Trump 2.0, the Fed, and this Market Selloff – December 20, 2024

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Dear Valued Clients and Friends,

A market sell-off that began on Dec. 5 (two weeks ago) accelerated this week, and today’s Dividend Cafe is going to be almost entirely devoted to it.  I want to cover other issues adjacent to this, but the general gist of things today is all about the week that just was.  Yes, the drama playing out in Washington right now is thoroughly discussed, but its role in the current market distress is presented outside of conventional understanding.

I wrote all of Dividend Cafe today prior to 7:00 am ET, except for this paragraph you are reading now and the wrap-up below.  This morning, futures were down -250 points.  I am hoping markets will drop a thousand points between now and 4 pm ET, so then all the math used below will hold (haha, only I am not really kidding).  But there is a reason I am not changing Dividend Cafe despite the market rally of this morning (Dow up +750 points as of noon ET when I am interjecting this paragraph) … that reason is: the market activity today doesn’t negate my points; it reiterates it.  Everything right now is stupid.  But see the WRAP-UP below for some other concluding thoughts that also factor in today’s rally.

The sell-off last week may have been six days in a row, but it was a grand total of 800 points (from the Friday, Dec. 6 close to the Friday, Dec. 13 close), which is down -1.8%, which represents a mathematical change that should never under any circumstances even be noticed, let alone warrant coverage in the Dividend Cafe.  This week’s change is (as of press time pre-market Friday, where futures are down -250 points) around 1,700 points, and closer to -4% on the week.  So in two weeks, with what is essentially a -6% drop and twelve down days in a row (ONE day was up +15 points, or +0.04%, and that is a really cheesy way to break a streak!), it is more worth mentioning.  But even that is about to come with some caveats.

I think this is an important Dividend Cafe, but probably for reasons different than you may think.  Jump on in – you’ll be glad you did.  Egg nog is optional.

Download Podcast Transcript

Losing streak and Wednesday sell-off

The week’s big story was an -1,100 point drop in the Dow on Wednesday that came on the tenth day in a row of a Dow decline.  Ten days in a row was the longest market losing streak since 1974, which some of you will be bored to hear was the year I was born (and also the year USC was down 24-0 to Notre Dame but beat them 55-24).  Richard Nixon might say that the losing streak in the market in 1974 was not the worst thing that happened that year, and I know the Notre Dame Fighting Irish would say that, but I think I am on a tangent now and should reel it back in.

The market being down ten days in a row is a lot.  But until yesterday, the Nasdaq wasn’t participating in the market drop, and the S&P wasn’t down that much.  But a -3.6% drop in the Nasdaq yesterday alone and -3% in the S&P did a lot to play “catch up.”  Now, there was a time that an -1,123 point drop in the Dow would have been a drop of over 100% of the stock market’s value, but now it was a measly -2.5%.  The math of this whole thing is inconvenient for catastrophists and those glued to their account screen all at once.

The Dow was 45,000 two weeks ago and 42,100 this morning, a -6.4 % drop from peak to trough (that followed a larger gain than that the few weeks prior), and the S&P is down -3.6% from its recent high (most of which happened, well, Wednesday).

So is the question we ought to be asking now, “what will the market do next?”  That seems rather silly, doesn’t it?  The big move up in December was not on anyone’s radar and was immaterial to real financial results.  The big move down the last couple weeks is immaterial to real financial goals and objectives.  So why should the next two days or two weeks or two months be different?  If anything, I would argue this obsessive, error-filled, almost comically fallible handicapping of what the market did a week here or a day there or what have you, along with the cartoonishly stupid explanations (“the market is freaking out that the Fed might be at 3.5% instead of 3.25%!!”).  I mean, just stop.  Seriously.

It defies logic and rationality to believe that anyone talking about what the rate will be and when, including the Fed, knows what they are talking about.  It defies logic and rationality to believe that how the market will respond to what the Fed will do and when, knows what they are talking about.  Expectations for the month after the election were wrong, and apparently, expectations for the month after the month after the election were wrong, too.  The next tariff, the next tweet, the next rate announcement, the next data point – it is noise, my friends – noise.

The business of business is business (Calvin Coolidge said it best when he said the business of America is business).  What I mean here is that markets are about businesses doing business.  And these are not daily, weekly, monthly, or even yearly things – they are long-term, strategic, intentional, capitalized, serious, scaled, significant endeavors that have almost nothing whatsoever to do with a rate announcement here or a Presidential policy there.  Noise will come and go.  And certain policies and news events will impact fundamentals – obviously.  No one is suggesting that the cost of capital or tax rates do not matter.  But we are in a stupid period right now (and I am saying that about a lot more than just markets).  We are not talking about business.  We are talking about noise.  It can be fun and interesting, and it can be profitable for the financial media brothels that depend on it.

