Investors came into this week fresh off one of the biggest up-weeks in markets in years and rejuvenated by a Sunday announcement that there appeared to be substantive progress in the talks between China and the United States. Markets advanced 300 points on Monday, and at that point were fully 1,540 points (no typo) higher than where they had been on just November 23 (not quite ancient history).
The good times didn’t last, as Tuesday saw an 800-point reversal in markets, and Thursday saw the markets open down another 750 points (markets were closed on Wednesday in honor of President Bush Sr.). I have no idea where markets are as you are reading this because things are moving so quickly, and when that happens it becomes impossible to match this commentary release to the real-time price levels of the market. But let’s just assume that this week ends as low as it is now, or even lower. That would mark the THIRD week in a row that the market has moved up or down over 1,000 points.
So to state the obvious, volatility is high. And this week’s Dividend Café strives to be high on explanation, on advice, on analysis, and on value. So jump on into the Dividend Café to better wrap your arms around all that is happening in this crazy market, and what it means to you.
Dividend Café Video
Dividend Café Podcast
Mr. Market Doesn’t Like Mr. Tariff
President Trump tweeted the following on Tuesday mid-morning:
“I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN.”
The market was up nearly 300 points Monday after the exact scenario we discussed last week played out regarding the big meeting with China – a truce was called on the planned escalation of tariffs; some general commitments were made around Chinese purchase of American natural gas and agricultural commodities; and intellectual property theft was prioritized for the next round of discussions. But with that tweet the next day, the markets dropped 800 points on Tuesday and reversed half of the gains of the prior six market days.
The fact of the matter is that the modestly good news from last weekend’s meeting lacks specificity, so markets are vulnerable in how they process it, to begin with. The market is trying to discern if the next 100 days really will generate progress or not. The tweet, and other administration efforts to understate the progress made, were not received well by the market.
Let’s refresh why this is so important
The markets were looking for relief to the idea that this trade war was escalating. Monday they got reasonable hope that, at a minimum, things were not looking to get worse (the scheduled increase of significant 10% tariffs to a 25% level was suspended). But as I will never tire of reminding you, markets hate uncertainty even more than they hate bad news. And uncertainty still lingers all over the U.S./China trade issue. Both sides are understandably doing their best to talk up the hope and promise of a good deal, but with little specificity available as to what has been agreed to, President Trump’s tweet seemed to indicate things were not moving as well as markets had hoped.
“Tariff Man” is probably not a marketable superhero figure, but it is an even worse economic argument. Tariffs are taxes. I don’t think the “I am Tax Man” rhetoric would fly well with markets either, even though they mean the exact same thing. If the politics and policy side can tolerate tariffs (or even embrace them), that is one thing (I will spare you my evisceration of that insane argument, but I will pretend it is acceptable for now). However, I am not writing about the politics or policy now – I am writing about the market response. Basic apolitical truths exist that markets fully comprehend. One is that “when you tax more of something, you get less of it” – an old Art Laffer line. Taxing (tariffing) more of commerce leads to less commerce. Markets like commerce. The trade fears are not resolved, and it is a debilitating sentiment.
I spoke more about this mess on Fox Business Wednesday, and covered a few other topics as well.
This week’s Advice and Insights podcast is dedicated to the “Tariff Man” (embedded above)
And that yield curve?
There are those who will say the yield curve “inverted” this week – pointing to an eventual recession (the 3-year Treasury yield went higher than the 5-year Treasury yield). As math goes, there is an inversion when a maturity has a higher yield than a longer maturity, period. However, the historical discussions of yield curve inversion very specifically refer to an inversion of the 2-year vs. the 10-year, which remains much flatter than where it started, but 15 basis points away (at press time) from inverting. All of it is real. All of it points to fear in the market. All of it points to the risk of a policy mistake (either monetary or fiscal).
To help our clients and the readers of Dividend Café, let me state this: When the 2-year and the 10-year bond yields invert, we have had a recession (on average) 2-3 years later every time. It has come sooner, and it has come later. It has been a minor recession, and it has been a big one. Markets have rallied, and they have sold off. It has offered no predictive value whatsoever to how an investor ought to be invested.
And it has not yet even happened.
The takeaway? It is a better media soundbite than it is an investor message.
So break it down for us – what is going on?
Elevated volatility is the era in which we find ourselves, with the market going up or down over 1,000 points each of the last few weeks.
While trade fears and questions about Fed intentions were theoretically and modestly helped over the last week, enough uncertainty exists to continue exacerbating market volatility.
The economy is strong, but the bond market is signaling fear around its ability to stay strong, as short-term rates have gone higher and long-term rates lower (an implicit message of, “we think you’re good now, but won’t stay good”). The Fed has played into that by [necessarily] raising interest rates. Absent a steepening of the yield curve, the message will be that economic growth is going to shrink, and that will call into question the corporate profit expansion that has driven this market higher.
A positive and unambiguous resolution to the trade war uncertainty would go a long way towards satisfying markets about longer term economic growth.
And this bull market’s expansion requires sustained profit growth, which will come from greater productivity, which will come from increased business investing (capital expenditures), which are currently drying up because of fear over …
Connecting dots on Fed-speak
In the chart below you can see the point at which Chairman Powell said “we are a long ways from the neutral level [with rates],” and then you can see where he said seven weeks later “we are very close to the neutral rate.” Is the short-term sentiment of the market heavily linked to expectations on Fed intentions? You bet.
