The Dividend Cafe - When Markets Fight On!

Episode Date: September 2, 2022

Why in the world would I waste the precious soundwaves of Dividend Cafe to recap day-by-day market action when this hallowed ground is supposed to be reserved for what actually matters in markets (and life)?  Because we are entering football season, of course, and how this all connects is about to be readily apparent to you. 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 welcome to a Labor Day weekend Dividend Cafe. I am very happy to be sitting here in our Newport Beach office studio and getting ready for a longer weekend. And I wanted to give you guys here on the podcast and video a little different twist of Dividend Cafe. Now, I actually do believe there's a very important market lesson coming, and I think there's market history. And I hope that you'll get the lesson out of it that I intend.

But I want to do it in a little different way than I normally do. And I just will put a disclaimer out there in advance that if you just hate football, or particularly if you hate my beloved USC Trojans, you may not enjoy listening to this week. But, you know, it has been 13 weeks of summer, June, July, August, 13 dividend cafes. I think it was 47 DC Todays. I wrote 42 of them or something like that. So over the summer, there's been a lot of writing. There always is. We don't take a week off or anything, but a lot of writing. There always is. We don't take a week off or anything, but it's been an intense summer. There's been changes in Fed policy. There's been market volatility. There's been debate about inflation and recession and a lot of things. We've covered it extensively. I feel good

about the material we put out there and the perspective commentary. I certainly feel good about the way we're executing on these things within our client portfolios. So taking a little bit of a different journey this week is meant to be kind of fun, but perhaps it's just fun for me as the creator and not so much fun for you as the listener. But I hope that isn't the case. The Written Dividend Cafe goes through the whole deal. I'm going to just basically give you the same kind of story. I love football season. I love the fall. And I particularly, although I am a fan of NFL football and I'm a fan of the sport of college football. My family and I were watching

games last night with a couple of colleges that we essentially couldn't care less about. But it's just there's something about college football that is incredibly entertaining and energetic and enjoyable. But from a passion standpoint, I do love USC football. I have my entire life. And I've done from time to time with Dividend Cafe certain biographical journeys. The kind of experience I had play by play through the financial crisis was a highlight for me that I did in Dividend Cafe some time ago. I think it was at the 10-year anniversary of the GFC. Some of the personal

anecdotes around the events of 9-11 when I was much younger in my career and newlywed with Jolene. I wrote a Dividend Cafe several months back, not too long ago, about the housing market and particularly our own story of houses bought and sold over the years and lessons learned and that kind of thing. So I don't think I get overly personal in Dividend Cafe. I'm not against doing it. I'm pretty much an open book. The reason why I don't get more personal more often is I'm pretty boring.

And what you see is what you get. I say what's on my mind and I share what I share and I don't sit around thinking about that stuff a lot, to be honest with you. But what I will say about the USC thing is, look, I was born May 30th, 1974, effectively at USC because my dad was a doctoral student up there. And by doctoral, I mean his PhD in philosophy, not a medical doctorate, a medical. He was not an MD. He, so I was born in Torrance Memorial and we lived in Manhattan Beach first two years of my life. And you say, okay, well, we don't really care about when you were a baby, but I got to tell you on my six month birthday,

which was November 30th, 1974, that was the day that it was, I think, perhaps the most famous game in USC history. USC was down 24 to nothing, getting ready to go into halftime against Notre Dame. I mean, 24 to nothing in any game. The game's over. USC did not lose that game. And in fact, absolutely wiped the floor in Notre Dame. The final score was 55-24. And so a complete total blowout turned into a complete and total blowout the other way.

And those 55 points were scored in 17 minutes. And it was on the front page of the New York Times the next day. It remains one of the most famous stories in L.A. sports history. But I remember it very well. And you say, come on, you were a baby. How could you remember it? I'm just telling you, I do. And if you think I'll remember it because I've watched the game like a thousand times on video over the last 40 years, maybe that's it.

But I'm going to tell myself I remember it at six months old. So there was a national championship won by SC that year. In 1978, I was getting ready to move back to Southern California with my family. There was a national championship won by SC that year in 1978. I was getting ready to move back to Southern California with my family. So we had gone away after my dad completed his doctorate and he took a professorship job in the South. And we were gone for about three years. And the reason I bring up the South is you remember Alabama is not a bad football team either, either historically or present day.