But for the sake of your holiday season, your year-long peace and joy, and the good tidings of your actual financial well-being, tune it out.  Businesses are not about noise.  This will always be an inherent superiority of the dividend growth focus – its intrinsic re-focus on the actual trajectory of a business and its cash flows versus the noise of stock prices.  We spend too much time trying to answer questions that can’t (and shouldn’t) be answered – “Why did markets go up or down today?” – and not nearly enough time on questions that can and should be answered – “What is driving this company’s cash payment to us, and why is it going higher?”

To these ends, we work.

Stupid is not the real “S” word

I said above that we are in a “stupid” period right now, and I meant it.  I know it isn’t the nicest word, and I try never to call people stupid (I really do), and I did teach my kids when they were little not to say that word (at least not out loud in public).  But I owe you some explanation as to why I think there is a lot of stupidity in the air and what it means for investors.

It is a simply incoherent thing for investors to believe that valuation does not matter, that strong revenues and profits mean there is no limit to what someone should (or will) pay for those revenues and profits, and that it was antiquated or obsolete to care about such things.  It is also irrational to believe that a new “theme” – a new buzz – maybe a shiny object, but maybe not – very possibly a transformative thing in terms of productivity and utility – changes the whole world of investing and economics, instantly, without casualties, false hopes, volatility, and angst along the way.  The straight upward line of aspirations of a whole space reflects hope, not reality, and sometimes things we hope for happen, but rarely without muscle fatigue along the way.  Treating high-risk, high-valuation stocks as “safe havens” – the places we “park money” while we wait for even shinier things to come along, is stupid.

That is not to say it doesn’t work.  It works until it doesn’t.  And pride goes before a fall.

But I am not saying there is stupidity in the air because I am trying to get people’s attention about not overdoing this AI thing.  All the warning signs are there – the people telling you that 100x is not too much to pay for something because this time it is different – but that does not reflect stupidity as much as it reflects human nature.  People want it to be true, and they are remarkably capable of making it true in their mental formulations until the reality mugs – which it always does.

The arguments for other shiny objects right now are not so much compatible with human nature, as I guess back to the stupidity camp.  They deserve to be called out, but it’s Christmas.  I just want to use the Dividend Cafe to oppose stupidity.  Sociological arguments for value do not create value.  Vibes do not create value.  There are some silly schticks going on right now that will not end well.  I will leave it there.

Final indictment of stupidity: Most coverage of the political sphere running into 2025 (as it pertains to markets).  The idea that we now have a blend of Adam Smith, Ronald Reagan, and Milton Friedman in charge of the U.S. economy is, well, untrue.  The idea that we now have Hitler, Smoot, and Hawley running the show is also untrue.  Euphoria about our national politics is common to human nature when one’s preferred candidate wins.  Doom & gloom is common when a candidate we loathe wins an election.  And when you apply one of these extremes – euphoria or doom & gloom – to markets out of the context of politics, you are never going to be right.  Ever.  History is clear, so we must be smarter.

Capitol Hill Causation

Is there some correlation between the market volatility of this week and the clown show in Washington, D.C., around funding the government?  What if my answer would have been no a week ago but is yes today?  “When the facts change, I change; my mind, what do you do, sir?” (John Maynard Keynes).  Particularly as it pertains to the last couple of days and this whole escapade, I am entirely open to the non-verifiable claim that some of the market vulnerability is related to events on the Hill.  But let me clarify what I mean, and do not mean, by that.

What I do not mean is the generic fears of a government shutdown, something I have written about so many times over the years I cannot even count.  This particular situation playing out right now on the Hill, whereby there may very well be a shutdown for some period of time, is completely immaterial to markets, meaning the actual shutdown itself.  I hate to bore you with the deja vu of past shutdowns, but they are always and forever political stunts, media soap operas, and market shrugs.  The shutdown is not the issue for markets.  But when I say recent market distress is related to the events of this week, I am referring to what this all reveals much more than the event itself.

Put differently, the “event itself” will be done in a few hours or a few days if it is not already done by the time you are reading this.  These things do no underlying damage because markets do not need the element of government that does “shut down” during these periods of theatrical gamesmanship to ever be open, let alone for the three minutes or three days that they go through this stunt.  What markets are realizing, though, is that optimism of a grand strategy about, well, anything, is lacking.  The broader dysfunction, lack of consensus, and misunderstanding of the political will and control certain key people have undermines a narrative that there is a clear and strategic plan for key governmental objectives.  This is not to say all policy objectives markets are hoping for are about to fail; it is to say that markets have gotten a little refresher this week in “operation chaos” and have not been thrilled with what they have seen.

Now, let me be fair here politically.  Donald Trump is not the President of the United States right now, and as best I can tell, the person who is has absolutely nothing – nothing – to do with the present budget impasse, the debt ceiling, a potential conditional resolution for funding, or any of these discussions.  It is utterly surreal that everyone, especially the “democracy dies in darkness” stalwarts of our media, has given this a pass.  But it is what it is.  Somehow this whole story is a story about the incoming administration, not the current one.  That is not necessarily very fair.

