The Dividend Cafe - Tweeting The Market Higher

Episode Date: December 13, 2019

Topics discussed: The markets ripped higher and I will unpack more details when you click into this week's Dividend Cafe ... Since the market’s massive rally last Friday after mind-numbing good jobs numbers the market had barely budged this week. The Democrats in the House filed articles of impeachment against the President this week. The Fed stood still on interest rates. And the British voters headed to the polls to elect their Prime Minister. It wasn’t a boring week in the world, just in the market (until Thursday morning). So this week we’ll dive into the jobs data, the strength of the economy, the vulnerabilities in the economy, the pending tariff deadline, and all sorts of big things. It’s a whopper of info, so let’s get caffeinated in the Dividend Cafe ... Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, financial food for thought. me have to redo everything I was going to be talking about, writing about, speaking about, thinking about today because of a little tweet that came out just as the market was getting ready to open here on Thursday morning. And so by the time you're listening to this, I very much expect, I don't just think it's possible, I think it's probable that things will have moved once again. But here is where we are. Monday, Tuesday, and Wednesday of this week, the market was dead, dead flat. I think up 20 points one day and down 20 another and just not moving. And there was some sort of significance to that in that the articles of impeachment were officially filed this week. The market didn't even move. I think it was up 20 points that day. I think it was up 20 points that day.

The market's just total apathy around the whole impeachment thing perhaps mimics most of the country's apathy around it unless you are real deeply entrenched into a lot of the Beltway scene of D.C. But it is somewhat stunning to see how little interest there is in it. But rather than even make that kind of political or cultural commentary, I'll focus on the market aspect for which there's no empirical denial that it's been a non-event. And so I'm all teed up to kind of say, well, it's been this very low volatility week and markets are flat, coming off of what had been over a 300-point rally last Friday after the jobs report came out. And that while we're concluding this week with what appeared to be very low volatility, kind of boring week in the markets, even though it wasn't necessarily a boring week in the news cycle, that actually I expected over the weekend that we're going to end up with something that changes that, that will go into next week with a lot of activity because this Sunday is December 15th,

which is the self-imposed deadline for a potential round of new tariffs with China. for a potential round of new tariffs with China. And as I'm sitting here talking, polls are open in the UK for their election by which they should come out of it with either current Prime Minister Boris Johnson re-elected to a fresh term or Labour Party candidate Jeremy Corbyn elected. And then, of course, there's a whole lot of parliamentary seats up for grabs that either solidifies or weakens or something the parliamentary composition necessary for Prime Minister Johnson to get the Brexit vote and execution across the finish line. So there's all these open-ended things and, you know, we're going to go from there. But then this is where President tweets, President tweets. It's a Freudian slip if I've ever heard one. President Trump's tweet just a few hours ago,

getting very close to a big deal, and that was in all caps as the president is want to do in his tweeting, getting very close to the all caps big deal with China. They want it, and so do we. And now the reports that are coming out with White House kind of reinforcement are that U.S. negotiators have indeed offered to slash existing tariffs by as much as half tariffs by as much as half on roughly $360 billion of Chinese-made goods that U.S. imports from China, as well as to cancel the new round of levies that are going to take effect on Sunday. So my view had been 80-10-10, 80% chance that they delay the new round of tariffs, 10% chance that they go forward with it, 10% chance that not only do they not go forward, but that they cancel other tariffs altogether. So in other words, 10% chance of it getting really good, 10% chance of getting really bad, 80% chance of it just kind of flatlining and delaying and suspending and waiting.

But now the indication that there was the possibility of things getting even better than expected, the market rallied. I think the futures had the worst I saw it early this morning was down about 50. And then we were up over 300 points. He had a 350-point swing in the aftermath of the president's tweet. Now, by the way, as I'm talking, the market's only up about 100 points. So the market's given back a couple hundred points of that upside. Either way, I guess this reinforces where the narrative was that I originally started with, which is that this is moving minute by minute, and it's moving around stuff we don't know what will happen. We have reason to believe that you could end up getting a better trade

scenario in the next few days than had been previously expected. I do not know that that will happen and I would not bank on it. I would not be making investment decisions today based on it. And obviously the problem when you start to expect a really good thing is that then that does enhance the risk of the bad thing. Because if the really good thing doesn't happen, it sets you up for a reversal the other way. I stand by the parts we do know, which is that the president wants and needs a deal and that China wants and needs at least tariff relief. And so when you look at the politics of it, when you look at the economic implications to both sides, I think that there's a lot going on here.

