Insights on MLK Jr.'s Legacy and the Forecast of Financial Trends

Discover the multifaceted brilliance of Martin Luther King Jr., as we unveil the improvisational genius behind his "I Have a Dream" speech and the intriguing history of his name change. The episode then seamlessly transitions into a strategic analysis of the Federal Reserve's interest rate tactics and their profound implications on the financial markets. Prepare to navigate through the complexities of the Fed's projections versus market expectations, with in-depth discourse on the potential consequences of varying rate cut scenarios for the stock and bond markets in the upcoming year.

Venture further into the realm of finance as we scrutinize the current market landscape, marked by major stock movements and interest rate hikes. We'll dissect the tangled web of geopolitical issues, from Houthi missile strikes to the delicate dynamics between China and Taiwan, and how these factors play a pivotal role in shaping global economic trends. With a forward-focused approach, we anticipate the future of market stability and growth, discussing upcoming financial reports, retail sales data, and consumer sentiment, all through the lens of the market sages at Barons' roundtable and the enduring allure of dividend kings in these uncertain times.

** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.

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Transcript

Alan Eppers: 0:00

And now introducing Mr Keith Lanton.

Keith Lanton: 0:05

Good morning, three day weekend to the honoring of Martin Luther King's birthday yesterday. Today is January 16th, so just a little bit past halfway through the first month of the year already, and this morning we're going to talk about some interesting facts about Martin Luther King Jr, and then we'll dive right into financial markets, discuss interest rates and the Federal Reserve and the outlook for what they're going to do this year and the two different paths that may possibly play out. Of course, there's always a third, fourth and fifth path that we're not even aware of. That could transpire, but we'll talk about the two most likely paths going forward and what implications that may have for the stock and bond markets. We'll talk about Barons, which talked about the changes in interest rates and what effect that may have on markets as well, as well as summary of Barons' round table, where they had some market pros get together and give their outlook for the year, and we'll also discuss not dividend heuristic cracks, but dividend kings, and we have time. We'll talk about healthcare stocks and then we'll turn things over to Brad, and Brad will give us his thoughts about the markets and, again, bond markets continue to be the leaders of all other asset classes in 2022, 2023 and now in 2024. So before we begin, yesterday financial markets were closed due to the honoring of Martin Luther King Jr and his birthday, and some interesting information about Dr King. He was the first black person to be named Time man of the Year.

Keith Lanton: 1:48

You may have heard this before, but, as a reminder, martin Luther King improvised part of his I have a Dream speech. That speech was took place in March on Washington in 1963. Almost didn't include those powerful words, because Dr King had often said in the previous speeches he had hopped on the theme of having a dream and his aides before the speech suggested that he not repeat himself. But as the crowd of about a quarter of a million people in Washington gathered, gospel singer Mahalia Jackson called out to him telling him about the dream, martin. He paused and then decided to leave his prepared notes behind to improvise the next section of his speech.

Keith Lanton: 2:33

Martin Luther King is the only non-president whose birthday is a national holiday. He started college at age 15. He went to Morehouse College and he skipped grades 9 to 12 and was admitted to college at 15. The King family paid the hospital bill for the actress Julia Roberts. Julia Roberts's parents ran a place where children could go after school to theater and the King family asked if they can enroll their students after struggling to find a place to enroll them for theater, and the Roberts family said absolutely. And when the Roberts family was having financial difficulties, the King family helped pay for her birth.

Keith Lanton: 3:14

Dr King was awarded the Nobel Peace Prize at age 35, the youngest person to ever receive that award. And Martin Luther King was not born Martin Luther King, he was born Michael King Jr. He was actually born on January 15th in 1929. In 1934, his father, a pastor at Atlanta's Ebenezer Baptist Church, who was also named Michael King, went on a religious trip around the world and was inspired by Germany's Protestant Reformation figure, martin Luther, whose advocacy and teachings challenged the Catholic Church and decided that in honor of Martin Luther, he would change the name of his son. So here we are a day after Martin Luther King's birthday, halfway plus through the month, and we are once again contemplating what the Federal Reserve is going to do about interest rate and as we approach the middle of January of 2024, the narrative seems very similar to the way it was at the end of last year, where we are focusing on the Fed, but what is different is the story has shifted from Will the Fed raised interest rates, which was what we were talking about, just two or three months ago then,