And USC went into Alabama in 1978 and beat them. And USC had another loss that year, but they beat Alabama. So you end the year. Just think about this for a second. You end the year with two teams with the same exact record, but one of those teams beat the other team at their field. USC won at Alabama and they gave us co-national championships. So you can think what you want about that. But while this is going on, 1973 and 74 were a brutal time in the stock market. Essentially, it compounded. It was about a 50% drawdown in the market. Now, the market was hit hard with a recession, with oil embargo, with really weak corporate

profits, maybe just the whole existence of Gerald Ford being president with ongoing regulation, price controls, wage controls. Of course, the country was in a tough position. Nixon had left in the Watergate scandal resignation. The Vietnam War exit and experience was very difficult to endure. And there was not a lot of economic momentum. And then in 1975, the market was up 38%. It has not been up that much since.

The Dow's biggest year of my lifetime was 1975, coming off of the brutal 74-73. That, first of all, happens a lot, which is why timing these things is so difficult, that the percentage gain out of a balance can be quite profound. But it also is a lesson in that foolishness of trying to play into momentum. Momentum can be subject to very violent reversals of momentum. And in 1978, that Alabama shared national championship year, In 1978, that Alabama shared national championship year, the 10-year treasury yield was over 10%. You have a bond market getting killed. You have a stock market that's now back down again, 1978, 1979.

It was just a brutal decade. Gold more than doubled in 1978 and then went on like a 20-something year market of doing nothing and I think dropped 65% nominal terms, more than that in inflation adjusted. But my point is this. The 70s were a very difficult decade in the market. USC, it was a wonderful decade. Several national championships. But I'm only four years old now and i'm moving back to southern california and in the 79 season

there were high hopes we had won a national championship the year before and we had a kid by the name of charles white who would go on to win a heisman trophy that year um in 1979 it was running back it was our third heisman winner and also third running back Heisman winner. And we, my dad could have not afforded season tickets to USC. He was starting a church and was an adjunct faculty at different, you know, institutions. But there was someone who donated season tickets to him and, and I was just absolutely hooked.

And so getting to go to some games and then watch them, and I was a very little kid, but just absolutely loved it. And so you go into the 80s and 90s, and again, there's a sort of juxtaposition here between USC football and markets and economy. I think a lot of people know coming in the 80s, there was a turning of momentum that did take place in the economy. Now, we were in a negative GDP growth environment in 1980, and then Reagan became president. And in 1982, we double dipped. I happen to believe the historical lesson that a lot of it had to do with Congress pushing

out the enactment of the Reagan tax reform to the next year, where if they had done it retroactively, I think that recession would have been avoided. But regardless, we had a double dip. We had rising rates. And then from 1983 to 1989, real GDP growth was almost 5% per year, real GDP growth. You just had massive economic expansion, optimism, growth, prosperity. The tremendous decade in the 1980s. Of course, we know the successes Reagan had in his administration of Cold War policy,

the eventual failure of the Soviet Union, the fall of the Berlin Wall. What's not to love? Well, USC football went through a difficult period. Multiple coaches in this period of time. You went from John Robinson to Ted Toner to Larry Smith, back to John Robinson again. Okay, so whenever you go full circle with coaches, that's usually not a great sign. There were some good moments in there. A couple Rose Bowl wins in 85 and 90. I love telling people how USC sent Bo Schemblecker out

and Schembleck Beckler, the coach of Michigan, out in the Rose Bowl, his final game ever, and a loss. And we sent Lou Holtz out from Notre Dame in 96 with a loss. So these two iconic, famous coaches both played their final game ever against SC and both lost. And I think that's fun. But the 80s were a great period of economic expansion coming out of a very difficult period of the 70s. You go into the 1990s and the good times kept rolling for the U.S. economy and the U.S. stock market. In 1990, the market was down a few points, not much. You had a recession, you had a savings and loan crisis, you had high yield froth kind of get beat up a little.

And then you had not a single negative year the rest of the decade, 91 through 99 every year in equity markets was up. And particularly 96 through 99, you actually had positive GDP growth that was basically the 80s level, like that four and a half percent real GDP number. And you had a balanced budget to boot. You had a strong U.S. dollar. You just had a lot of really good things going on in the markets, in the economy. It was a little different of a story in the 90s, but this is where it becomes a bit more biographical. My dad passed away in December of 1995. And that year, by the way, at the beginning of the year, Sports Illustrated did the unspeakable, which is put USC on the cover

and predicted they win a national championship, so you can imagine what happened there. But it was a very weird season because SC was really good. Keyshawn Johnson was a senior. They won pretty much every game except for they lost to Notre Dame and they lost to UCLA, and so the two games that are rivalry games were their losses. So that kind of takes the wind out of your sails.

