The Dividend Cafe - What Next?: A Post-Election Reality Check

Episode Date: November 6, 2020

November 3 has come and gone, and while the results may not yet be fully etched in stone, we have a pretty good feel for where things are headed. I suspect there are two camps of you who read the Dividend Cafe, and I do not refer to partisan leanings. What I mean is that I imagine many are excited to not hear about the election any longer, and then there are many who want to wrap their arms around everything as fully as possible (as far as what it all means to the economy and markets, etc.). I want to do a bit of both, personally. I want to accommodate that latter group today, providing as much useful analysis of where we go from here as possible, and then I look forward to having a lot less to say about the political implications of, well, most things. The fact of the matter is that the political dynamic (a) Always affects markets to some degree, not just in a week like this one; and (b) Always has much, much less of an impact than people believe it does. Policies matter. And there are impacts in both macro and micro parts of the economy and investment markets that stem from policy decisions. But many investors have been utterly confounded over the years (including this week) by markets seeming to respond differently than they expected in response to some political outcome. Investors who find themselves surprised by a market reaction to a particular political outcome that is different than they expected it to be can be forgiven since truth be told, market reactions confounding people’s expectations is the normal state of affairs. Much of it has to do with the ability of markets to have already priced in a certain outcome before it happens, meaning what seems to be a market response to something is really the market now adjusting to something else – that the market was ahead of the news headline. 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 and good morning, good afternoon, whatever time it is you're listening to this. Welcome to the weekly Dividend Cafe podcast and video. Welcome to the weekly Dividend Cafe podcast and video. It's just been a whirlwind of a week, and I'm sure a lot of you feel the same way. I really can't even believe it's Friday. I mean, I don't know. It isn't that I don't.

It doesn't feel like Friday. It just sort of could feel like any day. I'm on about two to three hours of sleep now for three nights in a row, literally. And it's not even really the sleeplessness at night and all the busyness and things, but then in the daytimes with market action and all the things going on, it just feels like incredibly and painfully busy time right now. And yet that's all in the backdrop, obviously, of the election and the uncertainty of certain things and maybe now partially some of the certainty. I think that we do know a lot more right now than we did a week ago. And we know a lot more than we did two or three days ago, even after the immediate parts of election results. And so

I'm going to force myself, as I did in the written dividend cafe this week, to really stay focused on the task at hand, which is covering for you, I think, investment and market and economic implications of where we are and try not too much to get distracted by a lot of the what-ifs and could-bes and this and that that because those things are impossible to forecast. The margins in a couple of states are so tight and there could be recounts and there could be lawsuits.

And there is right now an incredible amount of social angst that's building up. And what I've chosen to do in the objective hat of discounting what I think is most likely to happen and what that means to the clients for whom I manage money and in the positioning of what we're thinking about macroeconomically, I've chosen to look to where the betting odds are predicting things go and not trying to be an election law uh forecaster which by the way i i would imagine that that would be a um a very unprofitable profession um because i don't think any of them would know what the heck to expect on certain things either uh what we know a few different things right now. And so let's just get the politics stuff out of the way. From a baseline expectation standpoint, the Republicans are going to keep the majority of the United States Senate. They may do that at 51-49 if they lose one of the two seats in Georgia in a runoff. If as expected, and I'd put a very high probability on this, they keep both of those seats. Uh, they'll have a 52 to 48 majority. And the baseline expectation a week ago is that

they would lose the Senate at 51 49 with a pretty easy scenario, getting them to losing 52 48. a pretty easy scenario getting them to losing 52-48. So you're at a three or four seat differential as to what was expected just days ago by the Republican keeping the Senate seat in North Carolina, in Maine, in Montana, and in Iowa. I think I said about 100 times in this podcast over the months that we've just gone through. The Republicans need to win three of those four. It'd be a tall order, but they were very unlikely to be able to keep Arizona and Colorado. And they did not keep Arizona and Colorado. They did pick up Alabama. And then as it turns out, they've kept all four of those seats that they needed to win three of the four.

The funky thing in Georgia with the runoff is what it is. But again, with the majorities that they already won by, even though they're forced to a runoff, and then now losing the libertarian candidate on that and all of the passion that will go into the markets are most certainly expecting Republicans to prevail in both those seats. And I'd put that at an incredibly high likelihood. The House of Representatives, don't worry, I'm going to get to the president stuff. But the House of Representatives is the biggest chalk of what's going on here. And the majority is not going to flip. It isn't like the House is going to go from a 33-seat lead. Let's see, what was it? It was, yeah. Oh, why am I forgetting these numbers? Remember I said to you before, it was a 35-seat lead that the Democrats had going into the election. And there are still right now, as we talk, 33 that they're saying too close to call.