Keith Lanton: 4:24

maybe two months ago the narrative shifted to perhaps the Fed won't raise rates, but it's going to be higher for longer. And now it's so easy to forget where we were just a few months ago. Now we're all talking about when we'll be the first cut in interest rates and how many 2024 federal rate reductions can we expect. And the expectation lies between the Fed's dot plots which the Federal Reserve released the last meeting, which are indicating that we may see three rate cuts this year, and the Fed funds futures, which are pricing in six rate cuts, although this morning we're already seeing that perhaps some of those six cuts are being dialed back and we're seeing a pickup in interest rates. But the difference, as we can see this morning, between three and six is very important because three rate cuts may mean we have a preemptive Fed. Six rate cuts may mean that we have a Fed that's behind the April and needing to act aggressively. So if we were to see three rate cuts and they have a preemptive Fed, that would be a Fed that is anticipating some slowdown, mixed with some acknowledgment that perhaps they didn't have to raise rates as much as they did last year, but that they had to be comfortable and achieve a margin of error so that they were comfortable, that they squashed the remaining inflation embers and that now that the Fed has in effect achieved its ability to quell the inflationary bug that's out there now, the Fed, in this preemptive mode, which is three rate cuts, can glide the economy into the proverbial soft landing.

Keith Lanton: 5:58

And if we see three rate cuts, even though the markets right now think that they want six rate cuts, it's more than likely that what that would mean is that stocks probably would be performed more favorably in that scenario because we would maintain a strong economy, we would maintain an environment where earnings continued to grow, we would have slightly lower interest rates, which would be a positive, but we wouldn't have this sharp reduction in interest rates and that perhaps wouldn't be as bullish for high quality bonds, which would perhaps not see a dramatic change from current levels, let's say the tenure of around 4%. Now, at the moment, the markets seem to be telling us that they prefer six rate cuts and that's what's being priced into Fed funds futures, at least at the moment. But six rate cuts probably comes with some baggage, meaning that if the Fed needs to cut six times, then they will probably be acknowledging that last year. They over tightened, they overdid it. The economy is slowing meaningfully perhaps, if they have to cut six times. Unemployment is picking up beyond what was previously hoped for, which was some uptick in unemployment, and we may be headed for a recession. And this scenario would imply outperformance in bonds, especially high quality bonds, but weakness for equities, and Bloomberg talked about this a little bit this morning, acknowledging that so far at the beginning of this year, the stock market has been pretty quiet. The major indices are pretty much flat through mid-January. Meanwhile, the move index, that's MOVE, which is basically the VIX or the volatility index for bonds, has fallen since the beginning of the year. One thing that's worth watching, bloomberg says, is where the action in the bond market is actually happening Since the end of December, since the beginning of the year, the 10-year has actually increased modestly since the start of the year, while two-year yields have declined, and this is as investors have been pricing in rate cuts coming sooner.

Keith Lanton: 7:56

Therefore, there's been a pretty significant re-sneaping of the yield curve lately the two-year spread, meaning two-year treasuries, to 10-year spread, so the difference between the two-year treasury and the 10-year treasury is now the least inverted since October. Again, an inverted yield curve is when that two-year is higher than the 10-year. So right now it's the least inverted, meaning that the difference between the two-year which is higher than the 10-year is the least higher than the 10-year. It's been since October, and is it possible that we could be setting ourselves up for a possible steepening of the yield curve in the end of this inversion? What's interesting here is that we may be at the end of the rally and the long end of the treasury curve right Since what we've been seeing is since the beginning of the year, the markets are anticipating Fed rate cuts, but what's been happening is the 10-year, which moved a lot at the end of last year, has not budged.

