The Dividend Cafe - Trump Bump Gets More Interesting

Episode Date: December 1, 2016

Trump Bump Gets More Interesting by The Bahnsen Group

Welcome to this week's Dividend Cafe podcast. Am I the only one who can't believe we're in the final month of the year? A rather incredible November for a lot of reasons is now behind us, and with that we prepare for the final month of what's been a really incredible year. By incredible, I refer to a year that has certainly confounded experts, seen history achieved in so many ways, and allowed for countless news events to come and go, countless market gyrations to come and go, many of which warranted the description. Incredible. Our objective through this year at the Bonson Group has been to balance a need for steadiness and discipline with the pursuit of tactical opportunity, and all of that in a manner highly specific to each individual client. Those individual client needs are unique, and our

manner of responding to 2016 zigs and zags and incredibleness, if you will, has been unique. Before I close the book on the year, though, we do have a month to go. This week's Dividend Cafe is especially meaty. We'll hope you'll listen through to the whole thing and also check out the charts and written contributions at DividendCafe.com. Well, the winner is this week. In a week, we want to write about the crazy month of November and the state of stock and bond markets. But the real winner in the race for top story is the OPEC summit in Vienna. For the first time in 15 years, Russia and Saudi Arabia agreed to a coordinated production cut in oil. It was actually the first production cut agreement at all involving any OPEC country since 2008.

cut agreement at all involving any OPEC country since 2008. Oil ran up dramatically over 9% on Wednesday alone, went another 4% on Thursday. So it's still sitting in that kind of $50 range. And a failed agreement, you know, very well could have led to the $40 range. But, you know, the energy sector ran on the news, the integrated companies, the pipelines, the producers, even petrochemicals all moved in concert. Is this rally in oil and oil-related investments sustainable? More specifically, is it expandable? Does it have room to go? We believe the answer to that will end up depending on global demand. From a supply standpoint, it's a somewhat limited part of the story now. The shale producers in the U.S. are a big factor. Non-OPEC foreign producers are a big factor.

And we certainly do not believe Saudi Arabia and their pending economic interest want to see an oil price much south of $50. But the issues to watch are A, compliance with the production cut agreement, and B, global demand levels. In the meantime, this is good for all energy investors who have stayed engaged in these fundamentals and these realities. And by the way, beyond this OPEC agreement, the biggest news for energy investors may very well be a 2017 change in U.S. energy policy. Two stories for the price of one. Just as much as the stock market rally is and will and should dominate headlines since the election,

so is the carnage in the bond market a massive story. We measure this impact by looking at the spread between stock performance and bond performance, a spread that most of the time is not massive because bonds do not have a lot of negative months. Note, if you get a chance, dividendcafe.com, the chart we have showing the historical feat that took place this month as it was one of the widest disparities between stocks and bonds in 30 years. Why don't we just eat dessert all the time? There's a practice at the Bonson Group and in most competent wealth management firms known as rebalancing, where portfolios are recalibrated to their desired target asset allocation, their appropriate target allocation on a periodic basis, sometimes annually, sometimes more, sometimes less. but it's essentially a way of trimming gainers and adding to those positions that are down a bit,

so as to maintain fidelity to the risk and reward trade-offs that investor is seeking. We would love to always be in the hot assets when they're hot and never in the cool assets when they're not hot, but at the end of the day, that isn't the way investing will ever work for a disciplined and responsible investor. Proper diversification means allocating across varying asset classes to achieve the various objectives one has in risk, downside protection, liquidity, tax efficiency, volatility, upside reward pursuit, and cash flow. The asset classes will often perform in varying ways from one another, zigging and zagging, leaving allocations over time different than when the portfolio management began. Rebalancing restores the allocation to an optimal desired place, which gives return a boost by adding to distress positions at lower levels, and it reduces risk by selling off positions when they get a bit frothy. It's so obvious I don't know what to do. The very clear theme from pundits and analysts right now

