Dear Valued Clients and Friends –
I know it isn’t Monday, but with the Memorial Day holiday yesterday, we felt you were entitled to a special long-form edition here on Tuesday, and I had a blast writing it (what else am I supposed to do on a Monday holiday?). There is an updated Fed perspective to share today, a great deal of housing info including the lessons from Austin, Texas, and quite a bit more.
Dividend Cafe on Friday went into a lot of issues, but none so crucial as where diversification is done right, and done wrong. The written version is here (my favorite), the video is here, and the podcast is here.
I was on Maria Bartiromo’s Wall Street Friday night, Mornings with Maria early this morning, and the Hugh Hewitt show this morning. And Brian was on Cheddar TV on Friday morning.
Off we go…
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Market Action
- The market opened down -100 points today and worsened halfway through the day, eventually getting down over -300 points, and then rebounding 100 points or so by the end of the day.
- The Dow closed down -216 points (-0.55%), the S&P 500 was flat, and the Nasdaq was up +0.59%.
*CNBC, DJIA, May 28, 2024
- The market’s reversal of April woes in May has not come with the breadth we had been seeing but rather has returned to some top-heavy ways. 92% of the S&P 500 was above its 50-day moving average at the beginning of the year, and 85% was at the end of the March highs. But after the April sell-off and May rebound, only 50% of S&P 500 names are above their 50-day moving average.
- The market has gone up or down 1,000 points in each week or two-week period (one way or the other) for quite a few weeks in a row. After last week’s market drop, where do credit spreads stand? 300 basis points – haven’t moved. Low and slow.
- The ten-year bond yield closed today at 4.55%, up seven basis points on the day.
- Top-performing sector for the day: Technology (+1.38%) and Energy (+1.08%).
- Bottom-performing sector for the day: Industrials (-1.26%) and Health Care (-1.25%).
- Some multiples worth considering: the entire Energy sector in the S&P 500: 1.3x sales. Consumer Staples in the S&P 500: 1.4x sales. The Mag7 in the S&P 500: 7.3x sales. Tech P/E (trailing year earnings): 40x. S&P trailing year P/E: 25x. Energy: 13x.
- Market sentiment in the Citi Panic/Euphoria model: Highest level in over a year and in full “euphoria” mode.
Top News
- Lawyers are making closing arguments in the Trump case in New York City, and the jury is expected to begin deliberations on Wednesday or Thursday.
- Hess investors approved the pending $53 billion acquisition by Chevron.
Economic Front
- Durable goods orders were up +0.3% in the month of April.
- The Conference Board consumer confidence index flew higher in May (up to 102 from 97.5).
Housing & Mortgage
- A few tidbits in the data worth sharing:
- As has been shared numerous times lately, 40% of homes do not have a mortgage at all – the highest we have ever had.
- 30% of homes selling are still selling above their list price (demand is still exceeding supply when a transaction is able to happen).
- Foreclosures, which reached 2-3 million per year from 2008 through 2012, were practically zero now. Not literally, but by statistical comparison, they barely exist (because who gives up a home when it has equity).
- 45% of mortgages are below 4% right now.
- The data points one sees in Austin, TX, provide a useful model for what ought to play out around the country … “Ought to” is a prescriptive term, though not a “descriptive” one. Inventory is up +442% over the last two years and there are currently 9,000 homes available for sale. This, my friends, is now what you call a “buyer’s market.” Values are down -17% from their peak. What happened, and why do I see this as a good thing? Demand surged because a lot of people wanted to move there. The job market, the culture, the tech scene, the finance scene, the music scene, the proximity, etc. all made it desirable. Oh yes, also, the tax and regulatory environment. Anyways, demand surged, and builders responded by, wait for it, building homes. Demand exceeded supply – prices surged. Supply caught up with demand – prices corrected. What a concept.
- Speaking of which, new single-family home sales declined -4.7% nationally in April and are down -7.7% from a year ago.
- While Austin and a few Florida cities have seen the most pronounced drop in prices for reasons I describe above, the largest home price appreciation over the last year has been in Milwaukee (+11.8%), Indianapolis (+11%), and Providence, Rhode Island (+10.5%).
- Since 2022 the monthly percentage of income spent on housing is HIGHER for homeowners (35%) than renters (30%). This is a surreal comment of housing affordability since it isn’t exactly like rents have been cheap.
