The Federal Reserve just raised interest rates by 25 basis points, oil and diesel prices are still climbing, and the stock market has been choppy for the better part of a month. If you are living on your retirement income, or getting close to it, that mix of a Fed rate hike, rising interest rates and stock market volatility can make even a calm investor check the account balance more often than usual. On this week’s Financial Hour, our team of portfolio managers and analysts sorted through what actually happened, what it means for dividend paying stocks and bonds, and why we start with income, not headlines.
At Dupree Financial Group in Lexington, Kentucky, we manage retirement money for a living, so we listen to this kind of news through one filter: what does it mean for the income our clients depend on? Joining the conversation this week were Michael Dawahare, Mike Johnson and James Dupree, and they covered a lot of ground, from the Fed and the bond market to oil, geopolitics, the midterm elections, and how we manage a dividend income portfolio when prices swing. The show also opened with a little Kentucky music talk about Sturgill Simpson and his alias, Johnny Blue Skies.
“Inflation doesn’t retire when you do, and a volatile market doesn’t care about your timeline.”
Tom Dupree, in a Dupree Financial Group spot that aired during this week’s show
On Wednesday, the Federal Open Market Committee, the group inside the Federal Reserve that sets short term interest rates, raised its benchmark rate by a quarter of a point. You can read the committee’s own statements on the Federal Reserve’s FOMC page.
A basis point is one hundredth of one percent. So 25 basis points is a quarter of a percentage point. It sounds small, and on any single day it is. But when it lands on top of higher oil prices and a market that has been jumpy, retirees notice.
One of our hosts explained that the market had seen this coming, with roughly a 90% chance of a hike built into prices before the announcement. Chair Kevin Warsh’s comments, the hosts noted, gave people room to argue the numbers alone did not call for a hike. He raised rates anyway, and the market took it in stride.
The reaction showed up on the yield curve, which is simply a line comparing what the government pays to borrow for a few months against what it pays to borrow for 30 years. The short end moved up a little. The 30 year Treasury yield peaked at roughly 5.4% and was sitting below that afterward. As one host put it, “the Fed is taking inflation seriously,” and that is what the bond market was reading into the decision.
The hosts pointed to diesel crack spreads, which is just the gap between the price of crude oil and the price of the diesel refined from it, running at all time highs. In their view the committee had little choice. One host said “it would just defy reality to suggest that when diesel and oil do this, that it doesn’t lead to higher prices.”
That same host said he liked the message the decision sent to Washington: do not say there is no inflation when diesel costs are blowing out. The practical point is simple. Higher shipping costs work their way into groceries, restaurant menus and everything else that moves on a truck. And another host added that prices are sticky on the way down. “It’s not unusual to see the price never come back down.”
You can follow the official inflation numbers on the Bureau of Labor Statistics Consumer Price Index page.
Tom Dupree put it plainly in a Dupree Financial Group spot that aired during the show: “inflation doesn’t retire when you do, and a volatile market doesn’t care about your timeline.”
Heading into the weekend, the hosts described a strange moment. America is producing more energy than it ever has, the Western Hemisphere is building decades of energy strength, and the OPEC name has faded in importance. And yet there is an energy shock.
The explanation was a bottleneck, not a shortage. One host compared it to Interstate 75 North going from three lanes to one lane, where you get a short term disruption even though there are plenty of cars and plenty of road behind the slowdown. In his words: “We do not have a supply problem. We’re swimming in it. We just can’t get it to where it needs to go right now.”
The hosts also pointed to refinery closures in California and other places as part of the reason the fuel cannot move where it is needed. For more background on how diesel is made and priced, the U.S. Energy Information Administration’s diesel overview is a plain English place to start.
When prices rise, businesses generally raise theirs too. One host explained the logic: “that’s why equities, stocks, companies, are typically a good inflation hedge.” Companies pass higher costs along, those higher prices tend to stick, and that shows up in company margins. Historically, the host said, ownership in public companies has been the strongest hedge against inflation.
That is an observation about history, not a promise about the future. Dividends can be reduced or eliminated, stock prices can fall, and all investing involves risk, including possible loss of principal. For a refresher on how dividends work, the SEC’s Investor.gov dividend glossary explains it clearly.
A large part of the show covered world events that are moving oil and markets. These are our hosts’ on air opinions, offered as market context, not predictions.
The hosts noted that the State Department approved an Iranian delegation to travel to the United Nations next week, where they are expected to meet Gulf counterparts. That is a day or two after Chairman Xi and President Trump meet in Washington, so several pieces are in place for a possible agreement toward the end of next week.