post-election is that A, the Trump presidency will spur growth, which will be good for stocks, and B, it will pay for this with more debt and borrowing, which will be bad for bonds. It's a reasonable prima facie set of conclusions as talk of infrastructure spending gets the Keynesians excited, talk of corporate tax reform gets the supply-siders excited. Talk of corporate tax reform gets the supply-siders excited. As for the logic leading to bond pessimism, any sort of reflation that becomes inflationary would indeed be bearish for bonds. However, one of the reasons we would be very cautious about backing the truck up to invest in the obvious or consensus views about all of this

is that these reasons are, well, obvious and consensus. That doesn't usually work out well. Secondly, it ignores the incredible nuance and complexity that will go into how this all plays out. We have not gotten out from under whatever distortions exist in capital markets from eight years of highly accommodative monetary policy. Unknowns exist around how monetary policy will play out in the year or two ahead. Global conditions are highly suspect. Any number of these things could impact global appetite for risk, asset price valuations,

and interest rates. In other words, stocks and bonds. We want to be balanced, measured, stocks and bonds. We want to be balanced, measured, and seek attractive valuations, but we have no intention of pouring ourselves into one way as all this works out. So what was the final survey, by the way, on third quarter growth? Well, the earnings of the S&P 500 grew 3.2% in Q3, the first year-over-year increase in quarterly earnings since Q1 of 2015, nearly two years ago. Estimates entering the quarter were for a decline of over 2%. So it was a really bullish backdrop for stocks, irrespective of Trump and the other issues that we discussed in the preceding paragraph. What kind of creates this bullish environment? Earnings growth. We'll see if we can keep it going. At least there's nothing else to worry about now, right? Let's not lose sight of this fact in a post-Brexit, post-Trump

reality. This Italian referendum matters. And this weekend, the Italians go to vote with a referendum that their prime minister has put before the voters. And essentially, should it fail, he has said he will resign. We don't know exactly how this whole thing will play out, but a prime minister resignation, more concerns about euro exits, particularly from a staple of the European Union like Italy. These are all volatility creating events. Do I think Italy will actually leave the European Union, which is certainly not the subject of this referendum, but I don't know. But the reality is a potentially disruptive event lingers, and there's unknowns around the repercussions.

I would like to say more about all this after the vote and the results are known, but I think we've learned by now with unexpected achievements in the political realm that it is worth paying attention to. in the political realm that it is worth paying attention to. The big bad dollar is getting heavy, or is it light? We wrote before the Thanksgiving holiday about our disagreement with those who suggest a strengthening U.S. dollar is necessarily bad for emerging markets equity investing. We acknowledged that in the big dollar rally of 2014-2015 that emerging markets dropped about 14%. However, we would point out that in the big dollar rally of 2005, emerging markets went up 29%.

There are several periods in the last 20 years of U.S. dollar strength, and there were both emerging markets drops and rallies within that. So I guess our point would be in the world of emerging markets investing, for a long term growth investor, there are much more important factors than the U.S. dollar. I'm going to go ahead and leave it there for now. There are a couple sections in thedividendcafe.com that are worth going to that were not covered here on the podcast, some that require a little visual assistance. As we said, November was one of the strangest months in capital markets I've ever seen. The markets started off rallying because they thought Hillary Clinton would get elected. They then sold off because of election volatility

and the unknowns that go therewith. They then reacted overnight to a Trump victory by dropping 800 points, only to go on a violent rally upwards instead. In the meantime, bond markets sold off substantially out of fear that Trump would blow out the debt, as we talked about. Stock investors saw the overall averages go up, but many sectors and names within that struggled quite a bit. It was a very selective and very divergent month in stocks. Oil got crushed, but then OPEC sang kumbaya together and oil rallied huge. It's up, by the way, 100% now from its February lows. All in all, bonds and utilities are down. Most stocks are up.

Alternatives mostly did well well unless they were commodities, and commodities did well only if they were energy. So risk is being redefined right before our own very eyes. What no one did was see all of this coming in the way that it did, and what no one but the most dishonest of your friends did was invest in all the things that went up and none of the things that went down. Asset allocation is a framework for not getting rich when things go well so that you cannot go poor when certain things do not. No home runs, no strikeouts, just singles and doubles. And so to that end, we work. Thank you for listening to Dividend Cafe.