But of those 33, they're looking at as few as 15, but as many as 20 that will go on the Republican side and then another 10 to 15 or something on the Democrat side. So 11 to 15 on the Democrat side. So listen, the net of it all is as right now, the Republicans have picked up a net of six seats. They lost two and won eight. And when all the rest of these are done, the Republicans are probably going to flip somewhere around 10 seats. And that is not, they were expected to lose minimum of 10, probably 20. So let's meet in the middle and say 15. minimum of 10, probably 20. So let's meet in the middle and say 15. So if you go from a minus 15 expectation to a plus 10, that's a 25 seat differential. And it will result in a thin margin for Speaker Pelosi. It could very well result in a more moderate Speaker of the House if the Democratic Party decides, probably not in 2021,

but maybe in 2022, that they want a new face of leadership. It's hard to predict those things right now, but there's a lot of wailing and gnashing of teeth going on. But my point being that as we look to what this all means for markets and the economy, you have a Senate staying in Republican control and you have a House that did not go all the way that was expected. And all this talk I've done about the margins of victory, they play into what the political capital and momentum and ability to affect certain things will be for President Biden, Biden administration. For President Biden, Biden administration. Now, on that front, we know that Pennsylvania right now, as of the time I'm recording, has just a very, out of over six million votes cast, I think a 9000 vote lead for Biden. More votes coming in are expected to go for Biden. There are talks of lawsuits and disputes and things.

And I'm just not going to get into all that stuff here. People can speculate. You could turn on your favorite cable news show, and you can hear probably if it's your favorite show, you can hear what you want to hear about. It's going to be this or it's going to be that or it isn't true here. It is true there. And I just don't know, and I don't have any ability to apply it to investment decision-making. And I don't have any ability to apply it to investment decision making. So my point is only to go off the betting odds that right now say somewhere between 95 and 96 percent chance that President Biden will end up securing the Electoral College. Excuse me, the former Vice President Biden will secure the Electoral College votes necessary to become President Biden.

So I bring up the House, I bring up the Senate, and we look at the market here up over a thousand points on the week. And I say to you that divided government has produced this rally. Um, it does not feel that divided government is a good thing or divided country is a good thing. If you go on Twitter, it does not feel like it's a good thing. Probably a lot of dining room tables. It does not feel like it's a good thing, probably a lot of dining room tables. I have tremendous unease about the lack of social cohesion in our society right now. I have tremendous unease about the volume, the noise, the toxicity that exists in this very polarized, very tribal, and no matter what anyone wants to say, mostly 50-50 split across society. You're going to get one of these two gentlemen to be the president, and whoever it is, is going to have won three or four states to put

them over the edge by just a few votes. That's the likelihood. Now, it does appear at this time that that individual will end up being Joe Biden, but my point is we have a very divided country. So when I switch gears right now and talk about divided government is a good thing. I'm not referring to the polarizations that exist throughout the culture. I'm referring to the concept of a Republican Senate but a Democrat House of a Republican chamber on the legislative side because of the Senate and yet a Democrat-controlled White House. If you want to even bring in the judicial branch, obviously a couple hundred new federal judges from Republican appointees as well as the Supreme Court that is now lined up with six Republican appointees and three Democrat appointees. That's as divided as it gets.

You're basically talking about one branch of government under kind of Republican control and one under Democrat control and then another one that is split, Republican and Democrat control. That divided government is what markets have liked. And what I mean by that is the inability to do things that markets don't like. ability to do things that markets don't like. And so when you look at this particular cycle, there was a sort of what we call tail risk, a sort of high impact event that might have had a lower probability, but that markets are nevertheless concerned about. And I think that, by the way, in case you're interested, I don't normally do little real time updates, but as I'm sitting here recording, I lifted on my phone and see that the Secretary of State in Georgia has just declared that there will be a recount, which means whether that ends up prevailing barely to Trump or barely to Biden, we're going to go through a whole recount process there. That's not unexpected.