Dad dies in December 95. And then the Rose Bowl is a few weeks later and USC honors his passing by winning the Rose Bowl for the first time in six years. And I, at that point, now I'm a young, single adult, and Dad and I had really watched a lot of USC football together. It was a huge part of our connection, and that USC thing became a way I could live vicariously. Well, there was a nostalgic thing and also a kind of coping thing. You can imagine all that stuff going on. He was 47, and I was 20 in my early 20s now in the years that followed. And I didn't really miss a game, 96, 97, 98. They were

really bad years for USC. There were some great moments, some great wins, some great memories. But again, just a tough time for SC and not a tough time for markets. The 95 to 99 run is well known. Greenspan had to call it at one point a rational exuberance. Things were moving so quickly. We know about the tech boom. There was irrationality in the tech boom. Companies like Globe.com and Pets.com that are kind of cultural,

you know, laughingstocks now. But back then, there were also big, huge, world-changing success stories in networking and routers and servers and in the advent of web browsers and what would become an internet and digital transformation in society. So I entered to the new, well, it's a new decade, but a new century, new millennium. And there's all the Y2K whiff and the joke that that whole thing was. Jolene and I get married in 2001. USC fires Paul Hackett. And the dot-com crashes upon us and USC hires a brand new coach named Pete Carroll. And so there's something, the bear market started in March 20 of 2000 and lasted about October of 2002. And just as that bear market was ending,

and that bear market had the tech boom connected to it in the front end that lasted all the way throughout, excuse me, the tech bust. But then 9-11 and people forget about the kind of final act of that bear market because 30 months is a long time for markets to be down. The accounting scandals with Enron and the failures with WorldCom and Adelphia and some of the arrests of people, even a couple of inside trading scandals. There was low confidence in markets and muted economic growth largely caused by the problems in the tech slowdown. So those were the circumstances in the economy. And of course, they were at that point beginning to let people refinance every dollar of equity out of their house. And they were lowering interest rates and people started paying double what a house was

worth. So good times were able to keep rolling. And then from 2003 to 2007, from the low of 2002 to the high of 2007, the market was up almost 100%. And in that period, as Pete Carroll becomes the new coach at USC, we went on just this absolutely historical run. Jolene and I were at the Orange Bowl in 2002. We beat Iowa in the Orange Bowl. Carson Palmer won the Heisman Trophy. 2003, we win a national championship. We beat Michigan in the Rose Bowl. I was also there. We started off the year going out to Washington, D.C.

And a somewhat pregnant Jolene and I were there as USC beat Virginia Tech at the Redskins Stadium in 2004. But then a very pregnant Jolene and I did not go to the USC National Championship destruction of Oklahoma in the Orange Bowl in January of 2005 as our firstborn Mitchell was born in February of 2005, just a month later. And so then the next year we have what I consider to be the hardest, most painful sporting moment, not just for me, but for all time.

I'm projecting this into all of you. There's never been a more painful sporting event than USC losing with 16 seconds to go to Texas in what would have been our third national championship in a row. I will say this. It took me years to have the objectivity and maturity to say it, but it was one of the greatest football games ever played. But it did not end the way it should have ended. And so SC loses that national championship game. And then in 06, 07, 08, we win three Rose Bowls in a row.

But, of course, you know that in markets, the good times did come to an end there near the end of 07. Going into early 08, you have the crash of Bear Stearns. And into September of 08, you have Fannie, Freddie, bankruptcy of Lehman, the meltdown and eventual changing of hands of Merrill Lynch, of AIG, of Wachovia, Washington Mutual, via a Washington mutual total questioning around the viability of Morgan Stanley, Goldman Sachs city essentially became a ghost of its old self to this day. And that was September of 08. And also in September of 08, USC lost on a Thursday night to Oregon State. They're only lost to the year and kept us going to the national championship

game that year. So you then say, okay, what's going to happen next? And I'm, of course, talking about markets. I mean, we just had the great financial crisis, massive GDP contraction, the most since the Great Depression. You go into 2009 and markets begin recovering March 6, 2009. And from March 6 until March, until, excuse me, full year 2021, the markets don't have a negative year other than 2018 where it was just down a pinch. It wasn't down much. I think it was about four or 5%. And also in 2009, Pete Carroll ended up going back to the NFL. Many thought he would end up doing it eventually.

And so Pete goes to Seattle Seahawks. He ends up winning a Super Bowl there a few years later for the first time in Seahawks history. And USC comes in the second decade of the new century. And now we're into a coaching carousel. And we go through Lane Kiffin and Edward Geron and Steve Sarkeesian and then now Clay Helton. And so tomorrow in the Los Angeles Memorial Coliseum, USC will start their fifth head coach in what is essentially less than 10 years, Coach Lincoln Riley, who we poached away from Oklahoma.