Keith Lanton: 8:47

It's the short end of the yield curve where we see rates declining. We are not seeing rates declining in the longer end of the yield curve, which you might imply means that the long end of the yield curve is largely exhausted. It's moved to the downside, meaning yields have moved down about as much as they're going to go and therefore any further cuts are going to only be on the shorter end, which means that the longer-term treasuries may not have a lot more price appreciation built into them, the one scenario where you may see meaningful appreciation in longer-term bonds, especially longer-term treasuries? Is this scenario where we do get that hard landing, where the Fed does have to cut rates six times and the economy is a lot worse than expected and therefore those 10-year, 20-year, 30-year treasury rates decline more than anticipated. Of course, time will tell. We will get more feedback as the year progresses. Regarding the economy, we do get some more data this week. We're going to talk about that and we had some Fed governors already speaking this morning.

Keith Lanton: 9:44

So this narrative between three and six rate cuts at least that's where we are in the story of the Federal Reserve and the story of the markets. That's where we are today three versus six, or perhaps four, five, six or perhaps zero, one, two. But markets are focused right now on three, six and that's what you may want to keep your eye on in the near term if you are following the financial markets. So this morning, s&p futures right now I'll give you, let's see if I can get you more up to date are down about 20 points off their levels just from just a few minutes ago. Dow futures down about 92. Nasdaq futures, being led lower predominantly by Apple, down about 80 points. Oil this morning is up about 45 cents, say, barrel to 73.13, some activity in the red sea again, and the 10-year treasury, which was just over 4%, as it now at 3.997. So we're hovering right around that 4% level.

Keith Lanton: 10:40

This holiday, short and weak, is setting up on a lower note, doing part to pre-open losses and influential stocks like Apple, tesla and Boeing. And the rising rates that I just mentioned have also contributed to the negative bias this morning, with that 10-year F flirting with 4%, up six basis points from Friday. Right now it's up about five basis points from Friday and the two-year note is up about six basis points from Friday all the way up to about 4.21%. And then we have geopolitical worries continuing this week after Houthi missiles struck a US commercial ship. According to the New York Times, china is expected to increase coercive measures toward Taiwan, according to axios, after launching Taiwan one Taiwan's presidential election, and he is more inclined to be friendly to the United States and he ran on a platform of hostility towards China and China clearly not pleased with those election results. Also on a China related note, the People's Bank of China left its median term policy rate unchanged, but there has been a lot of speculation about more stimulus in China in the near future, perhaps a hundred billion dollar long term federal government in China, taking more of a lead from the local governments in propping up the economy in China.

Keith Lanton: 11:57

Also, last night Donald Trump won the Republican Iowa caucuses with record 51% support. Ron DeSantis, badly needing a second place finish, achieved that, although only slightly ahead of Nikki Haley, who came in third place to Sanis, received about 21% of the vote, haley about 19%. Vivek Ramaswamy officially suspended his campaign. The word for ending his campaign and the endorse Donald Trump. The reason that you suspend your campaign is that you can still collect funds to pay off any debt you have. So you don't end it, you suspend it. Atlanta Fed President Rafael Bostic, who is an FOMC voting member, warned that progress on inflation is likely to slow, according to the financial times Politico reporting that Congress will vote on a continuing resolution this week to fund the government through March 8. Congress will then have more time to pass remaining appropriations bills that will fund the government through September 30.

Keith Lanton: 12:56

Overseas equity indices in the Asia Pacific region ended on a mixed note. In Hong Kong the markets were down over 2% and in China the markets were up about 3-tenths of 1%. Japan down just under 1%. Major European markets are trading in the red, down about half of 1%. In individual company news we did get a slew of earnings. Goldman Sachs up about 1%. They beat earnings by $1.86. They also beat on revenues.

Keith Lanton: 13:23

Morgan Stanley out with earnings this morning. Sachs up about $1.1%. They beat by $0.06. They've reported revenues in line. Pnc Bank trading about 1% lower. They beat by $1.04. And they also beat on revenues. But they see first quarter revenues below consensus and they said that 2024 revenues will be in line. Market's not as positive on those. Forward guidance at PNC Under supply symbol TSEO perhaps the first of perhaps many to keep an eye on, saying that they are seeing delayed deliveries due to Red Sea issues. That stock is down about 3% this morning. Starbucks upgraded by an analyst to overweight from equal weight. It's up about half of 1%. Boeing downgraded to equal weight from overweight at Wells Fargo. The big story with Boeing is that China has delayed delivery of Boeing 737 Max Jets. According to Wall Street Journal, boeing down to about $213 a share, down another $5 this morning.

