The Dividend Cafe - Fed Indepence Day

Episode Date: April 21, 2025

Today's Post - https://bahnsen.co/43YcP5F Market Turmoil Amid Presidential Threats and Tariff Tensions In this Monday edition of Dividend Cafe, recorded the day after Easter, the host reflects on recent market movements and significant factors influencing them. Despite the lingering concerns surrounding tariffs, the primary driver of market uncertainty today includes President’s hints about potentially firing Federal Reserve Chairman Jay Powell and requesting emergency rate cuts. This has fueled concerns about the politicization of monetary policy. The market saw significant declines with the Dow, S&P, and Nasdaq all dropping around 2.5%. Additionally, credit spreads have widened, indicating potential recession fears, and freight and shipping have been impacted due to the trade war. The segment also briefly touches on Pope Francis's death at age 88 and the upcoming selection of a new Pope by the Catholic Church. 00:00 Introduction and Weekend Recap 00:16 Tariffs and Tax Policies 01:53 Market Reactions and Federal Reserve Concerns 04:11 Market Performance Overview 06:00 Economic Indicators and Credit Spreads 09:31 Housing Market and Tariff Impacts 10:33 Federal Reserve Rate Cuts and Oil Prices 11:17 Energy Infrastructure and Tariff Definitions 12:30 Conclusion and Upcoming Events Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to The Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Monday edition of Dividend Cafe. The day after Easter, it was also a three-day weekend. Markets were closed on Good Friday. I do hope that you got a chance to listen to the Dividend Cafe from Friday, where I talked there a lot more than I'm going to today about the latest with tariffs, with other countries, with China, impact on bond markets, currency, and the sort of upside

downside risks that exist around the tariff policy downside and the tax bill, the part of the administration that is still looking to cut taxes potentially on the other. And so there is a tug of war around a massive tax increase that the administration's wanting to do with tariffs and a potential tax decrease with the tax bill. But that doesn't feel like much of a tug of war in markets, and it's not a tug of war in coverage because there's only one side of this that's really getting covered by the press, but in fairness to the press, by the administration as well.

The markets got hit today, and it really was a little less about tariffs. Don't get me wrong, that's lingering. That's not going anywhere. There was some expectation there might be an announcement of a big deal coming with Japan and reality it appears that maybe nothing did get done and people are a little underwhelmed by that conversation because we charge higher tariffs on Japan than they charge on us and so that's a tough negotiating position to get like a better deal but make it reciprocal. But if it's reciprocal, it would lower tariffs on them and so that's not really what they're

going for. That's lingering and then of course the ongoing questions and the much bigger elephant in the room regarding the stuff with China. But I've spent all this time so far to talk about what I'm not talking about because really I think the primary driver today was some additional uncertainty tethered into markets around the president's insinuation that maybe, just maybe he needs to fire Jay Powell, the chairman of the Federal Reserve, and asking Chairman Powell to be cutting interest rates in between Fed meetings, which they have done before.

They did it once during the financial crisis. They did it during COVID when the world was shut down. But it would be a little odd to do it when we're being told that the economy is doing great and everything's going really well and then to go do an emergency rate cut. So I don't think the president really wants them to cut rates in between meetings. I think he's working the refs, so to speak. The language I used on television Friday about it. But the questions that are being posed to markets that are adding an uncertainty premium on top of an uncertainty premium in markets are whether or not Fed independence is potentially

under siege, that there is the politicization of monetary policy. I'm one who believes that the Fed has never been totally apolitical, but this is at a more explicit and concrete level that we most certainly have never seen. And I think markets would and will shrug off the president merely threatening and treating. I don't really care at all for the president of the United States calling the chairman of the Federal Reserve a big loser as he did today on social media, but I don't think markets get worried about bad manners.

Hopefully parents do. You know what I mean? But not markets, okay? So anyways, back to this. I would say that markets are more wondering if there's more than just rude tweets, but an actual potential legal crisis coming because the president cannot fire the Chairman of the Federal Reserve. And their talk that the president's looking for ways to go about doing it could force something to get to the courts and just adds another level of uncertainty.

And so, markets were spending a lot of today pricing that in. So, in terms of what exactly did happen with markets, it's funny, we have a little bit of stuff today in every category, but not a lot. And a lot of these Monday Diving Cafes lately have been just piles and piles of bullet points on a couple of the particular issues, public policy or what have you. But really right now I'm just going to go around the horn with one or two bullets per area. Within the market today, the Dow was down at 1.1300 points, came back a few hundred at the very end,

but closed down 972 points, 2.5%, or what's called 1,000 points. The S&P down 2.4, the Nasdaq down 2.5. So all three indices really down within a whisker of one another about 2.5%. I can't emphasize enough the challenges, and I've talked about this before, as we're going into earnings season, people alluding to the PE ratio of the market, but I do not think the PE ratio right now reflects the forward PE because I don't think that the E reflects the forward E. And what I mean by that is earnings are going to be impacted by what has happened. I don't know if it's a drastic impact or a very minor impact, and both are possible. And certainly the sooner it gets worked out and the better it gets worked out

for American interest, then the less impact there would be. But there's already been some impact and I don't think that's reflected. We're not seeing downward revisions yet in earnings. So you very likely have earnings that will be lower than are currently projected, which means the PE ratio right now is higher because the E itself, when the math gets redone of that numerator divided by denominator, you're going to reprice. So all that to say, we need to get a better clarity on where earnings are and are going as a result of present circumstances. Credit spreads would indicate they're not going to hold up great, referring to earnings, credit spreads themselves. They had been