Federal Reserve
- We are sitting at a 50/50 proposition for a rate cut in September now, done from the 60%+ odds we saw before. Odds are at 62% for a cut (some of that 62% is in the second cut bucket) by November. We are at 83% for a cut by the end of the year (less than the 100% that had been priced in for some time). I am growing more skeptical that a cut will come in September just because the impact of a token 25bp cut at that time may be less efficacious than is worth it for the [silly and misguided] controversy it would create about the Fed trying to impact the election. If they haven’t cut by the time of the September meeting, it makes sense to me that they would wait until the November or December meeting to touch it.
Oil and Energy
- WTI Crude closed at $80.15, up +3.1% on the day.
- Oil prices were down -3% last week, and natural gas prices were down -4%.
- OPEC+ meets this coming Sunday, where they are expected to maintain current production cuts through the end of the year.
- I think there is one very strong reason to believe things like natural gas are going to see larger use in the years ahead than declining use: Electricity.
Against Doomsdayism
The reason I started the Against Doomsdayism section was not because I did not believe there was anything going wrong in the world. My own consistent writing regarding excessive government indebtedness and stunted economic growth should be proof enough of this. However, because the testimony of history is so clear that pathological pessimism is irrational and because my own observations are so clear that most people’s pessimism is more of a personal coping mechanism than something borne of analysis, I believed (and believe) that some more coherent and reasonable assessment was in order. As the very title of the section suggests, the intent is to be an antidote to something. So, to that end, I am going to devote the next seven sections to the Seven Laws of Pessimism that I recently came across from Maarten Boudry. I believe they are a helpful framework and perspective to what it is we are opposing and seeking to better understand.
(1) The Law of the Invisibility of Good News: Progress happens gradually and imperceptibly, while regress happens all at once and immediately grabs our attention.
The basic conservative impulse I hold dear, one the late, great Roger Scruton has written about many times, is that good things are easily destroyed but not easily created. I believe this is true throughout life, throughout the world of ideas, throughout institutions, and throughout the artifacts of civilization. Unfortunately, the principle is at play in the manufacturing of pessimism. We see a car accident in all its tragedy, real-time, visibly, upfront and close. The “car accident” may be a natural disaster, a crime, a financial panic, or any other awful thing – but the sources of positivity that ought to inform our disposition are more gradual, less sensational, and therefore, can become less prominent if we are not more diligent.
The second law of pessimism – next week.
Ask TBG
| “I would like to better understand your thought process for how you select outside managers you would use that are outside of your dividend growth portfolio. What are ‘outside managers’? Are these people that wealth advisors hire to vet or scout out companies to invest in? I am missing something …” ~ Tom S. |
| At our practice, we are responsible for all portfolio construction for our clients. This first means asset allocation – the decision of what weightings to what asset classes towards the creation of a solution for a given client’s objectives. So, we are the ones determining what percentage of a client’s portfolio will be in stocks, alternatives, bonds, real estate, etc. We then have to apply that asset allocation to an asset LOCATION (i.e. what asset classes go in which client accounts and at what weightings towards the aim of maximizing tax efficiency and portfolio logic). For example, if a 55-year-old client needs a lot of income, we wouldn’t want to put non-income-producing investments in the after-tax accounts and income-producing investments in the retirement accounts if the goal is to defer retirement account withdrawals that will be taxable. Pretty basic stuff. Okay – so we are internally doing ASSET ALLOCATION and ASSET LOCATION. Then, for the amount we allocate to CORE DIVIDEND (the dividend growth strategy we run as a flagship, core, primary strategy around U.S. equity at our practice), we are managing this soup-to-nuts in our practice – from research to stock selection to weighting, to trading, etc. We run it and administer it all the way through for all clients. But for some portfolio strategies we allocate to, say, BORING BONDS, we use what you have called “outside managers.” We happen to use a practice called Invesco for TAX-FREE BORING BONDS and a practice called Voya for TAXABLE BORING BONDS. They are doing the research, weightings, credit selections, duration determination, and trading. We have to do the due diligence on them, and we meet with them constantly and stay engrained in portfolio analytics, strategy, and thinking constantly, but as the core competency of managing these niche asset classes is always left to a specialist, we focus on manager selection and diligence, and let them focus on the particular portfolio management!
In a nutshell, we handle the following in-house:
And we leverage the division of labor of specialized managers in the following asset classes:
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On Deck
- This Friday’s Dividend Cafe will be a 50-year tale of markets and investing.
- PCE inflation data comes out this Friday.
- A special Q1 earnings scorecard will be in tomorrow’s Weekly Portfolio Holdings Report.
Enjoy your TUESDAY night. The rest of the week’s “programming” reverts to normal tomorrow =)
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.
