The Dividend Cafe - The Week Volatility Said, "Remember Me?"

Episode Date: February 9, 2018

This week, David Bahnsen covers this week's market volatility and what investors should learn from it. Topics discussed: "Navigating" through volatility What could Washington D.C. do to really make this worse? Is this all going to spook the Fed? Links mentioned in this episode: www.DividendCafe.com

Welcome to the Dividend Cafe, financial food for thought. Hello and welcome to this week's Dividend Cafe podcast. This is David Bonson, Chief Investment Officer, Managing Partner, the Bonson Group of Hightower Advisors. It is a crazy week, crazy week in the market. Lots to say, lots to go through i'm very hopeful those of you that are clients received the rather frequent communication we were putting out throughout the week if you are listening to this and whether you're a client or not just would like to see some of the kind of comprehensive material that we put together and we're communicating and disseminating during

the height of the market's volatility earlier in the week, then please check that out at marketepicurian.com. That's sort of the website where we publish some of our deeper dive type things as opposed to dividendcafe.com where we do a good survey overview of a lot of things each and every week, and we're about to right now. But at MarketEpicurean.com, you'll find a pretty holistic assessment of panic attacks in the market, both the one we had this week and kind of the history of them, and how we went about approaching that for clients. There's plenty of things we need to discuss this week. Municipal bond market, the jobs market,

the state of 2018. So we're going to do all that and cover this week that surely represents the craziest market week since Brexit. But let's go right into it. And if nothing else, listen to this or fast forward near the end. The closing section is something that I think is the most important message we could possibly give to you. But because it's the latter portion of the Written Dividend Cafe, I'm going to make the listeners hold out for it as well. But look, everything along the way is going to be good too, I promise. Okay. So breaking down the week that was, look, even as January represented the 15th month in a row of a positive total return for the S&P 500, and it was one of the best performing Januaries in history, the very end of the month into the first few days of February saw market volatility return as interest rates continued to move higher.

The good news of significant wage growth last month caused markets to go all abuzz around higher inflation expectations. By Monday of this week, the 10-year treasury yield was sitting at 2.85 percent. Stocks began to collapse. Down 500 points turned to down 700, and then bids began being pulled in mass, and sell orders flooded the system. At one point, the system broke down into a 1,600-point drop before becoming a 700-point drop before becoming an 1,100-point drop for the day. Now, on a percentage basis, this was the 108th worst day in market history. I mean, barely even worth mentioning, but it felt quite different due to the point levels involved.

On Tuesday, the market opened down 500 points again, but then closed up 500. And throughout Tuesday, it went back and forth between up and down 29 times. Wednesday, markets opened down 300 before going up almost 300, and then they ended up closing flat. So volatility, technical algorithms, ETF complexities, all sorts of things made for a dramatic first few days of the week. And like I said, marketepicarian.com has a lot more deep dive color into panic attacks. Well, for those who are not as excited as we are about a reintroduction to the lifelong reality of market volatility,

though we actually mean normal market volatility, not thousand point per day volatility, or not as excited about the causation of this recent bout of market volatility as we are. Let's review a few things. Technicals aside, what fundamentals caused the initial market reversal before things got silly? Bond yields spiking higher. And what has caused bond yields to spike higher? Growth, employment, higher earnings,

higher wages, etc. So what's not to love? The fear is that all this growth increases demand for money which drives interest rates higher. Higher interest rates and higher wages in particular compress margins and then the law of economic cycles turns unfavorable on risk assets. Well, what is the antidote to fears of higher rates and inflation impacting profit margins for equity investors? Productivity. There should be no surprise, none, that in the face of this kind of economic heat, bond yields have moved higher. The question is whether or not the economic growth will be productive enough to absorb it all. There are a lot of monetary ramifications to the present lay of the land, and one of the most confusing but real elements of a

highly interventionist central bank is that good news becomes bad news for risk assets and vice versa in the most mysterious of times and ways. Navigating through volatility. I remain at a loss as to how one navigates through volatility other than not doing anything dumb and buying high quality assets at lower prices when there is cash with which to do it. That would be the second suggestion of navigating through volatility. But in saying that I am at a loss, implying that I don't really know what's behind that impulse to do something dumb, I'm being disingenuous. I do know what's behind it. It's the immutable human nature that forever and ever gets in the way of successful investment outcomes.

