The Dividend Cafe - Trump 2.0, the Fed, and this Market Selloff – December 20, 2024

Episode Date: December 20, 2024

Today's Post - https://bahnsen.co/4gLnPpU End-of-Year Market Insights and Political Implications - Dividend Cafe In this special episode of Dividend Cafe, recorded on Friday, December 20th, David discusses the market's recent volatility, reflecting on 11 consecutive days of market downturns followed by a significant rebound. The episode highlights the irrationality of market reactions and emphasizes the importance of focusing on long-term investment strategies and the health of underlying businesses rather than short-term market fluctuations. David also addresses the political landscape, particularly the challenges faced by the incoming administration and its potential impact on policy and markets. Listeners are provided with reassurances about portfolio management amidst market noise and given a realistic perspective on political and economic developments. 00:00 Introduction and Year-End Reflections 00:44 Market Recap and Current Trends 01:52 Volatility and Market Sentiment 03:11 Investment Philosophy and Noise 07:14 Federal Reserve and Market Reactions 13:19 Political Landscape and Market Implications 18:32 Final Thoughts and Takeaways 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. Hello and welcome to a very special Dividend Cafe. Why is it special? Because it is right now Friday, December the 20th, and this is going to be the last Friday Dividend Cafe of the year. I will have a Dividend Cafe on Monday. Brian and I are going to share duties Monday the 23rd. And then I'll be doing one myself on Monday the 30th. The last Dividend Cafe of the year will be that Monday. But this is the last Friday,

and it has been a whirlwind of a week. And because I'm recording the podcast in the middle of the day Friday, I have the luxury of giving a bit more context. Let me just catch up to speed as to what's been going on in markets, and then you're going to really resonate more with the topic this week. I wrote a very extensive dividend cafe this morning between the hours of 4 a.m. and 7 a.m. about the fact that the markets had essentially been down 11 days in a row. The Dow was up 15 points on Thursday, which was 0.04%. So it didn't exactly count, but we had had an 800 point drop in markets last week,

and then a 1700 point this week. And the futures, what I was writing this morning, were down another 250 points this morning. And the dividend cap is written around that. There's absolutely nothing I want to change. My message I'm about to give you is just as potent and just as important and relevant and all those things. But then now, as fate would have it, the markets are up, as I'm sitting here talking right now, 750 points. And so some of the drama and some of the math may feel a little bit different, but the underlying message certainly is not.

And I will say, I think it's reiterated because one of the points I am making today is that everything is stupid. And having the Dow be down 1,200 points one day or 1,100 on Wednesday and up 750 on Friday does not take away from my point of everything being stupid. It makes my point that everything is stupid. So I'm going forward with every message I intended to give, but I just wanted you to understand that we do not like to get the Dividend Cafe to people at six o'clock

at night on a Friday. And we presume people have already maybe started their weekend, started dinner, done whatever it is they do going into a Friday evening. And so in order for us to get the Dividend Cafe out on the time, we really prefer to get it out. I'm generally writing and recording before the markets have closed Friday. And this can sometimes happen. I don't care. And even where every now and then I get people that are irritated by it or something, it doesn't bother me. I think most people realize what the point of dividend cafe is supposed to be is never going to be sensitive to what one day's intraday movement may be.

But in this case, there's a lot of math that's out there and 700 point moves can change math and thousand point moves can change math. But let's just talk about why I wanted to get into this. And a lot of this is going to end up transitioning from the market lessons of the last two weeks to some very current and future situations back to our favorite topic over the last two months of politics, of the incoming administration and some of the policy related things. So hang tight. And if you want some political messaging, you're going to get it. If you want just really reassurance message

about portfolio, you're going to get it. And if you want a reality check about what's going on out there, you're going to get that too. So three things all coming together into one message, all three important. The fact that markets have had the volatility they have is very interesting, but it's also not unique and it isn't even all that

volatile. The consistency of 11 days in a row down, which hasn't happened since 1974. Now that is unique. The magnitude is not. A drawdown of the S&P until Wednesday wasn't even down over these two weeks. And then it was down a few percent. And by the time Friday closes today, I don't even know if it'll be down 1%, 2%, if that, I don't even know if it'll be down 1%, 2%, if that, over the whole period. The Dow, though, as of this morning, was down 6.4%. Let's say right now that's all the way down to something like 4.8%. This is not the stuff big drawdowns are made of. Now, one of the things I always realize, when markets go down a lot quickly and the percentage from peak to trough

is not yet that bad, and I point out the math of it, I am ignoring the fact that most people are not worried about the math that has been, but the math that will be. Because a lot of times things that drop five are dropping five on their way to dropping 10 or what have you. And I get that. I've been through this a few times myself. And so I understand that the emotion is not always just on what has happened, but what has happened combined with what it might indicate about what will be. But the reason I bring it up is that we did not merely have a market that dropped over the last couple of weeks a few points. You had a market that in the five weeks before that had gone up crazy, and the markets in