Why not go all in on the market with this dip?
First of all, asset allocators don’t go “all in” on anything – they diversify across asset classes to create an optimal mix of risk & reward characteristics and outcomes. But tactically speaking, what is the reason that this market dip does not command an aggressive weighting into stocks? First of all, I would like to think that one’s appropriate weighting of stocks in their portfolio for their situation was appropriately set before the market correction (I certainly believe that as it pertains to clients of The Bahnsen Group). But further, we spoke last week about each head of a two-headed monster having the ability to be either a friend or foe to markets in the year ahead (China/trade and the Fed). In theory, the last week saw positive developments on both fronts, even if they were uncertain and unconvincing developments (i.e. the modestly positive vibrations in the U.S./China talks and the Fed talking down their own hawkishness); and yet, markets sold off dramatically this week. This points to me that excuse to sell is high, and negative sentiment is right now biased against stocks. I make no attempt to time when that may change and do not recommend you do either. I further recommend you ignore those claiming they can.
So how can we play “Sentiment”?
Sentiment is inherently unpredictable, and those who claim to be able to do so are either (a) Responding to sentiment, not predicting it; or (b) Total charlatans. Or both. Or even worse. But you get the idea.
The Chart of the Week below speaks to sentiment realities. Our view is that sentiment is, if anything, a contrarian indicator of what investors ought to be doing (the empirical and historical support for this view will fill a journal), but even on a contrary basis, is a lousy predictor of timing.
Does oil get a play here?
Oil prices were volatile Thursday as questions allegedly came out of the OPEC meeting as to how serious OPEC members were about oil production cuts. My own view that I am quite serious about is that volatility of the commodity price is to be expected around OPEC meetings, and the 51 other weeks of the year as well. But fundamentally, the actors who may or may not be jawboning the way oil traders want are all in the same economic boat: They do not merely want a higher oil price; they desperately need it. Supply/demand dynamics trump OPEC press conferences.
CAPEX ad nauseum
If oil prices decline to a point where capital expenditures are decreased, it would undermine a generally bullish thesis, for the same reason presented earlier that we see capex as so important to the American markets thesis. We do not believe that will happen, but we do believe it would be problematic if it did.
Dividend growth says what?
Companies growing their dividends in this period reflect confidence in their outlook despite the impact of tariffs and monetary policy. Dividends being paid to investors who are not withdrawing from their portfolios enhance the investor’s long-term returns as those dividends reinvest at lower prices. And dividends being paid to investors who need income allow the investor to focus on positive cash flow instead of temporarily declining asset prices.
This equity philosophy is unfazed by market volatility, and while this may not be emotionally satisfying all the time (understood), it is absolutely important economically, intellectually, and practically.
Politics & Money: Beltway Bulls and Bears
- The arrest of a Chinese executive Wednesday night on alleged sanctions violations added to the narrative of China/U.S. tensions being more significant than had been hoped for out of the summit last weekend. I don’t have a lot to add to the facts around that arrest, and I certainly do not have a way to measure how much it played into Thursday’s market action, but I do know it is another piece in a narrative that markets have formed: That signs of strain in the U.S./China dynamic are not good.
- One of the things that came out of the talks with Beijing was the announcement that U.S. Trade Representative, Robert Lighthizer, would be spearheading talks on the U.S. side. While the more pro-trade side of the administration’s team is heavily involved (Mnuchin, Kudlow), the markets likely felt that a more protectionist-leaning Lighthizer running lead was not a good sign.
Chart of the Week
When would you guess investors felt most optimistic about stocks (when bulls outnumbered bears by 44%)? If you guessed back at the highs of January, you’d be correct. We’ve since endured an up and down year resulting in flat performance. And what is the sentiment now? Bears outnumber bulls by a stunning 22%. I will let you guess what history has had to say about the sentiment of the crowds as a predictive force!
* Pension Partners, Charlie Billello, AAII, Nov. 26, 2018
Quote of the Week
“Buy on the sound of the cannon, sell on the sound of the trumpets.”
~ Nathan Rothschild
* * *
In a week like this, you may wish that I focus more on the distress in the market, but I think I have said all I can intelligently say there. I just really, really encourage you to reach out if you have any questions at all about the strategy being implemented on your behalf.
Rather, I will use my closing comment to pay homage to President George Herbert Walker Bush, who went to be with his Lord this last week at the age of 94. Much like his predecessor, Ronald Reagan, President Bush is deeply associated with my younger years, as I was a hopeless political junkie throughout elementary school, middle school, and high school (I started Kindergarten in 1979 when Bush ran against Reagan; I graduated high school in 1992 when Bush ended his Presidential term). So my 13 years of primary/secondary schooling correlate exactly with President Bush’s time in the White House. Unlike President Reagan, President Bush will not be remembered as a transformative President, but he will be remembered as an American hero, a kind and decent man, a family man, and a true patriot. He is missed and will be for many years to come.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The Bahnsen Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and 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 described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee.
This document was created for informational purposes only; the opinions expressed are solely those of the author and do not represent those of HighTower Advisors, LLC or any of its affiliates.
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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