And it's entirely understandable, but dangerous. Getting out of quality and suitable investments for no other reason than a highly fallible view of their price level begs for a big mistake on the exit. Then getting back into quality and suitable investments at the right highly fallible guess of a bottom doesn't just beg for a mistake in re-entry timing, it almost assures it. Investors cannot call tops, obviously, and they really cannot call bottoms. All they can do is know that corrections are temporary and that principal capital they need should never be exposed to market corrections anyways. A full absorption of the various principles in this little section I just typed

and I'm now speaking to you is probably worth more than anything I've ever put into Dividend Cafe. So let's read Ducks 2018. This is fascinating to me. Our big themes entering 2018 written in the white paper we published exactly one month plus change ago. One, potential market melt-up situation. Two, elevated market volatility. Three, significant pickup in sociopolitical pressure on new technology companies. Four, inflation expectation adjustments and rising rates. So let's evaluate 36 days into 2018.

Well, A, we had a market melt-up. B, we've had market volatility elevated. C, we have now significant pickup in socio-political pressure on tech companies. And D, as we saw this last week, inflation expectation adjustments resulting in rising rates. Yeah, a lot of times when we make a 365-day forecast, it's not our intention for all four to kind of hit the wire, so to speak, in the first 30 days. kind of hit the wire, so to speak, in the first 30 days. Interestingly, about last week's unemployment report covering the month of January, by the way,

200,000 new jobs created, markets worried that that was too overheated, wage growth looking the best it had been in a long time, really caused bond yields to spike. I would point out, that was January. You look at January of 2014, 15, 16, and 17, the not seasonally adjusted number has typically plunged. Could be that we're looking at even higher numbers into the future. Well, if this is bad, sign me up. So like I said, stocks had dropped at one point over 2,000 points from their all-time high. The VIX had blown out by over 200%, the so-called measurement of fear gauge.

You had that worst intraday price drop in history. But the spread between corporate bond yields and government bond yields shrunk. So let me put that differently. Investors were demanding less return to compensate for the risk of corporate debt versus Treasury debt than they did before the market swoon. Now does that sound like the kind of systemic and macro risk aversion you would expect? It certainly doesn't sound like fear of the financial health of these companies does it?, that's because it isn't.

Washington, D.C. didn't help things much this week. Their announcement of a $300 billion budget bill agreed to on a bipartisan basis in the Senate with the full support and promotion of the president. Still waiting to see what the House is going to do. You know, again, right now, I cannot emphasize enough how important GDP growth is to deal with the growing deficits and overall national debt denominator we're dealing with. If you go to DividendCafe.com this week, we have a little bit more on potential Washington, D.C. policy mistakes. I'll give you a hint. One would be protectionism. The other would be reversing deregulation. Not at all worried about the latter. Well, not too worried about the latter and reasonably not worried about the former, but a little more info on that. Definitely an important section on Europe and European equity investing right now, municipal bonds.

And then let me close out. So that you'll get all at DividendCafe.com along with our chart of the week dealing with the precedent 2003 might offer us in which the market moved up huge in concert with a big, huge tax cut. Then shortly thereafter, market kept rallying and then had a correction. And then after that market correction in 2003, it spent the rest of the year appreciating 15%. So take it for what it's worth, but interesting chart of the week at DividendCafe.com.

Okay. I will not say anything more important than this ever, forever and ever. It will never be fun, comfortable, or peaceful to experience panic attacks in the market. Run-of-the-mill volatility, extreme accelerated volatility, both cause anxiety and stress, and we understand why. We really do. And yet because we collect fees from clients to tell them the truth no matter what and to earn their trust at all times, it's imperative that we point something out, especially in times like this. The sole risk investors face has nothing to do with up and down movements in the value of their portfolios. It has to do with a failure to achieve financial goals. If your goal is a certain current income from your portfolio, this week's volatility did not remotely disturb the successful achievement

of that goal. If your goal is a certain future value for like a purchase or a future cash flow for retirement, this week's volatility did not disturb it. Risk is failure to achieve a financial goal and we live on a planet Earth to keep that from happening. We live on planet Earth to keep that from happening. Our role as advisors to our clients. Volatility is not the same as risk. Other than when too much volatility causes a pain threshold to be violated and then capitulate to real risk. But a fluctuating account value for one receiving current income

or one saving for a future objective is not a risk and never will be. Delineating between these two things is among the greatest nuggets of wisdom any investor will ever comprehend. I'm going to leave it there for the week, incredible week in the markets. Thanks for listening to Dividend Cafe. Please check out Advice and Insights podcast. In both cases, Dividend Cafe and Advice and Insights. Subscribe, write us a review. Unless you have something bad to say, then just don't say anything at all. Your mom taught you that lesson. But email us, BonsonGroup at HightowerAdvisors.com.

Any questions you'd like us to address, we're going to do a whole Q&A podcast edition next week. Thank you for listening to Dividend Cafe. Thank you for listening to the Dividend Cafe, financial food for thought. investment advisor to 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 or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and 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,

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