The Dividend Cafe - Monday - June 30, 2025

Episode Date: June 30, 2025

Today's Post - https://bahnsen.co/4nsTzUY Market Comeback and Legislative Insights: A Mid-Year Review In this episode of the Dividend Cafe, we reflect on the historic market rebound in the first half of 2025, breaking a record previously set in 1998. Host David Bahnsen discusses the recent dramatic market fluctuations and the unpredictability of events like the US-Israel-Iran situation and trade tariffs. He also highlights upcoming reports for clients, including portfolio summaries and insights from the Berkshire Hathaway annual meeting. The episode covers recent legislative developments, including a significant bill expected to be signed by President Trump, and discusses various economic indicators such as bond market performance, housing market trends, and inflation data. Additionally, public policy updates from the EU and G7 countries are reviewed, emphasizing their impact on trade and tariffs. The episode closes with thoughts on the Federal Reserve's rate decisions and previews the upcoming discussion on market bubbles. 00:00 Introduction and Market Overview 00:54 Historical Market Comeback 02:16 Unpredictability of Market Events 03:39 Berkshire Hathaway Annual Meeting Insights 04:16 Market Performance and Sector Highlights 05:39 Legislative Updates and Political Maneuvering 10:21 Global Trade and Tariff Developments 12:33 Economic Indicators and Housing Market 16:11 Federal Reserve and Interest Rate Speculations 18:09 Conclusion and Upcoming Content 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 The Dividend Cafe. We are officially at the end of the first half of 2025. With today's market close, we now will enter into the second half of the year for the remainder of this shortened week. The week will be shortened by the 4th of July holiday on Friday. For clients on Wednesday, they will receive a pretty thorough weekly portfolio holdings report as they do every Wednesday, but this will also include a significant amount of

the kind of quarterly summary. We're only right now as I'm sitting here recording about 40 minutes from the close of the quarter. So I haven't compressed all the final closing data, but we know enough to know that this was a historical comeback in markets that all took place intra quarter. And in fact, as I point out in thedivinecafe.com 98, and it was 59 days for the market to make a new high. There have been 17 times in modern history of the market dropping over 15%, and the 55 days that this represented from its, excuse me, trough to a new high represents an all-time record.

And that's really just remarkable. There have been times where the market had dropped and it was, you know, over a thousand days until the market made a new high. Now multi-year bear markets are one thing. This obviously was event-driven, and I talked in the Friday Dividend Cafe about the very unique issues that were catalyzed by particular events. Initially, the trade tariff war that ended up being substantially backtracked, and of course the US, Israel, Iran situation last couple weeks.

So the general theme of unpredictability of events and unpredictability of market response to events is still something that we want clients in particular to remember and hold on to. But I think in the particular moment we find ourselves in now, it's really fascinating to think about how quickly the utter panic had been, rather justifiable, not panicking if it were leading to action of abandoning a well-thought out investment plan, but panic in the sense that it very much looked like we could be on the eve of a full blown global trade war that would do recessionary damage to the US economy.

And for us to go from that to a place where we are now with what seems to feel like unbridled euphoria, again, in various pockets of the market. It really speaks to the unpredictability, but also the quickness with which things can transpire. At dividendcafe.com, not only do you have the links to Friday's Dividend Cafe about a lot of this Middle East, US, Israel, Iran stuff, the written Dividend Cafe from Friday, the video, the podcast. We also have a report. One of our equity analysts, Leping Long, was at the Berkshire Hathaway annual investor

meeting. We send them out there every year. And this year we went through the trouble of doing a recap report of some of the key takeaways because we just believe that they're always insightful. And so the link for that is the Dividend Cafe as well. And there will be a client version of that in the Wednesday email this week that gets into more portfolio holding particulars that aren't going to be there for public consumption, but appropriate for clients.

So the market opened this morning up about 200 points. It zigged and zagged throughout the day. It didn't go negative, but it went higher and lower. But then it closed at the high of the day, kind of rallying in the final minutes of trading and ended up on the day 275 points, which is 0.63% to the upside. Both the S&P and the NASDAQ were up right at around half a percentage point. And so you just closed out on a rally and we've been up most days in the last couple of weeks, so very, very few down days. Bond market also closing positive.