Now let's go back to last week's jobs number. Why did the markets go up 350 points on a good jobs report? Well, the reason is that I really think this was the final nail in the coffin of that imminent recession theory that was popularized last summer. 266,000 new net jobs created in the month of November. The rosy expectations were about 180,000. So you had a significant outperformance, even what was already of what was already a pretty optimistic outlook. You also had revisions to two prior months of data to the upside, adding another 48,000 jobs. And then this week, the Fed came out and essentially said, obviously, they didn't't raise rates and no one expected them to and they didn't cut rates and that was well priced into the futures market that they weren't going to be.

But in the language of what they said, they referred to continue to assess global developments, that language of global developments, global currencies continues to permeate and has been at the heart of what's been going on in U.S. monetary policy all year. And then there, again, quote, muted inflation expectations. In other words, because they want to see 2% or higher inflation, they'd be willing to let it run a little hotter than that to make up for the period in which it ran cooler, but they would at least like to get to that 2% level or a little more. And yet they are acknowledging that they're not seeing it, they're not getting it, and therefore they think that muted inflation level in which we persist right now, which is, of course, really a byproduct of the accelerated deflationary issues that have come about as a result of the crowding out of the private sector

and the downward pressure on bond yields caused by excessive levels of government spending. But the point being that the Fed is really comfortable saying that they don't anticipate moving anytime soon. Fed is really comfortable saying that they don't anticipate moving anytime soon. Now, there's this thing called dot plots where you get the indication of what the various Fed governors anticipate rates will be into various points in the future. And I think it's eight governors that are indicating that they see rates being higher in a year from now than they are now. And again, I've made this comment quite a bit and I want to reinforce it. I don't believe them. I believe that you really have to look to the Fed Funds futures market and what the Fed is doing, not what they said or what they're indicating. And

what they're doing seems very clear to me that they plan to sit still and really provide an awful lot of accommodation to the economy for the foreseeable future and then just anecdotally in an election year the notion of them potentially altering with the election by being either excessively accommodative beyond expectation or tightening,

I find to be very, very unlikely. So let's assess where we are with the economy, the job support, the potential of this trade issue, what the Fed said this week, because they're all kind of separate things, but they all sort of come together at a point. The economy is strong, no question. The labor and wages data are hugely supportive. You have to rid yourself of any political presuppositions and just affirm the two things I just said, because they are undeniable. The economy is strong. The labor and wages data are hugely supportive. But you also have to rid yourself of any political prejudices or aspirations. And this next comment, which is that there are cracks in business investment, capital expenditures, and manufacturing side of the economy that point to a future vulnerability, not a recession, not an imminent

collapse, not anything that undermines the prior comments on a strong economy in support of labor and wages, but cracks and vulnerability in the business investment side. There's nothing contradictory in all these statements. And I will add that they're indisputably true. This is not in the realm of opinion. And so therefore, what one does about it obviously invites a whole lot of different perspective. that we are adamantly, that we are adamant in our view that we are headed to a period in which there will be either a break higher or lower based on economic activity. That point, whether it's in three months, nine months, or 18 months, that you either are going to get a leg up in the market or you're going to have a kind of reversal of this great bull market we've been living in. And my own view is that that will

largely come down to two things. And I'm going to write about this to you are blue in the face in going into 2020. And that is whether or not we get that resurgence of business investment, if and when the trade war is rectified and whether or not corporate earnings are able to maintain the impressive level of margins and organic revenue growth that has fed this really impressive earnings dynamic that corporate America is enjoying. So earnings and business investment are going to drive the intermediate phase of markets. And that is going to be much more of a macroeconomic event than one that is somewhat transitory or environmental around monetary policy. environmental around monetary policy. Now, in terms of the expectations of the trade war,

I had written my investment committee this morning that I was moving from 80-10-10, 80% odds for delay, 10% unexpected bad, 10% unexpected good, to 50-10-40, 50% delay, 10% unexpected bad, 40% unexpected good. But I guess I really don't know how to actually price that, how to weigh, how to set odds on those things. You could almost argue it's 50-25-25 because now that the unexpected good is a little less unexpected, it increases the risk around an unexpected bad. So those numbers are unhelpful. I have no intention of buying a stock or selling a stock of increasing a risk asset or decreasing a risk asset today or tomorrow based on this. All right. This is not like an activity-driven thing. My expectation is that on Monday, there will be some market response

