Dear Valued Clients and Friends –
The nation received the news many felt was inevitable Sunday afternoon, but it nonetheless created a shock through our political system and news cycle. President Biden has removed himself from the race and I am going to primarily focus on this shake-up to the Presidential race and its impact to markets in today’s Dividend Cafe.
I imagine the enthusiasm/energy/jolt of it all will help even out the race in the weeks ahead, but I do not know that for certain. I am better at analyzing dividend growth prospects than I am doing political prognostication. What I can do here in the Dividend Cafe is share the perspective of members of the Trump campaign, the Biden campaign, the media, professional campaign consultants, and Beltway insiders (some who are good people and some who you should not loan money to), and others I am either blessed or cursed to have in my Rolodex. I have worked nearly non-stop for 24 hours to assess all this and more, and I hope today’s Dividend Cafe will be valuable for your assessment of the race and its impact on the economy, markets, and your portfolio.
The standard categories are still covered (market action, the Fed, energy, Ask TBG, etc.), but the vast majority of our focus is on the new news shaking up this race.
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Dividend Cafe Friday looked at other reasons to suspect upside inflation risk in the years ahead, and dealt with each of them one by one. Just for fun, it also looked at market conditions in this Fed tightening period, why deficit spending is getting a negative multiplier, the history of growth vs. value, IPOs, the VIX, and Chinese real estate. Action-packed stuff with the written version (my favorite) here, the video here, and the podcast here.
Off we go…
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Market Action
- The market opened up a hundred points today, and then after zigging and zagging that away a couple of times, it closed right around where it opened.
- The Dow closed up +128 points (+0.32%), with the S&P 500 up +1.08% and the Nasdaq up +1.58%.
*CNBC, DJIA, July 22, 2024
- Why did small-cap equity suffer more in the period of Fed tightening, and why has it seemed to rally more than the large-cap as of late with expectations of reduced rates? Simply put,51% of small debt is floating rate, whereas only 25% of S&P 500 debt is floating. There have been other issues at play around earnings reality, but that cost of debt and its impact on earnings has been ground zero for the large cap/small cap performance differential.
- Market euphoria indicators are frighteningly high. That said, the VIX hit well above 16 on Friday.
- The ten-year bond yield closed today at 4.25%, up 1.6 basis points on the day.
- Top-performing sector for the day: Technology (+1.96%)
- Bottom-performing sector for the day: Energy (-0.72%)
- REITs hit a 52-week high in the U.S. last week
Presidential Race **** Special Section
- Obviously, the news of the week is the dropout of President Joe Biden. Several readers reached out to congratulate me for “calling” this nearly a year ago. However, there was a lot in my “call” that did not come to fruition. I did not believe it would happen this much against the will of President Biden, I did not believe it would result in Vice President Kamala Harris as the candidate, and I also believed Gov. Newsom of CA would play a role in how it shook out. I don’t think this was a forecast I deserve an A on, but I do believe it bears repeating Herb Stein’s dictum: “If something can’t continue, it won’t.”
- The obvious questions in front of us:
- Who will Kamala Harris select as a running mate? Lots of names are being circulated in the press (as conjecture or strategic advice), but my sources say they are focused on Gov. Josh Shapiro of Pennsylvania or Sen. Mark Kelly of Arizona. Both of those are likely smart political picks.
- Will the polling indicate that this makes for a tougher race ahead for the Democrats or will the race now tighten? My own view is that the current amount of lead President Trump had is unlikely to stay the same – it will either narrow 3-4 points or widen 3-4 points, and which way it changes will depend on whether or not there is a united front for the Democrats in the weeks ahead (or on the flipside, division and chaos). We shall see.
- Will markets have an ability to price anything out of this, or does it just enhance uncertainty? I believe this enhances volatility but leaves no clarity about how it will play out in the end. People who form their predictions out of their aspirations should not be listened to.
- Politically, the polling is going to be pretty irrelevant for a week or more. Yes, it demonstrates a theoretical baseline or starting point, but no one really knows yet whether or not Harris will receive blame for a whitewashing of President Biden’s cognitive decline, and no one knows yet what the impact will be on her eventual running mate choice.
- It is very fair to say that, “well, there is still an open convention, so perhaps there will be other nominees to choose from,” and certainly some strategists think they ought to field some other nominees. But realistically, they locked this thing down within minutes of President Biden’s announcement. She received a plethora of endorsements, including his. The funds raised in the Biden campaign can go to her (but not any other eventual candidate). And institutionally, it is clear the decision has basically been made. The few people who have not technically endorsed are all helping her by not doing so, by trying to allow the appearance of a process to play out.
