As you are receiving this week's Dividend Cafe, we are entering the earnings season whereby, for the next four weeks, nearly all of the companies in the S&P 500 will report their Q1 earnings results. Also as you are receiving this week's Dividend Cafe, I am sitting in New York City absorbed into my world of dividend growth. It should not be forgotten, of course, that dividends to investors are only possible when companies are making profits. So earnings season not only tees up us hearing what our portfolio companies are doing by way of dividends to investors, but it tells us the lay of the land for the sine qua non of dividends - the earnings from which they come.
And of course, even investors who reject the idea of dividends and dividend growth as the source of investment opportunity that we believe it to be joined at the hip to earnings. Stock ownership is a claim on a future stream of earnings, and that only has economic value if those earnings are positive, whether the company is distributing the earnings to you or not.
So earnings and dividends are all the buzz this week, and for the weeks ahead. But let's tell it like it is - earnings and dividends are all the buzz for equity investors, always and forever, any week. So jump on in, to the Dividend Cafe.
This week in markets
As I type, the markets are down a couple of hundred points on the week - so a pretty boring week overall. Most focus is on the launch of earnings season, but lots of questions persist about the state of the economy, the state of corporate America, and where things will go for the next 3, 6, 12, and 24 months (in the economy and the stock market).
Manufacturing ticked up in March, and Services remain in solid expansion territory as well. Construction spending has modestly picked up.
Even if one looks to global conditions, industrial commodity prices (copper, iron, ore, steel) are strong, not what you would expect in the current narrative of surrounding weakness.
Forward-earnings estimates have been picking up lately, and how the revised "next 12 month" (NTM) earnings outlook shakes out in this earnings season we are entering will be quite fascinating.
Our take? If you assume the U.S./China trade deal gets done (favorably), and that we don't go to auto tariffs on the European Union, then it sure seems that the positive economic backdrop and market backdrop stays positive for the short term. As for the intermediate/longer term, you know what I feel is the operative variable there (hint: capex).
Everything we believe in
We have built an investment philosophy around the dividend growth orientation, and in this week where my exhaustive book on the subject has come out, I found it appropriate to offer a more succinct summary of what dividend growth means to us at Market Epicurean. Check it out, and check out the consistent Advice & Insights podcasts on the subject as well !!
A dividend growth nugget
The index of dividend aristocrats in the S&P 500 (just those names with a multi-year history of increasing their dividends) vs. the overall index itself: The aristocrats have out-performed over the last ten years, seven years, five years, three years, two years, and one year. And for really long term periods (like the actual multi-decade eras most of us invest for), look no further for the return implication and risk implication found here:
Nuancing the jobs data
Keeping in line with our recommendation that people view the jobs data in rolling 3-month intervals vs. month by month by month, the March number flew back up to near 200,000 new jobs created, vs. the collapsed number in February (that proved to be an anomaly). However, it is worth pointing out that fully half of the new jobs in March were in the Health & Human Services industry and the Food Services industry - two sectors that are immune to broad economic health (people still need medical care, and people still eat even when the economy is slowing). The growth in higher-wage industries has slowed, and wage growth itself has slowed in manufacturing and construction. So the numbers were basically in the "Goldilocks" spot I hate talking about - good enough to indicate a growing economy, but with enough nuance to not get carried away and cause the Fed to re-think their pause mode.
A Q1 Anecdote
Last week's Dividend Cafe provided a lot of the summary data from Q1 in the markets, but one anecdote I thought I would share - so much macro-commentary entering the quarter centered around "widening credit spreads muting the outlook for risk assets" (wrong, spreads tightened and risk assets rallied), around "a slowdown in the U.S. and preparation for recession" (economic indicators improved and most recession signals are pushed out far into the future), and around "trade and Brexit keeping volatility elevated" (volatility collapsed in Q1 vs. Q4 of last year and trade watch actually helped markets).
When I read so much of the Q1 commentary now, it is almost like economists and analysts were writing what happened in Q4, as their forecast for Q1. It is either intellectually dishonest or just bad analysis. You pick.
The perils of intervention
One of the really difficult things about a Fed that excessively intervenes in monetary policy is it becomes very difficult to analyze what is happening cogently, and more importantly, why. Interventions can lead to things happening that don't seemingly jive with each other. For example, Treasury bond yields dropping, aside from intervening forces, generally would indicate weakness in the economy. However, corporate bond yields dropping generally indicates economic strength. The two happening at the same time, though, which is exactly what we see now, and precisely because of the Fed's reversal of policy dictates, makes it impossible to decipher a clear economic signal from the bond market.
The story for another day
I will do something more elaborate at Market Epicurean in a few weeks, but I have been spending significant time lately studying what causes excessive government debt to very often result in lower bond yields - perhaps one of the most counter-intuitive things in all of investing. The expansion of federal debt has a lot of people worried, including me, and for good reason. But it is imperative that we get the basis of the worry right, and I will be elaborating more on this subject more in short order.
You may recall me saying over a month ago that if the Brexit deadline was extended beyond the one in late March that the Parliament had passed, it would not be the last delay. Their next step was to push it out to April 15. A June date then became the next priority, and now as of this week, the date has been moved to October 31 (only the French kept it from being moved to December 31). So, what happens between now and October 31?
(1) A "Norway-style" relationship for Britain to the EU - a basic "Brexit in name only."
(2) A long-term pursuit of a free trade deal like what Europe has with other non-European countries
(3) A reversal of the Brexit referendum all together
There are a lot of political parts here that are impossible to predict.
Politics & Money: Beltway Bulls and Bears
- The President has nominated former Presidential candidate and Godfather Pizza CEO, Herman Cain, as well as a free market pundit, Stephen Moore, to serve on the Board of Governors of the Federal Reserve. Both nominations have been met with resistance around either qualifications or fears of political bias, or both. As of press time, it appears that the President is not backing down on the nomination of Stephen Moore, and is somewhat holding on to the Cain nomination as well. My political handicapping of this is that the Senate will split the baby and give the President one (likely Moore) but not the other (likely Cain). The political will to reject both is unlikely to surface, but so is the political interest in supporting both.
Chart of the Week
One of the great, undeniable trends of the ZIRP era of post-2008 (i.e., "zero interest rate policy" implemented by the Fed) was investors using bond funds as a surrogate for cash. Interest rate risk, credit risk, and any other normal consideration when investing in bonds was essentially ignored or discounted as the pain of zero-yield forced savers to find alternative means of generating interest income.
The Chart of the Week suggests that dangerous practice either will come to an end, or at least should come to an end. With cash and cash alternatives now offering real yield, and bond yields down to record lows, the collapse of that spread has changed the dynamic of cash surrogates entirely, Bonds ought to be used by an investor as if they were, well, bonds, and cash/cash equivalents ought to be used for short term liquidity.
Quote of the Week
"Kites rise highest against the wind, not with it."
-- Sir Winston Churchill