the two years before that five weeks had already gone up crazy. It is just incomprehensible to me that a market that goes up 5% in a week in November and then goes down 5% in two weeks in December, that the latter is what gets people's attention. It is, to use the S word, stupid. Generally speaking, one should not be overly excited about a market going up real quickly. And one should not be overly excited about a market dropping real quickly. And one certainly should not be excited about doing both to where the combined math of such are actually net positive or break even. But either way, I don't think any of it matters to the intended audience at Dividend Cafe. If the markets had been up 5% in a quick short period and didn't drop, if the markets had not

gone up 5% and then did drop 5% or more than five. Five weeks up, five weeks down, 10% down. All of these possibilities of different happenstance are totally outside of the investment philosophy that we are executing, which is to buy companies that are growing cash flow and sharing more of that cash flow with us. And what you are seeing right now is a classic case of noise. Some of the noise I'm going to get into in a moment is a bit more pertinent. Some of it has a bigger lesson than just the noise of the last week or the last two days and indicates some things I want to say about 2025. indicate some things I want to say about 2025. But nevertheless, a market with this idea,

OK, well, the Fed cut rates the other day and the market dropped eleven hundred and twenty three points. And the idea was, well, they seem to indicate they're only going to cut a half a percent next year, two different quarter point cuts. And the markets are hoping for more than that. Back in September, the futures were indicating that the Fed funds rate would get to 2.8% by the end of 2025. Now they're indicating 3.97%. 117 basis points has come back into expectations for interest rates next year. And yet the Dow is 1,000 points higher than it was, and after today, almost 2,000 points higher than it was back when rate expectations were dramatically lower

than they are now. It isn't true that what the Fed does exactly next year is the driver of markets. It hasn't been true this last year. It hasn't been true the year before. As rate expectations have changed and gone up and down and all around, time and time again, markets have been non-correlated to what the Fed has done and the expectations of what the Fed will do.

And the only exception to that is day of and day after. It does not matter to you who hold great companies that are growing cash flows what the Fed will do in January or not do in July. If you are going into a secular tightening cycle, then you often are going to get a secular drop in markets. If you're going into a secular rate cutting cycle, it's either already been priced in or you have additional upside to go if it's a surprise to markets. There's no surprise in anything right now at the Fed. So that conversation is stupid and it is overwrought for sensationalistic and melodramatic and unhealthy reasons.

What does cause markets to go down 12 days in a row or have a 1,100-point down day out of nowhere or a 750-point up day out of nowhere? It is right now very true that you have an astronomically high number of people that have been investing for a total of about five minutes. Those that have invested for six months, one year, two years, those, by the way, that have invested for even five years, despite 2022, I'm not referring to people who got their

faces ripped off with Peloton and DoorDash and Zoom and work from home type stuff that all blew up, or the SPACs, or Beyond Meat, or other failures in 2022. I'm not talking about that. There was market downside in 22, but basically there's a whole lot of people investing. They've never been through a sustained, real, normal, bear market. And I just want to make clear that this moment in AI is substantive. I've written a whole Dividend Cafe about it before, and I don't have anything to add to that Dividend Cafe at this time. And if I did, I would write it myself. I wouldn't use AI to write it. There is going to be some productivity enhancements that come out of AI. And there's going to be a lot of false starts in those productivity enhancements.

And there's going to be companies that have done very well that stay as success stories. There's going to be companies that have done very well that are going to crash and burn. There's going to be companies that never get off the ground. This idea that this was ever going to happen without some bodies buried along the way was ridiculous. It was stupid. If I can continue using that unfortunate, crass S word, it was just not thoughtful. And there's people that don't know it yet. Now I know another piece to it, which I've shared time and time again, which is that even in me knowing there's going to be more pain than people have so far

incurred, I also know that I don't know when that pain will come or what that pain will look like. So people get to do with these statements whatever they please. I've talked at great length about how we apply all these different truisms to the way we invest money. But what you have is a very expensive market in a very complacent spirit about risk overall, with some really good fundamentals in a lot of ways and some questions and some others, but all of it at a very rich price. And when there is a question about certain policy things or monetary policy issues or underlying fundamentals, if you do end up getting an earnings season that

underwhelms, then yes, the markets will be touchy, but that is because touchiness comes with excessive valuation. The only thing that we care about is the health of the underlying businesses we own, their ability to continue executing on the strategy that we understand them to have, and where their sustainability dividend growth plays in to the overall economic story of their business operation and execution. The up and down movements on the way are noise

because they are noise for people that are worried about what the market is doing. And we are concerned about what companies are doing. And companies sometimes that run into a tough patch, but it does not derail the execution. It's cyclical or something that is why you have well-paid, competent manager to deal with. Those things are more often than not actually buying opportunities, not selling opportunities. But when what we're just talking about is not a real company challenge, we're just talking about the market is up and down and what's going to happen and what's the mean with AI and what's crypto doing and is the Fed doing this and our valuations going there and so

forth and so on. That's noise and it is not relevant and you should not be concerning yourself with it. This does bring me to something I want to articulate the right way. Funny, by the time I'm done speaking, for all I know, there will be some deal announced out of the House as to what they're going to try to do. Maybe getting a clean bill, a continuing resolution to fund government through March or through some other extended period. There may not be. It's been a very volatile 48 hours in Washington, D.C.