Keith Lanton: 14:23

I mentioned Apple and Tesla. So Apple trading down pre-market after some headlines they're going to close 121 person team related to artificial intelligence in San Diego. According to Bloomberg, apple also announcing they will remove the blood oxygen sensor from the Apple Watch. That's according to Wall Street Journal. New York Times is reporting that Apple is going to discount iPhones in China by $70. Tesla is down pre-open after CEO Elon Musk said, quote I am uncomfortable growing Tesla to be a leader in AI and robotics without having 25% voting control. Enough to be influential, but not so much that I can't be overturned. End quote. And this coming after Musk sold a bunch of Tesla stock in order to purchase Twitter down on his X and now making a play to the board to try and get more stock, which obviously could be dilutive and giving him a greater say over the company, which could have positive or negative implications. Tesla stock down only about $3 on that, or 1.5%. What do we have going on this week? I mentioned a bunch of financial stocks. We've got more to come already.

Keith Lanton: 15:33

Goldman Sachs, morgan Stanley and P&C announced earnings, so we will get Charles Schwab discover financial in US Bank Corp Tomorrow. On Wednesday. Truest financial reports on Thursday. Fifth third bank and State Street close out the week on Friday.

Keith Lanton: 15:50

On Wednesday, the Census Bureau reports retail sales data for December, looking for US retail and food service sales to increase 4.10% of 1%, that's after a 3.10% rise in November. Excluding autos, retail sales are expected to be up 2.10%, matching the November figure. And then Friday the University of Michigan releases its consumer sentiment survey for January. What's going to be carefully watched here is consumer expectations for the year ahead. That number indicated that consumers are expecting prices to increase 3.1% in December, which was the lowest level since March of 21. So we'll see if that lower trending expectations on the CPI or well, not really CPI, but the consumer expectations of inflation continues. That is an important factor in driving inflation expectations going forward, because consumers are also workers and if they think inflation will be fairly low, they will be more satisfied with less wage growth.

Keith Lanton: 16:48

So, moving on to Barron, barron talked about the topic that we discussed a little bit ago, which is, would big rate cuts really help stocks? And they say history offers some warnings. So the Fed has lowered interest rates only five times in the past 90 years, when the core consumer price index that's, consumer prices excluding food and energy has been growing faster than the unemployment rate. That's according to Bank America, and currently CPI is running at 3.9%, excluding food and energy, and the jobless rate is running at 3.7%. So if we were to see a rate cut now, it would be one of those rare instances. This has only happened five times in the past 90 years. This would be the sixth time and if you look at those past five times, what you will see is that four of those five times happened when we were starting to experience inflation due to oil shocks in the 1970s and 1980s, and the other was in the 1940s. So most of those cuts that did take place in a period when we were seeing unemployment running lower than the CPI, when we're during periods of stagnation, which is a period when we're seeing rapidly rising prices and sluggish economic growth. This, therefore, would be a period that, if this were to take place, perhaps looks different than those previous times, the other time in World War II, so unique outlier. So expecting the Fed to cut rates while the core CPI is greater than the unemployment rate is a big ask of the Federal Reserve. So it would be something that would be unique and perhaps may, on reflection, lessen the probability that we will see a change in the Fed funds rate without a lowering further of inflation or an uptick in the unemployment rate.

Keith Lanton: 18:42

Another factor perhaps weighing on financial markets is the thought process that there's a lot of cash sitting on the sidelines because a lot of money moved into money markets. That money moved out of bank deposits in many cases, with big money center banks still paying interest rates close to zero. Logically, many folks move some of that money into money market funds and that money is sitting on the sidelines. Now some on Wall Street are expecting that money to move, possibly into stocks, that being possible kindling for the potential for equity prices to move higher as that money moves into the market. But some are saying hold on, slow down. This money that moved into money markets is not the typical money market funds that are waiting to move into equity markets. But this is possibly money that was just in savings accounts and this is money that folks view as core savings and therefore is not funds that will be invested in perhaps less kindling, so to speak, to fuel the equity market than some anticipate.