below 300 basis points since the inauguration in all January and February, pretty tight, pretty benign credit market conditions. They widened to 350 throughout March, and that was wider, but not wide. And then after the April 2nd announcement, they blew out quite a bit as stock markets were dropping. Credit spreads at one point got right up there near 500 basis points. They've been hovering between 400, 450. They widened again today. I think further breakdown of credit, certainly back up above 500, would suggest very high odds of a pending recession. The 10-year bond yield today closed at 4.41%. That's up eight basis points on the day. We had the short

end of the curve, six months, one year, two year, three points on the day. But you had the short end of the curve, six months, one year, two year, three years, all lower. So you had a steepening of the yield curve and actually quite a significant steepening at that. The best performing sector of the day was consumer staples, which was down 1.34%. You can write this down if you want for future reference. When your best performing sector is down 1.3%. You can write this down if you want for future reference. When your best performing sector is down 1.3, it was a very bad day with a lot of breadth in the badness. The worst performing sectors were consumer discretionary at 2.8 and technology 2.7 to the downside. The big news story of the day was, of course, that Pope Francis did die at the age of 88.

He had suffered from double pneumonia back in February and was not in a good health position. At that time, it looked like he had pulled out, but age and health caught up with the Pope, and he has passed on. And so now the Catholic Church will be selecting a new Pope via their process in the coming weeks. In the public policy, one of my major themes for 2025 was the deficit coming in lower than expected largely because of revenue for the fiscal year coming in higher than expected. And April tax revenues look like they're going to make me look good because capital gain revenues where there had not been income tax withheld, there usually is not, are up 30%

year over year. And so that was specifically cited as one of the reasons I believed revenue would outperform CBO estimates and the deficit would therefore potentially come in lower. As for the Japan trade delegation, I think I already alluded to that, what went on there and some of the challenges. I still expect a deal gets announced, but the markets may have been underwhelmed by where those things stand right now. Economically, pay attention to freight and shipping.

We're still waiting on more concrete data. What we're hearing anecdotally, hundreds of thousands of containers of cargo, and it's very possible it's over a million containers of cargo that have been either stalled or delayed or canceled altogether in shipment. This obviously the byproduct of the trade war. It was very known that there would be some of this and predictable, but it becomes much more evident in the real economy when there are not goods getting into our ports and goods coming from the ports to shelves. We will be monitoring that very closely for leading indicators. On housing, late last week, the NIHB Builder Sentiment Index came in at 40, very low.

50 is the breakeven level. Declining expectations were very poor. Present situation wasn't that bad, but we're offset by declining expectations. Prospective buyers is half of the level that it's needed just for breakeven. Number one issue being cited for uncertainty is, are you ready?

Tariffs. Shocked. Suppliers have seen a 6.3 increase in costs so far from tariffs, that's 60% of those surveyed believe that they will be increasing further from here. Housing starts in March fell 11.4%. That's the biggest drop in a year. And as I talk about all the time, all we need to be moving housing prices in the right direction is supply. And supply is not coming when starts are not

coming. And we continue to struggle with the building of new supply. So I'll leave it alone on the Fed. We're still looking at four rate cuts very likely coming between now and the rest of the year. I don't know if the Fed is going to get jaw boned into raising, excuse me, cutting rates in May now. It would be very difficult for them to do so because it would look like they got bullied into it. June is a foregone conclusion.

Oil was down 2% on the day. It had been up 5% last week. So it is back into a foregone conclusion. Oil was down 2% on the day. It had been up 5% last week. So it is back into the mid 63s. It had gotten all the way into the high 50s. I will point out the market, the S&P 500 was down 1.5% last week. Midstream was up 5%. You had oil prices were up. You had interest rates were down last week. You had a good start to earnings season with one of the big midstream names releasing. A very different environment for midstream where we continue to believe has just sentiment risk in tariffs, but not fundamental economic risk.

Now I say that referring to US-based energy infrastructure and especially gas pipelines for transporting domestic production and domestic supply. Imports from China of US-leaked natural gas appear to be at zero rate. So, it doesn't necessarily affect the investment infrastructure, but it does affect obviously the commodity price and supply demand fundamentals. We'll have this definition of a tariff in our glossary item for the day, a tax on imported goods paid by the importer, which serves as a subsidy to domestic production and a tax on domestic consumption.

A tax on imported goods paid by the importer, which serves as a subsidy to domestic production and a tax on domestic consumption. The Ask TBG today does get into comparative advantage, Taiwan, and national security concerns, and I will direct you to dividendcafe.com for the Ask TBG. I'm here in Dallas, Texas. I just flew in today. We'll be here for a couple of days moving around then on Wednesday and Thursday and Friday.

A lot of travel this week, a lot of meetings, but excited to be out here to go to our new office in Dallas, Texas. And I'm very excited to be meeting with an awful lot of clients on Tuesday night. In the meantime, we have a lot going on in markets and we have a lot going on to answer your questions, send them our way, and we're here for you if you need us. Thank you for listening. Thank you for watching, and thank you for reading The Dividend Cafe. The Bonson Group is a group of investment professionals registered with Hightower Securities

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