One host described the long Sunni and Shia divide between Saudi Arabia and Iran as a 1,200 year chasm that is not likely to be resolved, but said there could still be room for some kind of compromise. He also argued that if a single outpost of Iran’s Revolutionary Guard fires a missile or drone, that should not derail an understanding already drafted by political leaders, because those leaders cannot control every outpost. Everybody, he said, has an incentive to make a deal, including Saudi Arabia, whose budget is being hit harder than it has been in years with both the Straits and the Red Sea diminished.
The hosts said China gets roughly 80% of its oil from Venezuela and Iran, at prices they described as roughly 30% to 60% below the spot market, and that both of those supplies are now gone other than some black market activity. China went on a buying spree in recent weeks, which the hosts said is part of the spike in oil and diesel, and it coincided with the Houthis disrupting part of the Red Sea. Their summary: this is not a supply issue. It is an energy shock caused by a disruption in one part of the supply chain.
One host argued that much of the world has an incentive to see the midterm elections go against President Trump. As evidence, he pointed to Ukraine hitting Russian diesel refineries about a week ago for the first time since the war began, at a moment when Zelensky was meeting Canada’s Mark Carney, who talked about supplying drones and Ukraine joining NATO in some form. That host’s read was that the whole world is throwing everything it can at the midterms.
The hosts also noted that Jamie Dimon, who is not known as a Trump supporter, has backed what the administration is doing on Iran, warning that if Iran gets a nuclear weapon, Saudi Arabia and other Gulf states may follow. The point one host made is that the thing pressuring markets right now is the West finally confronting a major sponsor of terrorism, and that is what makes this moment unusual.
From mid August through today, the major indexes have pulled back. One host walked through the numbers over roughly the past month:
Smaller companies tend to be the most exposed to higher interest rates and higher oil prices, which is why the Russell took the biggest hit. The host also noted this is not the first oil spike this year. Oil jumped from the end of February through April, then settled back to somewhere in the mid 70s to 80 range, and the market recovered. What is different this time is that interest rates have also climbed, and by more than they did earlier.
The major indexes are still only a few percentage points from all time highs, but the hosts said the choppiness is jolting because people get used to low volatility quickly. Some individual sectors are swinging wildly. Historically, they added, that is when opportunities show up, because a one event shock can push particular sectors around.
The crux, the hosts said, is policy. Nobody knows what policies will look like after November, and some of what has been driving third quarter GDP, which was tracking near 5%, including reshoring and the AI data center build out, could be affected by the midterm results.
One host asked whether the market could actually react positively if the House flips, since that could limit some of the administration’s recent announcements. The answer was honest: “no one knows, starting with me.” The hosts noted that if the AI stocks and the so called Magnificent Seven, a nickname for seven giant technology companies, do not break down in October, it may be a tell that the market is not worried about the outcome. And if the weekly and monthly charts hold, that is also a signal worth watching.
James Dupree offered his read on why the momentum unwind happened, meaning the reversal in stocks that had run up on strong price trends. “I think some of that premium in the AI stocks has come out because of that,” he said, pointing to midterm uncertainty. He also noted that some of those names are down as much as 80%.
James also shared a market structure observation. Leverage, which is borrowed money used to invest, worked against people about two months ago, and it is an area investors have to respect because short term swings whip around leveraged positions. But he pointed to the SpaceX share unlock, the point at which early holders are allowed to sell, as a sign the market can absorb a lot. Before the unlock, some expected a flood of selling. Instead, roughly 200 million shares traded in a 15 minute window and the price barely moved, and the stock later rallied about 50% from that level. His conclusion: “I’m not sure if all that leverage made as big a difference as people think.”
One of the hosts read from a Bloomberg story about a 2016 study from the McKinsey Global Institute, titled Diminishing Returns: Why Investors May Need to Lower Their Expectations. The study said the last 30 years were a golden era of returns, and that a 30 year old would need to save almost twice as much and work seven years longer to end up in the same place as someone a generation ago.
Here is the problem the hosts pointed out. The study came out in 2016, and market returns since then have run well ahead of what it projected. One host, who said he believes in reversion to the mean over long periods, put it this way: “if you took research reports like this and extrapolated it out, you’d just be sitting on the sidelines since 2016 earning below inflation rate returns.”
