The Dividend Cafe - To Act or Not to Act

Episode Date: March 17, 2025

Today's Post - https://bahnsen.co/3XVR6aw Monday Market Recap, Fed Policy Insights, and Housing Sentiments In this Monday edition of Dividend Cafe, David discusses a brief market rally despite ongoing volatility. Key points include a mixed performance among major indices, with defensive sectors showing strength. Insights on the Fed's policies, housing market sentiment, and credit spreads are also provided. The show highlights the significance of constructing a well-founded investment plan and sticking to it through market volatility. Additionally, recent public policy developments and economic projections are discussed. The episode concludes with practical advice for investors on managing market downsides. 00:00 Introduction and Market Overview 00:46 Monday Market Recap 02:34 Technical Market Analysis 07:00 Public Policy Updates 08:58 Housing Market Insights 13:23 Ask TBG: Investment Strategies 16:21 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. Well, hello. Welcome to the Monday edition of Dividend Cafe. I bet you didn't know it was possible, but the market can actually go up two days in a row. It can even go up a lot two days in a row, and that's what's happened here

between today and the Friday rally. But nevertheless, we continue to sit in a very volatile and vulnerable position. We're gonna unpack more of that today. Even though the Dow ended up today up over 350 points, the NASDAQ was barely up, but a lot of the MAG-7, over half of the MAG-7 was actually down. So it's a mixed result, but the market rally, at least Friday and today, has brought a little bit of relief to those who thought things were

just going in a straight line down. Well, here's what I'm going to do today. I'm going to go through our normal Monday market recap, talk about Fed, talk about policy, talk about housing. I have a little more on housing than normal. But then I'm going to end up today covering here in the podcast and video the answer to the question of the day in our Ask TBG section, the real life question, which came from a real life non-client, I think teed up an answer that is probably the best thing we'll have for you today in the Dividing Cafe in terms of just actionable, important, practical advice in the midst of

this particular moment. So clients and non-clients alike hopefully will benefit from the answer. So the market opened up a little bit and then just stayed flattish for about half of the day. And then it did rally into the second half of the day, although it sold off a little bit at the close. But the Dow's percentage return was almost 1%. The S&P was 0.6%.

The NASDAQ was 0.3%. You had a very significant rally in real estate stocks, energy stocks, and consumer staples. The real estate REIT sector was up 1.66%. You had energy up 1.56, and consumer staples up 1.55%. So basically all three of those more defensive dividend oriented sectors up over 1.5% of the day. The bond market up a little bit today, the tenure was down about one basis point, the yield down to 4.29. Look, basically, let me just go through the lay of the land. A 10% drop in the S&P, which is what it had done until this little bit of recovery you had Friday and today, has happened a gazillion times.

But how fast was this 10% drop? The speed at which it happened? Well, it was the seventh fastest 10% drop on record. Seventh place, you could think that sounds like something or you could think it sounds like nothing. It doesn't seem all that dramatic to me. Seventh place, we don't give awards for seventh place. Well, actually, probably we do these days, but I'll save that for another day. It's not a worthless factoid though, but the

magnitude of it wouldn't even be in anyone's top 100 list, but the rapidity makes top seven, so there's something there. I did mention last week, it may have been a Monday as a matter of fact, that the S&P had broached its 200-day moving average, and I talked about how that doesn't mean anything to us. I was just sharing it for almost no reason whatsoever. Well, in a similar camp, last week became the first week that the S&P ended the week below its own 200-day moving average, and it hasn't done that since November of 2023. moving average, and it hasn't done that since November of 2023. So almost a year and a half since we've seen something like that on a weekly basis, so it just speaks to the technical breakdown in markets.