And I will say that over the last 10 years, things went better in markets than they did for SC. Now, look, we won a Pac-12 championship in 2017. We won the Rose Bowl in the 2016 season, January of 17. And there were some big wins along the way in the 2011 season where we were supposed to be on sanctions and left for dead. We beat Notre Dame on the road, beat a top-ranked Oregon team on the road, kept them out of playoffs or out of BCS. We beat UCLA 50-0. The last seven years,

we're 5-2 against UCLA. We're 17-6 against UCLA in the last 23 years. So in these difficult periods, there's been a lot of good things that have come out, too. But then now we go into this new era. Now, I think some people might say, OK, he's been setting us up. He's been talking. There's some market stuff, some economic history, some USC history. But is he going to pull it together to some lesson of how USC goes, so goes markets or something? Well, it's actually not at all the lesson because there's no correlation at all.

And I do know that. Thank you very much. But there's also not a reverse correlation. It is true markets were awful in 74, and we were top of the world in 74, and markets were awful in 78. We were great in 78. There are years like that. awful in 78. We were great in 78. There are years like that. And there are years where we were great when the markets were great, 2003 to 2006, that in-between period. Markets were up a lot and we

were on top of the world. But then there's years where we've been great and markets have been terrible. And a lot of years, markets have been great and we've been terrible. So, okay, this is, I'm sure, a great revelation. But what is the connection? If it is a correlation, if it is an inverse correlation, the idea that there's a non-correlation between USC football and the market could be said of every football program. It could be said of most musical charts, sports charts, political charts. These correlations don't exist because there's no causation. Eventually correlation dies off. So what is the point of connecting it together besides a little fun trip down memory lane?

Well, that is the main point is the fun trip down memory lane. But there is one other thing I'll say. Those of us who love USC, our mantra is fight on. USC, our mantra is fight on. And I believe that really great things have come to those of us in the Trojan community who have been patient, waded through difficult times. And any look at our overall record throughout history has proven that we have a lot more good times than bad times. Oh, I mentioned in Dividend Cafe written,

I should have said so for you on the podcast, the Dow Jones Industrial Average started in 1896 and USC played its first college football game in 1888. Okay, so we're eight years older than even the Dow, all right? There's a lot of history with all this stuff. But this fight on spirit is a determination, and yet it does not mean hope as a strategy. A lot of people do that with markets. They just hope something will work out.

They hope an overpriced stock will become more overpriced. That is not a great way to invest money. But I do believe that there is a fortitude, a discipline, a toughness, a persistence that makes for a very successful investor. I think it makes for a very successful USC football experience as a fan. Those guys that are actually playing the game, involved at the school, those things are required for them to do what they do. But it also is the mantra that is required for us to get through life. There's a fight on resilience that is, to me, very connected to one's well-being as a human and one's success as an investor. And that's what Dividend Cafe is ultimately about, behavioral success through philosophical, cogent investing. I think that the fight on spirit that is incredibly connected from my own life experience and personal passions and preferences to USC, that fight on mantra

has got to be present for an investor as well. That one studies history, understands it, and does not get knocked off their horse in those difficult times. Markets have had plenty of difficult times in your lifetime, in my lifetime, in various months, in various quarters, in various years, and in various decades. And we right now are in a period of uncertainty. I mean, we have a brand new head coach coming. Oh, I'm sorry. Uncertainty in the market. Fed funds rates about to go to 3% for the first time since early 2008. There is tightening. There

is political toxicity. There is recession or slowdown conversation all the time. There's just a lot of questions and uncertainty. And yet, I will not bet against an aspirational society and a free enterprise framework where there is the ability to monetize participation in public equities pursuing the creative, innovative, and productive work of mankind. I won't bet against it. I won't bet against USC Trojans either. So all lumped in there, whether you think it's a stretch or not, there is some connectivity in this lesson and point I'm trying to make. And to the extent that that lesson may not need to be reiterated for you, you get it, you understand it. I hope there's at least been a little history in some of this going back through these last four or five decades

as we look through the way markets can go up and down, the economy can go up and down, and certainly I see football has gone up and down. I look forward to where things go ahead because it is going to be tumultuous, and there are a lot of questions going into the future, but there are also principles we learned from history about how to engage the present and have a successful result in the future.

I'm very committed to those principles, first among them being to fight on. Thanks for listening to the Dippin' Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee.

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