All right. So back to the gridlock stuff. to the gridlock stuff. I think that when you look at this particular cycle, the possibility of having an impact, an increase in corporate taxes, which is just straight off the bottom line of net after-tax profits for companies that are then, of course, part of how shareholders monetize their investment, and then the possibility of a higher capital gain tax rate, which then is the tax paid on profitable investments, it impacts the net present value of what people hold as investment capital. And that is not going to be able to happen with this composition of a legislator and executive branch. And I'm going to talk about some of the things that can happen, but that's what I mean by gridlock. to talk about some of the things that can happen, but that's what I mean by gridlock.

There are things that need to get done and that are probably good for our country to get done, and maybe they will not get done or get done in as clean of a manner. And I'm not suggesting I think that's a good thing. I do believe sometimes not getting stuff done at the government level is a good thing, but I'm well aware of the things that need to be done from time to time by those who we've elected in our country. And I'm speaking to you from a market standpoint to say that what markets have liked this week is an outcome that took away a wave. And I mean a red wave or blue wave, but something by which there would not necessarily be that separation of powers and checks and balances that are reasonably embedded into our political system that are almost omnipresent historically and at this point change what could theoretically impact and particularly negatively impact things for investors.

Now, what does this mean for a stimulus deal? I will suggest to you that anyone who believes it now means we're not this mean for a stimulus deal? I will suggest to you that anyone who believes it now means we're not going to get a stimulus deal is insane. But I do believe that it's going to create a smaller stimulus deal. And I'm not at all convinced it's a negative thing. To the extent it ends up resulting in a more targeted one and a more thoughtful one, I think that could prove to be a good thing. And I think from an impact to debt markets and to deficits, I don't think you're going to get anywhere close to a two-handle. And yeah, I mean two as in trillion, not a billion. I don't think you're getting

anywhere close to a two-handle, let alone three or three and a half or four-handle, which is what the House had previously passed with their HEROES Act. So you may get $600 billion, you may get $1.2 trillion, and those things, some of which may be really good and some of which may be really bad allocation of assets, I don't know. But I do believe that right now it sets up for a stimulus bill to still get passed. Now when Senate Majority Leader Mitch McConnell says he thinks one will get done in the lame duck session, he may know something. I don't know.

He may just be posturing. He may be wishful thinking. But no, I don't think that's going to happen. And if I'm wrong, I'm wrong. But I believe it's more likely that you'll end up having to wait till after inauguration to get a skinnier stimulus deal done. Now, even apart from stimulus, we talk about government spending as if it's around these different stimulus deals, as if they're not already spending in ordinate amounts of money in normalized situation. I remind people all the time, the deficit was a trillion

dollars before we passed the CARES Act, before all the emergency COVID spending that has entered the fray. And so I look at four different possibilities of government, a Republican president with a Democrat Congress, Republican president with a Republican Congress, a Democrat president with a Republican Congress, which is where it looks like we may be headed, or a Democrat president with a Democrat Congress, which is where people thought we were headed. And I'll admit that fourth category is probably where spending would have been the highest. And a Democrat president with a Republican Congress is probably where spending will be the lowest, just simply in the sense that Republicans with

the Democrat in the White House all of a sudden seem to generally be more anti-spending than they are when there's a Republican in the White House. But regardless, all four of these possible political combinations result in huge deficit spending. And it's my firm economic conviction that that results in downward pressure on rates because of the deflationary spiral that it represents and that it necessitates. payroll that it represents and that it necessitates. And so while it's counterintuitive, I expect no change in that whatsoever. Other than on the margins, the fact that the stimulus bill is not likely to be as big as it otherwise would have been. Other implications in the financial sector, a financial transactions tax off the table now, a potential breakup of the big banks off the table now. The political realities are not going to allow for a real far left appointee in the treasury secretary or other

key cabinet positions. Very possibly, very likely a more moderate cabinet construction than you otherwise would have had. This includes Fed appointees, by the way, too, that could be more hawkish on capital constraints not being as likely to get confirmed now. In other words, more dovish Fed governors around capital allotment for banks, I think, is more likely and probably more bullish for the financial sector. And then it's more politically tolerable, even though it is under the Fed purview, not Congress. It's a pretty political thing overall. I think it will be more politically tolerable to allow more capital return to shareholders from the key financial institutions. All of these are byproduct of the way election things shook out this week.