Now if we're going to talk technicals, on Friday the rally that happened was a nine to one advanced to decline ratio, meaning for every 10 stocks in the S&P, nine were up and one was down, that's pretty significant breadth in the market. And yet you're not seeing it in the top part of the market capitalization, these so-called mag seven names. I mentioned again today, not a big rally in that space, several names there down, even as the markets were up. The breadth of the market is very different and where markets are participating and where

there are certain bright spots, certainly on a relative basis, it has not come from what has been the kind of more robust, growthy part of the market over the last couple of years. Outside the stock market, a data point came across my desk more recently as the levered loan index. The LSTA average loan index was trading at $97.75 to start the year, a 2.25% discount to par value. And 10 weeks into the new year, the average loan is trading at $96.54. So loan prices across the lever loan index are down 1.2%. That's not exactly a significant deterioration of credit, but it's a little bit of spread

widening. I'm watching credit spreads to get an idea of forward looking market expectations for economic sustainability, health, robustness, who spreads widening on a go-forward basis indicates some fear of economic deterioration. But when the average loan in a levered loan index is still trading above $96.50, that is not deterioration. You start getting to $, 92 dollars, that's pricing in something much more significant. Sentiment indicators are interesting because a lot of them have reversed so quickly.

It's a funny thing about sentiment, but equity flows continue to be very negative. The put call ratio is not great. It's not that severe either way. For a contrarian like me looking for really bad sentiment indicators as a sign of bullishness, because that's what it means to be a contrarian, the VIX at 21 is certainly a better place than 15, but it's not exactly 30. And so it's not indicating that much fear, but what I would say is on a more extreme side of things are a lot of the valuations and those are very skewed.

I've talked about over and over in recent dividend cafes by the concentration and magnified valuations at the top of the market. There's a chart in dividendcafe.com today with a number of indicators showing relative to the market's own history, how severe some of these valuation metrics are. In terms of public policy, the continuing resolution did pass Friday with enough that had to get done with 60 Senate votes to avoid filibuster. And they got just barely enough 60 as Senate Minority Leader Chuck Schumer ended up supporting

the continuing resolution and bringing enough votes with him, creating a little bit of political controversy along the way. But nevertheless, a government is funded through the end of September at this point. That's the next step still towards the House being able to then pass a budget and then at that point, reconcile to the budget another bill that will handle some of the tax issues they have in front of them. Another public policy issue, just because I read this report from Oxford economics over the week, is projecting there will be 200,000 less federal government

employees by the end of the year than there were at the beginning of the year. So that's not a reference to just turnover, it's a net number, a decrease by the end of the year. So that's not a reference to just turnover. It's a net number, a decrease by the end of the year. Now, put it in perspective, on average, about 200,000 jobs are created per month. There's some months that are 100, like last month was 150. Other months that are higher. But if you use 200 as a median number, it's one full month of net new job creation that would be leaving the federal workforce by this estimate. That number could go higher or lower, and I've already talked about the fact that probably in terms of the macroeconomic importance, it isn't just the federal government payroll

number, but contractors that get their work from the government but are not on government payroll. So there's a few other factors at play here as well. The retail sales number came out today. Core was up 1% in the month, year over year basically flat up, 0.3%. The internals throughout the report were pretty mixed, so you could find something in there if you wanted good news and find something if you wanted bad news, but it's just immaterial to us.

Now what I think is much more fascinating is a ResyClub housing sentiment survey. Our family office director, Joe Klein, sent me over the weekend a report, 10% of survey respondents saying that they will never sell their current home and 10% saying they will only buy a new home with cash. But then of the remaining survey respondents, not in the 10% won't sell and 10% cash buy, out of everybody else, only 16% said they would be willing to buy a new home with a 7% or higher mortgage. And it really went, the percentages goes up from there as the mortgage rates come down. But right now, if the rate is on 6.8% and you have only 26% saying they would do it

at 6.5%, there's some in between, let's call it 15% and 25% that are willing, but the inverse being, let's call it 80% of people unwilling to buy a home where mortgages currently stand. Now mortgage rates obviously could come down and that I believe is the intent of Fed policy, but it speaks to the most obvious self-proclaimed causation of the market's frozenness. On the inflation data came last week and where shelter fits in, I think it is just incredibly useful to point out. And I have both my friends, Daniel DiMartino Booth and John Balden to thank for some of this data that I studied over the weekend.