And yet, for right or for wrong, this week has provided a chance to see the lay of the land.  Elon Musk has flexed a bit (everyone seems to accept that he is an influential person in the administration with no official role whatsoever), and the fact that he cannot just get whatever he wants based on tweets or influence seems now accepted (I remind everyone that five weeks ago he came out swinging, hard, against Scott Bessent as Treasury Secretary, and five days later, Scott Bessent was Treasury Secretary).  Speaker of the House Michael Johnson, who may have the worst job in the United States of America, is clearly in a very vulnerable state.  Vice President-elect JD Vance appears to be the person many are looking to for a deal to come together, and that is not necessarily what markets want (or maybe they do – but not necessarily).

A lot of market hopes for matters related to taxes, deregulation, energy, trade, tariffs, Ukraine, the border, and so much more are connected to a concept of “the art of the deal” Presidency – some nebulous hope and assumption that there is, in Trump 2.0, a constant negotiation and chess game being played.

My own commentary on this is pretty frustrating to raging partisans.  I believe the narrative of Trump as a master dealmaker in politics has always been exaggerated and overstated, with his own reliance on chaos never fully grasped.  And yet, I also believe there is no denying that sometimes negotiating tactics and strategies that don’t appear to make sense have come together successfully.  This is not a “both sides” position – it is just obviously true to me.  I believe he values dealmaking, and I believe sometimes he does it well (you should study his 1990’s deals with the banks he owed money to), and I think sometimes the ways of Washington overwhelm him.

The government is going to get funded.  This whole thing is going to be resolved.  And yet the narrative of absolute authority and savvy to drive clever outcomes has been undermined.  What path ends up making the President-elect happy, and getting the needed House GOP votes (when the margin is less than three people), and getting through the Senate is unclear to me.  What I do know is the way it played out this week has undermined confidence in an easy path for tax reform, trade deals, and other agenda items.

Debt Ceiling

One of the things President-elect Trump has begun jawboning for this week is an elimination of the debt ceiling.  For a fiscal hawk like me, this may seem like a dangerous thing – I loathe excessive government debt, and perhaps there are still some who feel the debt ceiling is a strategy for containing it.  Well, you may have heard, it appears to have not worked so well if it is supposed to be that:

The debt ceiling is a national joke and is used for one reason and one reason only – to force legislative drama divorced from common sense and accountability.  If it worked as a device to foster fiscal restraint, I would scream for it, but it does no such thing, obviously, and brings out the worst in Washington time and time again.

There is a way to “ceiling” the debt – it is called, wait for it, “spending less.”  Coming up with trickery (that is never followed) to try and contain a Congress that cannot or will not be contained is absurd.  See my prior paragraph about stupidity.  I understand why the President-elect would like this component removed from the calculus of other parts of his agenda in the months and years ahead.  Will he get it punted entirely?  I can’t imagine he will, no.

What is going to happen?

  1. I don’t know
  2. Neither do you
  3. Neither does Trump
  4. It is not as important as letter E
  5. The Trump 2.0 team seems to be increasingly open to delaying their tax reform plans until after other legislative ideas.  This is the wrong thinking politically, in my view, but no one cares about my political assessment.  I can say, though, with more authority, that markets do not like it, and will not appreciate it, if true.
  6. This week’s events call into question how this House, this Senate, and this new administration will pass tough laws next year if they had this kind of trouble with this layup this week (a budget extension).
  7. Politics is hard.  Governing is hard.  Tweeting is easy.

Wrap-up

Markets go up, and markets go down.  Do this long enough, meaning, be invested in risk assets more than six months, and I promise you that a -6% drawdown will not even count as a drawdown.  We have bigger risks ahead than people realize and far bigger upside ahead than people realize.  In fact, the second part of what I just said is made possible by the first part.  Investors who understand both of those things are going to be the winners.

Chart of the Week

Value pummeled growth after the dotcom crash through the first decade of this new century, and growth pummeled value for the next decade.  Then, it got a little silly after COVID, and then that growth-over-value got pummeled, and then the growth-over-value came back.  And here we are.

Quote of the Week

“People are trying to be smart – all I am trying to do is not to be idiotic, but it’s harder than most people think.”
~Charlie Munger

* * *
Okay, let me have it.  Holiday joy for all, and have a wonderful, warm, cozy weekend.  It is the greatest season of the year.

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

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About the Author

David L. Bahnsen
FOUNDER, MANAGING PARTNER, AND CHIEF INVESTMENT OFFICER

He is a frequent guest on CNBC, Bloomberg, Fox News, and Fox Business, and is a regular contributor to National Review. David is a founding Trustee for Pacifica Christian High School of Orange County and serves on the Board of Directors for the Acton Institute.

He is the author of several best-selling books including Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It (2018), and There’s No Free Lunch: 250 Economic Truths (2021).  His newest book, Full-Time: Work and the Meaning of Life, was released in February 2024.

The Bahnsen Group is registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Securities are offered through Hightower Securities, LLC, member FINRA and SIPC. 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.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

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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