Dear Valued Clients and Friends,
Welcome to the final Dividend Café of 2017! We trust you and yours had a very Merry Christmas and will bring in the new year with joy, excitement, anticipation, and fun! It has been an incredible year, and though I am so excited to recap the year for you, as I am typing this there is still a day or two left in the calendar year for the market, and I don’t really think too many of you are reading this, if history is any guide about traffic and readership the week between Christmas and New Year’s … So next week will break into 2018 with a robust recap of the year that just was. Early in the new year, I will have my annual white paper complete setting the table for our key investment themes in 2018. But for now, let’s look at some closing thoughts for 2017 as we get ready for the new year (and USC’s big game tonight against Ohio State) …
[There is no video or podcast this week as the communications team is down for the holidays, but we will resume in 2018 with a brand new mid-week podcast, and the regular routine of our Dividend Café video]
A sneak peek into investor sanity
When I review 2017 and discuss the forecast for 2018 in the weeks ahead, one theme will be more prevalent than any other when it comes to the differentiator of 2017 and the likely shift in 2018 … No, it will not be that stocks went up in 2017 and will go down in 2018. The absolutely historical aspect of 2017 is not the mere stock market advance (for which history has recorded many, many such years). Rather, it is the unprecedented low levels of volatility. Could this lack of market volatility continue in 2018? Sure, it could, though I sure pray it will not. And I don’t really believe it will either. Now I am not talking about making a market bet on the VIX going higher, for which more suckers have been walloped in 2017 than anything I can remember in a long time.
I am simply talking about the inevitable reversion to more days that go down than we saw in 2018 and more bandwidth of up and down movements. Why do I wish for this? Isn’t the smooth ride of low market volatility and solid returns the stuff investors dream for? Only if they fail to understand math and markets.
Math – when we are reinvesting dividends, let alone averaging new moneys into a portfolio, we benefit from buying at lower prices. Markets – the return premium is enhanced by high volatility and contracted by low volatility. Market returns pay us for the volatility we must take to own them. Lower volatility allows for a lower premium, etc.
So in 2018, we will likely see more volatility than we did in 2017, and most investors will not like that, and most investors will benefit from it. Oh, the love of paradoxical truths.
A record you may not know about
Everyone knows 2017 has created all-time record highs in each major stock market average. But did you know that the Dow has created such new highs on 72 days this year (at the time of this typing), breaking the record of 1995 (in which the market made a new high 69 times) (2)? Now what if an investor had decided to exit markets this year back when it made its new high for the third time, or fifth time, or tenth time? Or let’s be more thorough in our analysis? In 1995, when the market made a new high 69 times, what happened to investors who missed out on 1996-1999 – literally four more years of massive double-digit returns? The bottom line is that discussion of “new highs” makes no sense whatsoever. Valuations matter. Profits matter. Interest rates matter. Economic growth matters. Top-line revenues matter. But “all-time highs” do not matter. It is pedestrian and often fallacious thinking. And when acted upon, it can be catastrophic.
Tax reform finality
The bill is signed, and we have done enough analysis on it throughout the progression of its design and into the final event last week to last a lifetime. With that said, the big question many are asking is – how did they get marginal rates lower, and get corporate tax reform done, and allow it to start 2018 vs. 2019, and still stay within their Byrd rule deficit limit, when just a month ago the mathematical room was not there to do all of it? The primary give offsetting the takes was in the repatriation rate – 15.5% vs. the 9% originally planned. That significant amount of profits earned overseas and now being taxed gave Treasury the revenue to offset other cuts. All things being equal, we wish the repatriation rate was lower, but the constraints they had to work with were what they were.
A New Year’s resolution we will keep
Josh Brown wrote a piece this week on his blog highlighting a few interesting things about the financial advisory profession (1). The first one stuck out in particular as it happens to be at the core of our own value proposition, and client commitments. This is a business where we are truly best served when we give clients what they need as opposed to what they sometimes want. We know clients sometimes fall into the trap – perfectly human and reasonable traps – of wanting to chase returns, of wanting a hot dot, of wanting to time the market, and of wanting to achieve market-level returns with cash level risk. We also know that the pursuit of such fantasies will blow people up, and our mission on planet earth is to keep people from blowing up. The unending obsession with the truth, with the right thing, with the disciplined path – in other words, all the things clients need, must be the sole mission of those in the advisory profession. And so to that end we work …
Did the tax plan make MLP’s more attractive?
On a relative basis, yes it did. Even though the C-corp tax rate was reduced, the 20% business income deduction for pass-throughs ended up in the final hour being quite beneficial for MLP’s. But it should be said – MLP’s are up more than 8% since the late November low point of the year (so much for “tax selling in December”), so much of that has been recognized by the market.
The path to stock price appreciation in 2018 will largely depend on, well, stock price appreciation. When investor sentiment turns positive, it creates a virtuous cycle whereby a higher currency exists for the capital needs of the company, and oil and gas pipelines are the definitions of a capital-intensive business. Our priority is not the stock prices themselves, but the sustainability of the cash flows that create the generous (and growing) dividend distributions. Through the entire challenge of post-2014, we have never wavered from this, and it has served our purposes exactly right. Will 2018 add to the mix with price appreciation? We shall see, but from tax reform to improved commodity markets to improved capital markets to an improved regulatory regime, we have more factors stacking up in the plus column.
By the way, I would add that instant and full expensing will help MLP’s as well. The limits on interest expenses deductibility, because of the complexity of the formula, may not impact many MLP’s …
Chart of the Week
We can summarize 2017 with any number of charts, graphs, illustrations, or major takeaways, but none are more significant than the final Chart of the Week of 2017. At the end of the day, through all of the talk about Trump’s tweets, tax reform, monetary policy, FANG, deregulation, and anything else that at some point hit the market news cycle, it was the growth of earnings around the world that drove markets higher. This basic acceleration of profits enabled stock prices to rise without their earnings multiplier growing to an obnoxious level. In 2017, as in every year: “as earnings go, so goes the market …”
Quote of the Week
“Be at war with your vices, at peace with your neighbors, and let every new year find you a better man.”
~ Benjamin Franklin
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My hope is to have our 2018 Market Positioning white paper (which has accidentally become an annual tradition) done in the next week. I will devote a lot of time to it over the weekend in between football games, if all goes as planned. In the meantime, since the next time, you will visit the Dividend Café it will be 2018, please have a very Happy New Year.
For you clients of The Bahnsen Group, it is the great privilege of our professional lives to work for you, and we look forward to 2018 and all it will bring as much as we cherish the work and experiences of 2017. Our team is growing substantially going into 2018 (a more formal announcement will be coming), and that growth of personnel is a direct response to one thing: Our insatiable drive to better serve our clients. We work hard managing risk, adding value, informing and communicating, and being the resource our clients deserve to facilitate their financial goals, organization, and success. It is a lot of work, and the work is often stressful, and yet – we cannot complain – for we love the work way too much to try such!
So here’s to all that 2017 has been, and all that 2018 will be. May it be a special and memorable year, and may you enjoy a new year weekend of family, friends, and fun. Happy New Year to you all …
The Bahnsen Group, HighTower
(1) TheReformedBroker.com, Three Things that Will Never Change, December 27, 2017
(2) First Trust Market Watch, Week of December 25, 2017
The Bahnsen Group is 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, and there is no guarantee that the investment process or the investment opportunities referenced herein 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 reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed 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.
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