Another host said he does not think of it as being cautiously optimistic. “I don’t view it as cautiously optimistic. I view it as an honest appraisal of the human experience.” He went on to say that “human experience says we will tend to innovate, we will tend to get better.” He also shared a line often attributed to Mark Twain, that when the world ends he wants to be in Kentucky because everything happens 10 years later there, followed by the second half: “most of the time the world doesn’t end.”
Then came a fact worth remembering. “Something like 30% of the earnings of the S&P 500 today are generated from companies that did not exist when that report was written.”
The hosts also mentioned investor Seth Klarman’s 2010 comment that artificially low interest rates were forcing everybody into risk assets. His sentiment may have been right at the time, but if you extrapolated it into a long term investing plan, it could have led you off the path.
The hosts’ answer was practical. “Price is truth.” Track the fundamentals of the companies you own, watch the weekly and monthly charts, and use the new research tools now available to speed that work up. Or as one host summarized: “It’s always in the charts.”
One host brought up another source of recent market noise, which is Treasury Secretary Scott Bessent pressing Japan to get its interest rates up. Here is the simple version. Japanese interest rates have been near zero for 30 or 40 years. So hedge funds could borrow in Japan for next to nothing, invest around the world at something like 4%, and pocket the difference. That is the yen carry trade.
Pushing Japanese rates higher unwinds that trade, which has been one factor pushing yields up recently. The host called that healthy, because the carry trade has been a distorting wet blanket over assets, much like our own zero interest rate policy was for years.
The second half of the conversation turned to what all this means for the way we actually invest client money.
One host described a call the day before with the management of one of our larger positions, a company whose business is tied to government agency mortgage bonds. The stock had dropped a few percentage points, in line with the market over the last month, and it pays a strong dividend. The call was a pulse check on the fundamentals, and because of what that company does, it also offered a look at what is happening in the bond market.
“You don’t form an investment thesis based purely on what’s going on on the macro.” The macro can explain why prices are moving, but the fundamentals of each company tell you whether your reasons for owning it are still intact, and sometimes improving, despite what the stock price is doing. That is how you back into a workable investment thesis, and sometimes how you find value.
Elizabeth from our team put the value idea simply: “when we are able to get a stock at a lower price that pays a dividend, then your yield goes up.” For new buyers, the current yield is higher. That is an added bonus on top of the hope that the stock also rises in value over time.
Another host built on that, saying that “if you’re able to buy more shares when the price is down, if you think the fundamentals are still intact and that price will come back over time, immediately that increases our client’s income ’cause they own more shares that are paying dividends.” If the price later returns to where it was, the client holds more shares that were bought at a lower price. That is not a promise. It depends on the company’s fundamentals holding up, and dividends can be reduced or eliminated.
The hosts were also clear that discipline goes both ways. For growth and momentum stocks, one host shared a fund manager’s saying, “buy high and sell higher,” because strength means the trend is intact, and if the trend is lost it may be time to sell. We may also see a higher risk growth stock that has been mispriced and take advantage of it, even when it pays a dividend.
What makes our approach specific is who we serve. “We’re dealing with primarily retirement money, and a lot of our clients are taking regular withdrawals, so they need that income stream.” That is why we look at every decision through the question of what it does for the income our clients rely on, not just for a price chart.
When the team meets for its investment committee, everyone brings a different angle on the market, so the result is a consensus and a balance, and you are not depending on one person’s mind. Charts, fundamentals and the most sophisticated tools an investor has had, all together. “But it is rooted in discipline.”
Not every firm is built this way. At many large national firms, you are assigned an investment counselor who relays your questions up a chain. Here in Central Kentucky, our advisors and portfolio managers are a phone call away, and you can talk with the people who actually make the investment decisions. Portfolios are managed around each client’s income needs, not around a one size fits all model, and we are a fee only fiduciary firm, which means we do not earn commissions on products we recommend. You can read more about how we invest on our Investment Philosophy page, and learn how we work with families through our Kentucky retirement planning services.
The Tom Dupree Show is the weekly radio program of Dupree Financial Group, hosted by Tom Dupree, founder of the firm and a 47 year veteran of the investment business. Each week, The Financial Hour covers the financial topics that matter most to retirees and those approaching retirement, in plain English, without the Wall Street spin.
Dupree Financial Group is a fee only, fiduciary Registered Investment Advisory firm based in Lexington, Kentucky. The firm manages separately managed accounts focused on income generating, dividend paying portfolios. We do not sell products, and we do not earn commissions on the products we recommend.
The show airs Saturdays on NewsRadio 630 WLAP. Past episodes are available in our Market Commentary archive.
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