Keith Lanton: 19:46

Looking back at last week, we saw last week that the S&P 500 just couldn't quite make it to a record close with, which is something that the S&P has been striving towards the last several weeks. The S&P did break out to a level above its closing high last week, but then settled back and was unable to break its record. Nevertheless, the S&P last week ended the week up 1.8 percent, about three-tenths of one percent off its record closing high. The Dow rose three-tenths of one percent and the.

Keith Lanton: 20:17

NASDAQ was up 3.1 percent Last week. Nothing seemed able to knock the market down. We had December's consumer price index come in at a positive three-tenths of one percent, which was a tenth of a point above expectations. Also, that number on its face wasn't great for investors, who had hoped that inflation will fade away and the Fed would turn its attention to cutting rather than raising rates. But the data was complicated and after the markets digested the data, at least at the end of last week the markets decided that they still saw a 79 percent chance of a rate cut as soon as March of next year. We're somewhat unwinding that this morning. Last week we also got some earnings.

Keith Lanton: 20:59

The earnings season kicked off and we got earnings from JP Morgan, bank America and Wells Fargo. On Friday all three of those stocks traded lower despite posting some pretty solid numbers. Citigroup was the lone outperformer, rising about one percent after saying it would cut about 10 percent of its staff. Most importantly, the most important metric we got last week from the banks was the narrative about consumer health. Specifically, brian Moynihan, the CEO of Bank America, said quote they're still spending. Talking about the consumer, where they spend is a little different Morgan services and going out in restaurants and experiences and less on goods at retail. It is interesting to note that about a year ago Moynihan, the CEO of Bank America, had warned that a recession was more than likely on its way, but at this earnings call he said he felt that the markets were perhaps well set up for a soft landing. So hopefully his predictions this year are better than what he was expecting last year.

Keith Lanton: 22:04

Speaking of what the experts have to say and think, baron put their pros together and had a roundtable discussion as their cover story for this week's magazine. They talked about the financial markets and pretty broad consensus expectations. With a few exceptions, the members of the 2024 Barons Roundtable expect the stock market to disappoint in 2024. They see the index delivering returns of minus 5 percent to plus 5 percent for the full year. They don't see a ruinous recession. They expect the Federal Reserve to lower rates at some point during the year. Their main worry is that stocks are too richly valued, leaving little margin for error. Those with a sunnier view cite massive capital investment across the economy, promise of new technologies like artificial intelligence and, in simpy, investor affection for the less magnificent 493 stocks.

Keith Lanton: 23:05

Baron also ran an interesting article on dividend kings. Dividend kings are a subset of dividend aristocrats. Dividend aristocrats are companies that have raised their dividends for the past 25 years. Dividend kings are companies that have raised their payouts for 60 years. So in this group of dividend kings, the champ with 69 straight years of dividend increases is probably a company that you went to guest at least I certainly went to and it's American States Water symbol, awr, which is a smallish California utility with 3 billion market value that supplies water to 80 communities in California.

Keith Lanton: 23:53

American States Water has an excellent long-term record with an annualized 12.5% returns in 1988 versus 10.8% for the S&P 500, which is quite an impressive showing. For a lower risk utility the stock yields about 2.2%. It has a sub-3% yield. Obviously, like many of the stocks on this list, they aren't necessarily high payers but they are stocks that have been growing their dividends. Also on this list are some that are less surprising, like Coca-Cola, procter Gamble, johnson Johnson, colgate, palmolus. All have that annualized returns, including reinvested dividends, in the 12-13% range since 1988. That's a seemingly small gap to the S&P 500, 10.8% annual return, but over a long period of time that 2-3% difference makes a big difference over that extended period of time. The ability to boost dividends for 60 years is a sign of strength and quality that investors may want to consider in a stock.