to what takes place in the trade rhetoric and activity over the weekend. And that if there is, in fact, any repeal of pre-existing tariffs, that markets have more room to go higher. And that if there is a suspension of the-existing tariffs, that markets have more room to go higher, and that if there is a suspension of the stage four tariffs and some sort of nod to an imminent phase one deal, I really believe that you will end up with a better position,

at least markets holding the rally that they've had. It would only be if we escalate the trade war that I think markets would be due for a correction and that would not to me be in the president's best interest. But wise minds can disagree on this stuff I guess. Let's talk Brexit real quick. Could you get some unexpected volatility tomorrow, Friday, over the weekend, what have you around that? Yeah, you could. I do believe that Prime Minister Johnson is going to be elected. And I think that the parliamentary aspect is

probably going to go to his favor. But there's enough unexpected, look, if anyone has not learned yet with Brexit, that we just don't know exactly how these things play out, then they haven't learned anything. So my own suspect, my own belief is that we will likely get a good response out of the British election, but that I prefer to not talk about it until we have more information tomorrow and over the weekend. At thedividendcafe.com this week, there are a couple other subjects that I get into that I'm not going to get into here now about liquidity in the bond market, the fear that there is a buildup of slightly less liquid fixed income instruments in a lot of people's bond exposures, and that fixed income managers have been sacrificing liquidity to reach for yield, and that there is a kind of embedded risk in it. And I talk about that and where I think that's right, where I think that story is a little bit incomplete, and then what we've done about it and how we've specifically approached the issue of liquidity in our bond portfolio. And I want you to read it in Dividend Cafe, but for those

that don't read it at all and just want me to read it in Dividend Cafe. But for those that don't read it at all and just want me to tease it here real quickly, I think if you're investing in the bond market and you're listening to this podcast, it is important that you pay attention to this. If you own all treasury bonds, it probably isn't pertinent. But if you have municipal bonds, any municipal bonds that always tend to be a slightly less liquid asset class, and if you have any high yield or securitized credit especially, which most bond investors do have right now because of the reach for yield and because of the risk opportunities that have existed in a lot of credit since the financial crisis, in a lot of credit since the financial crisis, you have to realize this conversation applies to you, that there was a regulatory implication that came out of Dodd-Frank where the government took away the ability of a lot of primary dealers to hold these things on their own inventory, to become liquidity providers in the marketplace as they disintermediated the ability of a lot of the big banks and the so-called

too-big-to-fail banks to be players in liquidity provision and credit and other asset classes too. And so there is certainly the risk of less liquidity should something go wrong. And I think that hard-to-get parts of the bond market add the potential for return. And yet hard to get parts of the bond market also means hard to sell. And so there is the need for a conscientious understanding of liquidity in the way one approaches the bond market. And to the extent you're a client of the Bonson Group, we're happy to talk to you about what we're doing in this regard. But I would not take this subject lightly. I think it's a big deal.

I also really enjoy some of the charts at DividendCafe.com this week about stock buybacks, the idea that the market has only moved up because of increased buybacks, when in fact you see a total flatline dollar level in the combined dividends and buybacks of the S&P 500 since 2014. You had a spike up in 2018 where you had a few hundred billion extra buybacks and dividends in that immediate aftermath of corporate tax reform. But then in 2019, 17, 16, 15, 14,

it's essentially right about the same combined dollar level. And yet the market was actually down in 2018 and up in all those other years. So I just want to kill the narratives that take hold in financial media and yet are not only not rooted in reality, but are oftentimes the opposite of the truth. The chart of the week at DividendCafe.com this week is one of my favorite, reinforcing our narrative that is so, not our narrative, our philosophy, our driving passion that dividend growers represent a better risk-adjusted place for investors than dividend cutters, no dividend payers, and dividend payers who don't change their dividend. And we just kind of evaluate both the embedded volatility and the total return profile over the last 30

years in these different categories of dividend payers, and I think the results speak for themselves. So do check out DividendCafe.com. It delves into other subjects besides what I've gone into here, but there is much more that will be said. Our entire investment committee will do a podcast together on Monday centering around the outcomes of where the trade talks are and where the Brexit and the British election results go. So in the meantime, reach out with any questions. Thank you so much for listening to this week's Dividend Cafe, and we really encourage you to write us a review.

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Have a wonderful weekend. Hope you're enjoying this holiday month. And thank you for listening to The Dividend Cafe. Financial food for thought. Thank you. The team in Hightower should not be in any way liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. This document was created for informational purposes only. The opinions expressed are solely those of the team and do not represent those of Hightower Advisors LLC or any of its affiliates.