And I would have said a week ago markets were down six days in a row. And I would have said it has nothing to do with what's going on in D.C. And Monday and Tuesday into Wednesday, I would have said the same. And there was reactions to Fed and other silly things going on. The Dow had been up about 300, I believe, on Thursday, and it gave all that up. And the Dow was pointing to be down almost 300 this morning, and now it's much higher. There is some of this that in the last 48 hours is more connected to the Washington, D.C. stuff. But I think a lot of people might say, oh, because we're worried they're going to shut down government.

No, that is not what I'm referring to. What I believe has happened in the short term this week is whether they do end up shutting down government over the weekend or not. I've talked about this so many times because it's happened 10 times and I've studied it 20 times, okay? 10 times in my investing career and 20 times over my adult lifetime. And the market's been up in over half those cases throughout the period of a shutdown. Shutdown is political theatrics and melodrama, and it is a stunt, and it is an embarrassment

to our country when parties are going around these things that are very, very solvable, obtainable, obtainable, maneuverable, and procedural and being done for gamesmanship around other ends. And you blame whichever side you want. We both know you're going to blame whatever side you're not a part of politically. I get it. That's how everyone does it. But it's all silly.

The media knows these things are stupid. They play into it for clicks and ratings. I do not believe that the point I was about to make around the last 48 hours, having a little bit more eyes on D.C., have anything to do with the risk of a government shutdown, which everybody knows if it happens will be fixed in three minutes or three hours or three days. or three hours or three days. It is rather that it has not been a great display of governmental competence this week at a time when a lot of people were wondering,

hey, is there a really good strategy and path right now we're seeing towards tax reform, towards trade policies, towards deregulation? And now when you see the very tight political majorities that exist and the reality that comes from that, when you see the splits that exist within the parties, across different chambers, it is just not the case that there is this strategic, visionary, master game of chess being played out. And I think markets see what has happened this week, which is mostly a shrug, and they go, look, small ball stuff, and they can't get past a budget impasse and a short-term funding hurdle. How are they going to get really big legislative bills passed next year? That's

what I think is at play. And hearing the Trump administration start to talk about, we might want to put off our tax reform until later in the year because there's some other priorities earlier in the year that will require more of those attention to resources. You can think that's the right thing to do as a matter of agenda. You can think it's the right thing to do politically, but I don't think markets like it a lot. And so that has come back in the fray. Now, maybe it all goes the other way. I don't know how something's going to play out. I've talked over and over again about what I think are some of the strengths and weaknesses of the incoming administration. This is not even really just about Trump 2.0. It's about the whole system, the way the Senate works, the way the House works, the people of the Senate, the people

of the House, the majorities that exist in the House, with the incoming administration, with all of their interaction with one another. If part of your bullishness and euphoria was based on the A-team of governmental efficiency coming to replace what has been years and years of political dysfunction, I have very bad news for you. It's not going to get better quickly or easily. It might get better. Some of these things I do believe will get done, but they will not get done without some pain along the way. I've said it over and over again. Even if there's a lot of negotiating prowess at play, which I think is underestimated when it comes to President Trump, but it's also overstated when it comes to President

Trump. Regardless of where the outcome is, the belief that there is not going to be some chaos along the way is getting arbitraged out of market prices, in my opinion. There will be chaos. There will be questions. There will be what appears to be flat-footedness. And the whole entire system politically is just challenging to begin with. So what is going to happen next? Okay, I'm going to close up for us with seven takeaways that are going to be very, very, very quick.

What is going to happen in this DC.C. stuff and with markets? A, I don't know. B, you don't know. C, neither does President-elect Trump. D, it is not as important as what I'm about to say. E, the Trump 2.0 team seems to be increasingly open to delaying their tax reform plans. This is the wrong thinking politically, but no one cares about my political assessment. Markets care. They won't appreciate it if it ends up being true. F, the events of this week call into question how the House, the Senate, the new administration are going to pass tough laws next year. And G, politics is hard. Government is hard. Tweeting is easy. That's what is going on and playing out right now. Markets will continue to go up and down. There are some

undervalued things in the value parts of the market. There are some overvalued things in the value parts of the market. There are some overvalued things in the growth parts of the market that has not changed with the adjustments of the last week or two. It isn't less true yesterday or more true today. It's just out there. And it would be stupid for me to try to time anything around that. And I don't need to be anything other than what I'm being, which is vigorously focused on strong companies that will drive results going forward. This is the focus I encourage you to have about markets right now.

And to a lesser degree, even the broader political issues as we encounter the chaos on Capitol Hill. Enjoy your weekend. Enjoy your holiday week. And please reach out anytime. Know that next week, Christmas week, I will be off the radar after I tee up what I'm doing Monday in Diven Cafe. And yet it is going to be a wonderful Christmas week because this is the greatest season of the year. I wish peace and joy for you and your family. And thank you so very much, as always, for listening to, for watching, and for reading the Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC,

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