But peak rent growth year over year was 29 months ago, and CPI peaked out 22 months ago. The Cleveland Fed new tenant rent index, so this is the Fed's own metric, shows new rent prices are down 2.6% year over year. Other market indicators that I quote quite a bit show something similar, down two, down three, down four. Only 47% of new apartments, newly built apartments, are renting out in the first three months that they're on market. So about half are taking longer than three months to get rented out.

That doesn't sound good. Redfin is saying that a typical new home now selling is selling for on average 2% below the asking price. That's the biggest discount in a couple of years. Now 2% as an average discount to asking price isn't big, but that number is not above asking price any longer. And that discount as a percentage is the largest it's been. And then we are at a nine-year high according to the Wall Street Journal for sellers pulling their home off the market.

Some signs of weakness which leads to I think a positive economically in generating a bit more affordability, selling prices get more realistic and asking prices for rent gets more realistic. The data is what it is. Now we're at a 52% chance, so it's actually come down a little bit, of the Fed cutting rates three times, which you know, at the end of the year. And we're at 21% chance of four rate cuts. But the range in our conversation had been either two or three cuts, and now it's three or four cuts. There's been a movement in the

range. The other Fed piece I want to share is that President Trump announced Michelle Bowman as his nominee for the assistant Fed vice chair for supervision. Michael Barr had been President Biden's choice there and he resigned. And I think that on the margin, this is a net positive for the financial sector. And our theme of financial deregulation crewed up half a percent of the day sitting at 67, spot 50. I will point out that even as WTI hit a six-month low last week, crude oil prices hit a six-month low, and we know that all risk assets are down quite a bit.

Midstream stocks actually ended up rallying pretty hard. They'd been down the week before, and they were up over three and a half percent on the week. They're up over three and a half percent on the year, even with oil down, natural gas down, and of course the stock market itself down. MLPs, by the way, are up about 15% more than the S&P is year to date. So, I mentioned the Ask TBG. Heidi said stocks are a long-term investment. I try to think of it that way, but the market volatility has been very uneasy. Many people would relate, Heidi. Given where things are right now and the expected GDP outlook being increasingly negative, is it unwise to continue to hold? No, it isn't crystal ball, but is

there some guidance on how much downside in the stockwork and is acceptable, albeit in a volatile period before one acts? And I said that our investment philosophy believes the downside volatility comfort level needs to be defined and understood before an investment portfolio is created and before market volatility events ensue. If an investment plan was created that accounted for the realities of market volatility, income needs, liquidity needs, tax sensitivity, your timeline, your goals, all the particulars that play into matching a real life portfolio for a real life person to meet real life needs

and goals, I would not change a properly constructed investment plan, let alone because of downside volatility that would have been factored into the construction of the plan. The damage that those do to themselves who believe that they can time in and out of market downsides, it's unfathomable, unfathomable. You will become a statistic when you start to play that game. Your investment plan being properly constructed is the key here, but where it is, you should not be abandoning it because of market volatility, let alone market volatility like this that

is run of the mill. This could get worse as I talked about Friday, but so far it is just standard par for the course market volatility. But selling after a downside market event is a strange thing, but I guess it's a human thing. Recessions happen. In fact, they're assured to happen. Bare markets happen.

They're assured to happen. Policymakers can and will make mistakes. Valuation excesses happen, and sometimes those things get repriced. There's geopolitical events. There's a lot of uncertainties in the market all the time. They're not rare. Their normal conditions is uncertainty. But I don't think investors trying to time these things have done well. But I don't think investors trying to time these things have done well. And what I do believe is that being properly invested through the investable ups and downs is the right way to go and that we want to remedy that with the right portfolio that accounts for all of these various factors.

So there's an important sequence to how things are done. Construct the plan first and stick with the plan second. Do not look for market downside events and then look to abandon the plan. That would have meant it was a bad plan to begin with. I'm going to leave it there. I am off to Washington, DC early in the morning. Thank you as always for watching, listening, and reading The Dividend Cafe. We'll be with you throughout the week.

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