In the private equity sector, some of the events that could have been out there, a backdoor tax hike taking out the carried interest benefit, a taxation, a deductibility loss on corporate interest expense that would have really attacked I think a lot of the very business model of leveraged buyouts. business model of leveraged buyouts. And also just the general tone and posture of how we speak about private capital markets, equity and debt in our country. The reality is I actually now, and by the way, the space is up six to 9% this last few days, the publicly traded private equity sponsor companies. I think you have an economically challenged opportunity set out there, a lot of companies in need of capital, in need of strategic resources, a ripe environment for M&A, for transactions. And you get this now with very low interest rates, very low cost of capital, Very low cost of capital, very liquefied financial markets. And to me, in a kind of post-COVID situation, that appetite for transactions and whatnot is really going to bode very well for that space. So a big sigh of relief probably in a lot of the private equity offices this week. Technology, look, technology has done plenty fine under President Trump, despite the fact he's been at war with that sector in a lot of ways, at least

rhetorically. So these things transcend the politics, but all things being equal is that sector having a little less exposure to FTC concerns, monopolistic accusations, antitrust type things, privacy constraints. I think there's still going to be some bipartisan pressure on technology. But the concern we would have with big tech has always been valuation driven. That's the primary headwind that the sector faces. valuation driven. That's the primary headwind that the sector faces. And I think that they, on the margin this week, will benefit from the very likely scenario of not having additional antagonism in the Justice Department or the FTC. From a currency standpoint, I expect the dollar to weaken. Part of it is some of the trade issues that have happened with Asia and Europe coming off that.

It isn't so much that it weakens the dollar as it benefits the euro and other Asian currencies and emerging market currencies. And therefore, by definition, is downward pressuring on the dollar that helps emerging markets equity. It helps multinational companies in the U.S. And I think it's a trend that we already saw in place that will continue with a weaker dollar. From a historical standpoint, I would point out to you. First, let me give a caveat because I mean this very seriously. I do not think you're going to see these master compromise deals with Mitch McConnell in the Senate and Joe Biden as president, if that is how it all shakes out. I'm not predicting kumbaya. I'm not predicting this kind of magical healing of wounds. I think it's going to be as partisan and political of a knife

fight in Washington as it always has been. But look, there was a 2010, a 2011, and a 2012 fiscal event, a debt ceiling in one case, a fiscal cliff in another, a kind of mini fiscal cliff in 2010, all of which those compromises came about with then Vice President Joe Biden and then Senate Minority Leader Mitch McConnell. They've done a lot of deals together. They actually have kind of made their own respective bases mad in some of those deals. But when thought is that we should not be assuming any kind of new magical paradigm of partisan unity, of nonpartisan unity, excuse me. But we should be aware that there is probably on the margin a better likelihood of certain things getting done for good or for bad than there would have been in some of the other arrangements. So we'll see how those things shake out. Ultimately, I'm going to conclude with this. And of course, I'm going to beg you to go read dividendcafe.com because I added so much more information there in the written version this

week. I believe corporate profits and the Fed will be the big stories of 2021, not the occupant of the White House. Now, if the occupant of the White House and the Senate had gone the other way, I understand that that would have invited different stories. But if we now kind of have our presumption as to where this thing's headed, regardless of what shakes out in the days and weeks ahead on the national scene, if the end run does end up being what the betting odds are currently pricing as 96% chance, then I think the corporate profit spectrum and the monetary policy paradigm are going to be what drives markets. And I think you can envision some scenarios where those things are going to be very bullish for equities, selectively though. But nevertheless, it's important to understand the driver markets in a week like this with all of the bets that were put on and the hedges and the just sort of uncertainty that had

built up in both stock and bond markets. You saw bonds rally quite a bit this week. It's important to understand that I think we're going back to the bigger things taking over and those are profits and that is monetary policy. Check out DivenCafe.com. Reach out to us with any questions you have. Write a review. Give us some ratings. Make it a negative review. Make it a positive review. I don't care. But say anything you want to say about our podcast at your player of choice. Send us a little snapshot that shows you did that. And then we will send you any one of my books that you would like, whether it was my prior book on Elizabeth Warren, my book on the case for dividend growth, or my initial book on the crisis of responsibility. We will send you a complimentary copy.

And with that said, thank you very much for listening to and viewing this week's Dividend Cafe. May you have a peaceful weekend and God bless America. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC, Thank you. 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 opinions, news, research, analyses, prices, or other information contained in this

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