Dear Valued Clients and Friends,
You may remember a time when the biggest concerns for investors were leveraged financial markets unwinding over-crowded trades, stretched valuations running into underwhelming earnings results, and true concerns about a slowing economy causing people to wonder if the 2023 recession was coming, only in 2025.
That time, my friends, was, ummmm, last week.
As I type, the Dow is at 40,600, up about +6% from where it was less than two weeks ago (it was 38,500 last Monday). The retail sales number for July was up +1% when +0.3% had been expected. Weekly jobless claims were less than expected yesterday. Nvidia is up +17% (now only off -10% from highs).
In one week, Japan has stood down, recession fears have faded, and valuations are reflating. You would think we were talking about the difference between two different decades, not two different weeks. Don’t get me wrong, markets go down one week and up another (or vice versa) all the time. But this is beyond mere volatility – entire narratives have changed in just a week. It can make your head spin if you let it.
We’ll unpack a little of the market reversal this week in the Dividend Cafe and also jump all around to the wide variety of other things on your mind – from interest rates to the tenets of asset allocation to the new economic proposals of Vice President Harris; we have a lot for you this week. So, let’s jump into the Dividend Cafe…
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So what gives?
I suppose a market that goes from 41,200 to 38,500 in six days (July 31 to August 5) and then from 38,500 to 40,600 (as of press time) in eight days could be appreciated by some. I mean, +6% and -6% are not to be sneezed at in what is essentially a week or two, but +/- 6% is something that markets can and do see for a thousand reasons all the time. We have already gone over what these reasons were, and the point is not really what happened around the 6% drop or what happened around the 6% comeback – the point is what an investor did, or should do, and didn’t do, or shouldn’t do, in such periods.
I have no doubt there is some grifter or charlatan out there saying, “I sold out right before the drop, and I got back in the right before the comeback,” and to them, I just simply say, “I am glad to hear your mom will get the monthly rent you are behind on this month.” Now, if I am being nicer and they are a real investor, I would just say, “Can I see the trade confirms, please?” And THAT will end the conversation – they will be gone – I will never hear from them again.
But I guess I would ask – what if someone was long the market, got out before a 6% drop, and got back in for a 6% rally – what if they weren’t a basement dweller or a liar? THEN would we say, “Hey, this could be awesome!” Let’s do some math.
Someone has $100,000 in the market. They sell. They still have $100,000. It goes down 6%. They get back in. It goes up 6%. They now have $106,000. Good? The other person had $100,000 in the market. They didn’t sell. It went down to $94,000 and then back to $100,000. So, person A is up 6k compared to person B. Still following me?
Quick question: What is being missed here in this scenario of a hypothetical liar lying about his fake market timing? Taxes paid to exit the 100k? Oh yeah. Risk? Oh yeah. The person who doesn’t re-enter at 94k but rather waits until 106k? Oh yeah. The dividends person B got to reinvest at 94k? Oh yeah.
But really, more important than all those other factors is this: It can’t be done, it won’t be done, and the UPSIDE (6% better off, less taxes and such) is juice not worth the squeeze. What REALLY happens over and over and over and over is someone believes they can call a top, they get out, markets go higher, they regret being out, THEN they get back in, then things fall, rinse and repeat.
And all because they committed the sin of timing what cannot be timed.
A better way
Anti-fragility makes something stronger during times of distress. Dividend growth divorced from macro market timing wants -6% drops and -15% down markets and spurts and stops and sputters because it is a programmatic buyer of these things via reinvestment of dividends. There are a bunch of companies paying out a bunch of dividends over a bunch of intervals, and the implementation of a holistic portfolio around this reality is agnostic about market timing and covetous of the math that inevitable market volatility has to offer.
Note that I did not say it “pursues” the market volatility. It doesn’t have to. Do we pursue oxygen? It just is. Volatility is going to happen in markets as automatically as breath is going to take place from our human bodies. We can discuss it, make guesses about it, and offer up theories before and after, but all of that does nothing to the one important part: It just will be.
You can try and time it. Or you can try and make money from it divorced from exhaustive guesswork and assorted fallibilities. Programmatic, recurring dividend reinvestment is humility in a discipline that rewards the humble. It honors history in a discipline that is filled with history. And it is economically sensible in a discipline that rationalizes the sensible.
A good thing to not care about
My investment philosophy is completely agnostic about what the Fed Funds rate will be at the end of the year … in other words, if I knew via secret revelation from God Almighty that the current 5.5% rate would be 4.5% at the end of the year, or if I knew via the same reliable source that it would be 5%, there isn’t a single investment thing we would be doing differently. The 50-100 basis point range of rate cuts by the end of the year is totally immaterial in our investment philosophy, and that is by design.
