a pre-tax basis, so if we isolate the impact of corporate tax reform, the quarterly profit growth was still in between 4% and 5%, a big number, not factoring in any of the impact of tax reform. That's organic. So that's why I see a lot of health in that story. And yet what I think is an understandable question into the future is when the strong economy is leading to higher wage costs, higher materials costs, higher debt service because interest rates move higher, and even a stronger dollar if we have a stronger economy having an impact on currency valuation in terms of export multinational companies. You do end up with a deterioration organically of profit growth.

Profit growth begets the conditions that then end up deteriorating profit growth. It's part of a business cycle. I don't imagine that that is imminent. I would imagine it's very much not imminent, but it's going to happen. So the question in the meantime is why is the market not appreciating from the dynamic we see now? And then my answer is it's this issue regarding monetary policy. So those are the macro conditions that we're dealing with. And I think that gives you a good summary to help understand your portfolio.

We go, well, that's great. What do we do about it? Can't we time what week is going to be up and what week is going to be down? Of course not. You know what I'm going to say to that. Can you time it? Can anyone you know time it? Can any professional that does what I do for a living time it? The answer is no. Anyone who tries will suffer. They could be lucky a week, lucky two weeks. It's

completely unsustainable. So you can't bet on these zigs and zags. So you can say, well, I'm going to wait it out. But the problem is you wait it out. What do you leave on the table when there's recovery? How do you time your reentry? There isn't any easy way to do it. The right thing to do is to be invested and adjust your waiting in such investment around the risk tolerance and your appetite for volatility, your ability to withstand certain fluctuation. But do you want to get paid while these things are happening? Well, of course, therein lies the rub of, therein lies the point, I should say, of our dividend growth philosophy. We are experiencing some of the most robust dividend

growth we've ever seen. You say, well, the prices and the stocks aren't going higher. I say, okay, I explained why. We're in this flattish market. In the meantime, small cap is doing quite well. Certain sectors are still doing well on a price basis, but the whole portfolio continues to generate cash flow. So you have that aspect of the total return coming in, and then on the price basis, it gets adjusted to reality whenever the settlement of this tug-of-war takes place. That's our basic thesis.

I'm definitely simplifying on purpose. I hope it makes sense. So reach out with any questions on that for a better clarification on the overall profit story, for better clarification on the macroeconomic story. And then please read DividendCafe.com this week for a much more elaborate treatment of these subjects and more. Tons of charts. I love some of the charts in this week. A little bit greater synopsis of our oil and gas pipeline thesis, having a massive second quarter up about 14 or 15 percent across the MLP sector this quarter. And we want to explain why that is just very early

in what we believe will be a multi-year story in that part of the market. So yes, I got to jump on a plane. I'm going to leave it there. Reach out. Thank you for watching Dividend Cafe. Look forward to coming back next week with yet another update. Take care. The Bonson Group is registered with Hightower Securities LLC, a member of FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor of 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 is no guarantee that the investment process

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