Keith Lanton: 24:54

How did the Kings do last year? Well, they didn't do so well. They posted a sub-10% return, which obviously isn't too bad, but doesn't stack up great against the 23.8% return in the S&P 500. You may say, well, why did this group underperform the S&P last year? It's because quality dividend payers trailed the overall market, as 2-3% dividend yields don't look so appealing with short rates at 5% as they did with rates when they were close to zero. The list of Kings also includes a group of industrial companies like Dover Parker, hannafin, genuine Parts, emerson Electric, Nordson, 3m. Lowe's makes the cut as the Cincinnati Financial, which is a property and casualty insurer. Another name you may not be as familiar with, northwest Natural Holdings, which is a gas utility in the Pacific Northwest.

Keith Lanton: 25:49

One little-known winner is Lancaster Colony, an Ohio-based food company with a $4.5 billion market value, having a strong long-term track record of 13.5% annual returns since 1988. Lancaster Colony has a leadership position in niche products like refrigerated salad dressings, frozen garlic bread and packaged salad croutons. It gets about half its sales from food service. Lancaster has grown its sales in an 11% annual clip since 1971. The conservative company has no debt, has doubled its dividends over the past 10 years and this company is currently yielding just over 2%. The symbol is L-A-N-C, but even mine. It does not trade cheaply, so this is not undiscovered, it's just maybe unknown to most investors. It's trading currently at about 28 times projected earnings double the P-E ratio of many food companies, and that's after having fallen 15% last year.

Keith Lanton: 26:50

Finally, before I turn things over to Brad, we'll mention that Varen did have an important article for anyone who may have gotten divorced recently or maybe contemplating divorce, that remarrying can have financial pitfalls and remarrying can affect your social security benefits. So anyone that you know who may be in this situation, it's important for them to understand how social security could affect their status if they were to consider to remarry. So if you do get divorced and you were married at least 10 years, then you are eligible to collect benefits from your ex-spouse's social security. So if you are at least 62, you're married at least 10 years and your ex-qualifies for retirement benefits, then you would be able to collect benefits based on your marriage to your ex-spouse. But if you were to remarry, there's a good chance that those benefits would go away to something to consider.

Keith Lanton: 27:55

Also, if you are widowed, there's an additional wrinkle. If you're remarrying before age 60, you're eligible to collect benefits based on your you aren't entitled to survivor benefits on your deceased spouse's earning record. Survivor benefits are often higher than spousal benefits, so eligibility for them could be a timing factor in remarriage, so important, if you are widowed, to think about whether or not to get remarried before the age of 60. Also, if you do get divorced and you are collecting spousal benefits from a previous spouse and that spouse passes away, then you would be entitled to their benefits as opposed to spousal benefits. So, all things to bear in mind, as these little differences make a big difference in terms of living out your retirement years. If these circumstances apply to you or someone that you care about, I'm going to turn it over to Brad to provide some more thoughts and insights this morning. Good morning, brad.

Brad Harris: 28:56

Good morning Keith. Good morning everyone. A couple of weeks ago I alluded to the fact that, with Fed funds still at 5.25% and the 10 year at 4%, the market was predicting 6 cuts or 150 base points in total if the market were to get back to normal normalized yield curve. Keith was discussing this this morning but just want to reiterate this. I had said that I felt that the Fed is signaling 3 rate cuts or 75 base points in total. It's hard to imagine, with all the work that the Fed did trying to cool inflation and with the economic numbers we have seen this year so far, that 6 cuts would be in the cards at this moment. However, if the economy falters, which the market seems to be saying, then of course it is possible. If you are in the camp that the Fed is going to cut 6 times this year, then you want to be in bonds.

Brad Harris: 29:48

The municipal is the area that I still see some opportunity in. The municipal institutional market with bonds that have 5% coupons in 10 years has had a gigantic rally and is pricing very aggressively. The secondary market with low coupon bonds for a buying hold investor hold a lot more value, in my opinion. Historically. Eventually the spread between these coupons will shrink. There are reasons. Institutions and certain investors want those 5% bonds with big premiums and, generally speaking, the types of investors we speak with at this point these discount bonds look appealing. I have a feeling we are just about everyone back in the saddle. Regardless of what happens in the treasury market, there will be demand for bonds this week. I hope everyone is a great week.

Alan Eppers: 30:35

I'll turn it back to Keith, thanks. Thank you, brad. That's everything I've got. Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heroldlantern. com.

Sophie Cohen: 31:00

Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.