- An objective read on this, putting aside any political preferences one may have, is that Vice President Harris offers a chance for the Democrats to restore energy and optimism with their own base, which has been grueling for four weeks. There will be more energy and presence now to try and make a case against the opposing candidate (who you may have heard is Donald J. Trump), and with a running mate pick who expands the appeal could offer a positive choice for those centrist/moderate/undecided voters who were previously not fond of either candidate. But of course, being equally objective, there are hurdles to overcome as well – the issues in which President Biden struggled (inflation, immigration) are her issues, as well, and she is, in fact, even to the left of President Biden on some issues that will be front and center in this campaign. The pros vs. cons are all on full display for both campaigns, and I do not believe anyone can predict how it will shake out at this early hour.
- She did struggle as a candidate mightily in 2020, but she now has four years of being Vice President under her belt, and will have an entire ecosystem behind her. As one of my favorite political commentators has said, “if you engage in static analysis, you might miss what is happening.”
- Far be it for me, a lifetime conservative who campaigned for Ronald Reagan in first grade, to be qualified to give the Democrats advice on anything political. But for my money, the running mate I believe would most accrue to the benefit of a Harris ticket is Sen. Mark Kelly of Arizona. I recognize Gov. Shapiro of Pennsylvania offers benefits to the ticket as well, but I think Kelly is the one to watch.
- It should go without saying that a lot of how this plays out politically may come down to how Vice President Harris’s opponent carries himself in the months ahead. Enough said.
- I can’t emphasize enough how important the Harris campaign team will be (presumably being formed in the days ahead). If she sticks with the same team the Biden campaign had, I will be surprised. If you start seeing some significant alumni from the old Obama campaigns come into the fray, watch out.
- I would argue (h/t Rene Aninao, Corbu) that the major categories of election implications are in (1) Trade policy, (2) Fiscal policy, and (3) Regulatory policy. I would also argue that each of these now has two-way risk, and given a race reset and uncertainty, will likely result in all three creating “sideways price action” for the next month or two.
- As for the fate of the 2017 tax cuts and the lot of them (which is not all) that are to sunset at the end of 2025, I would say that if Trump is elected, none of them will sunset, and if Kamala is elected, some but not all, will sunset.
- One thing to remember when people are desperate to believe markets are somehow confirming their own political preferences (which they almost never are) … Let’s say one believes that Value beating Growth so badly the last few weeks, or small cap beating the Nasdaq, or the move of the dollar, or the move of oil, or whatever else, was all because Trump was doing better than the polls … how would one disprove the idea that these things were moving that way because markets were becoming increasingly convinced that Biden would drop out and a more competitive race would ensue? Now, the first assertion may be right and the second wrong, or vice versa, or they both may be right … I can go on and on here … but does anyone believe that is provable, let alone investible? Can someone explain why a Trump win should mean one thing for the Nasdaq and a different thing for the small-cap? In each asset class mentioned, there are no black-and-white lines as to how markets will respond given a certain candidate outcome. This whole exercise becomes a vain attempt to politicize markets. It is fine for cable TV or social media, but for investment policy, it’s not smart.
- Markets may very well decide something has changed in the outlook for this race. They didn’t today.
Federal Reserve
- We are at a 98% chance of a rate cut in September and a 60% chance of a further rate cut in November.
- I do not believe there is any chance the Fed will be cutting rates next week, but I do plan to listen carefully to plans about their balance sheet (i.e., the pace and future of QT)
Oil and Energy
- WTI Crude closed just below $80, down a pinch on the day.
- Midstream was up another +1.6% last week despite a drop in both oil and gas prices. Kinder Morgan kicked off earnings season with hugely upbeat comments about natural gas demand.
Ask TBG
| “Why haven’t we built big oil refineries in decades? Is it purely, or even mainly, a regulatory thing, or is there a more compelling fundamentals/operations/profitability issue outside of the regulatory/political considerations?” ~ Jonathan D. |
| The regulatory issues and the profitability issues are not separate and, in fact, are one and the same. But it is important to note that many, many companies have upgraded their existing facilities, and that has been the strategy of choice (versus new construction, which requires new permitting). Litigation costs along with environmental compliance is, by design, a Herculean task, so refiners choose to upgrade current facilities versus seek the construction of new ones. |
On Deck
- Between Brian and I, the normal Tuesday, Wednesday, and Thursday recaps, Ask TBGs, and so forth will all happen per usual.
- Clients will receive their weekly portfolio holdings report this Wednesday, per usual.
It’s been an exciting month or so in American politics. Whether you are disgusted by all of it, animated by it, or just plain confused by it – know this: It ain’t over yet.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