That said, for those gripping on every report as to what the Fed Funds Futures market is saying, or what the Fed itself is saying, or what CNBC is saying, just be aware – markets started off the month of July believing the Fed Funds rate would be 4% at the end of next year (so from 5.5% to 4% in 18 months). That futures market now expects 3.3% at the end of 2025 (so a decline of 2.2% from 5.5% by the end of next year). In just a few weeks, an 18% adjustment has been made to expectations (70bps lower divided by a prior forecast of 400bps). If your investment philosophy does require knowing these things or being on the generally right side of them, might I suggest you take up cattle futures or sports betting?
Asset Allocation for the win
2022 was an exception, not the rule. Stock markets got killed (let’s call it -30% for the Nasdaq and -20% for the S&P 500), and bonds got killed with them (down -10% or -15% depending on which aspect of the bond market you are looking at). That 2022 was the only year in a hundred years that BOTH stocks and bonds were down double digits (in terms of their major indexes) seems to have been lost on people who called it the end of asset allocation. A few thoughts were always in order:
(1) Dividend growth equities were not down -20%, let alone -30%, but in some cases, actually up +5% or so …
(2) Alternatives could very well have ADDED to returns, depending on which alternatives, which strategies, etc.
(3 And most importantly, a bond that takes a hit to value when the prevailing interest rate goes from 2% to 5% can’t lose that money again – it can only go from 2% to 5% once. Yields may stay at 5%, and that bond purchased when yields were lower may stay at a discount to par until maturity, but the movement from par to discount only improves at this point – it doesn’t worsen (if rates are done going up, but even if they do not go down). Of course, if (when?) they go down, those bond prices actually increase. But even if that doesn’t happen, the 2022 bond action was, by basic mathematics, a textbook “one-time event” (in that mathematical magnitude)
All sorts of portfolio diversifiers exist, and as mentioned above, there is true anti-fragility in the asset class we have built our investment worldview around (dividend growth equity), but for all the negatives in the investment world right now (valuation, leverage, geopolitics, etc.), one very constructive component is the breakdown of positive correlation between stocks and bonds that took over 2022 and 2023 and the positive coupon in fixed income that makes fixed income more of the historical diversifier we are used to.
Some policy indications
Though there has not been any press conference, interview, or direct interaction, interested voters and market actors did receive a little indication about the economic platform of Vice President Kamala Harris, who announced:
(1) A “ban” on “price gouging” with food and groceries, seeking to curtail “excessive corporate profits”
(2) A $25,000 subsidy from the federal government to first-time homebuyers to assist with their down payment
I have spent ample time on these very pages criticizing the protective tariffs and industrial policy of the Trump administration, so it wouldn’t seem fair to me to consider what I am about to say “partisan” or “political” (I have worked tirelessly to be objective, charitable, and consistent the last eight years). That said, I also acknowledge I am a center-right movement conservative, and though I changed my registration to independent this year, I grew up as a Reaganite National Review reader and am, in 2024, still pretty much a Reaganite National Review reader. In that sense, I am pretty homeless politically these days, and I am also pretty committed to talking about public policy for clients and investors with transparency about my own ideological commitments, yet devoid of partisan hackery.
And so, with that said, both of these policy proposals are really, really bad. You know who is NOT a Reaganite conservative? The Washington Post. Let’s just say they may have been harder on proposal #1 (from above) than I am. Fundamentally, the issue is not whether or not people want affordable groceries but whether or not federal government price controls get that done. I would agree with the Washington Post that the history of price controls has been a history of “shortages, black markets, hoarding, and distortions.”
Strong demand and inadequate supply (either from a bespoke disruption or other macro event) can create price spikes. Monopolistic and cartel-like behavior is already against the law. Additional regulation here is not going to bring prices down for consumers but may very well force grocers and other economic actors to take protective actions that none of us want to see. This is called a “distortion,” and it works against not only investors but all stakeholders in an economy.
The 25k housing subsidy for a down payment issue is just another demand stimulus in an era of supply shortage. Now, candidate Harris did say she wants to oversee the construction of three million new housing units, and while I don’t know how the President could or should or would do that, I like some acknowledgment of the supply-side reality of the problem and I will interact with more specifics when they become available.
Chart of the Week
Leading indicators dropped throughout the Fed tightening period, but no recession came. Now they are headed higher, and it bears asking if “leading” indicators have lost their “leading” indicative abilities? Or is the economy on better ground, with industrial production indicating a pick-up as well?
Quote of the Week
“Our life is what our thoughts make it.”
~ Marcus Aurelius
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I am so excited to say that we are officially opening our new office atop the 31st floor of 1330 Sixth Avenue this Monday in the world’s greatest city. We have been at 44th and Lexington in the historic Graybar Building since 2020 but have needed to expand our space and location for the decade ahead. We will post some pics and such next week, but I cannot wait to record the first Dividend Cafe from our new spot at 6th and 54th, the spot we will call home for ten years to come. More office announcements are coming, and of course, Newport Beach still remains the most populous, but no one ever accused me of picking office locations around tax efficiency!
Have a wonderful weekend, and reach out with your questions, please!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