You had the 10-year yield down four basis points today to 4.24%. It also was not exactly ancient history that the bond market had gotten up around 4.5 and people were talking as if we were in pandemonium around a 4.6 yield coming or something like that. And here we are, you know, hugging around 4.2. So the big rally in the bond market that we've seen in the last, let's call it six weeks. Today, the top performing sector was technology was up 1% and financials almost up 1% as well. Bottom performing was consumer discretionary down nearly 1%. So the big news here is the big beautiful bill. It's kind of a weird thing to cover because it's basically done, but it's not really done.

And because they're probably going to go all into the night with various amendments and having to vote down amendments and other gamesmanship that may result in some changes or may result in something that still gets Senate votes, but then tweaks some votes on the House side, as things stand now, the overwhelming, because the Senate got the bill out of where they were, where you effectively need to advance it. And then you assume at that point people are not going to vote against their own vote to advance. So move forward 51 to 49, it was one vote better than requiring the vice president's

tie breaking vote. So the assumption is it gets out of the Senate and then that the concessions that have been made are palatable still for the House with that raise within majority. Now something could change, which makes it a little difficult for me to cover, but this is what all pundits are assuming, what the political class is assuming, the White House is assuming. The President Trump is going to be signing by 4th of July his so-called big, beautiful bill. Once it's all fully signed, I'll cover more next week.

There's so much about the bill I don't like. There are obviously things about the bill I do like. My own objectivity of what I like and don't like, it will not be compromised. But it's also true to say that this was an extraordinary work of political maneuvering by Speaker Mike Johnson and Senate Majority Leader John Thune. And you could hate both of them, or you could love both of them. You could hate the bill, love the bill.

That's immaterial to the point I'm making that this thing has required an awful lot of finesse, and that may be the political understatement of the year to get to this point, which it appears to be just days away from signage. The current policy baseline was used for budget setting. The Senate parliamentarian agreed to that. That's essentially what gave bulk of fiscal room to go forward in the window that they had agreed to. The bill does contain an awful lot of sunsetting provisions, just as the tax cut of 2017 did.

And that's one way to score it within a budget window that's going to pass muster. But in fairness, those things are not likely to sunset, which means the fiscal impact is not likely to be the way it's being scored. It's likely to be worse than that. And you could say, well, no, no, these things are sunsetting, but they're not sunsetting. I mean, they're in the bill to sunset, but these things don't ever end up sunsetting. So from a political reality standpoint, it's very likely that deficit impact is worse than projected, not better, but the hope would be that certain elements of growth materialize better than expected.

And there are some elements that I think are pro-growth in the bill. I do not consider extending the tax cuts from where they were and going forward with the same status quo to be pro-growth. I consider it to be status quo. I still want to do it. I still think it has to be done. That probably is the least controversial of the entire bill, but I don't think it's pro-growth. And so in terms of what is additionally or additively growth, we've talked about in the podcast quite a bit, 100% business expensing being one of the bigger elements and a few other pro-business pieces that have gotten put in there.

One thing that is really a surprise to a lot of us politically is the House bill in trying to accommodate this higher salt deduction got rid of the so-called PTET, the pass-through entity loophole whereby certain service businesses, LLCs and S-Corps, could pay their state burden through the entity and get federal tax deduction that wasn't limited by the salt level. And the House got rid of that entirely, and the Senate bill brings it all the way back. It went the opposite direction of what some analysts thought. So that's a surprise, but that's where things stand in the Senate bill that they should be voting on soon. The other public policy elements are actually quite meaningful today. It's a shame that I'm over 10 minutes into the podcast and just getting to this now, but the European Union

announced today a general willingness to proceed with a 10% base tariff, but the European Union announced today a general willingness to proceed with a 10% base tariff, but they want certain exemptions, pharmaceutical, semiconductor, aircraft, certain items. And President Trump has been very willing to create exemptions and carve outs across the board so far. They're looking for exemptions in the 25% auto tariff. So they seem to say, we're willing to take it on the chin and some of the other elements that we can accommodate here and there, but then we want a little bit of exemptions. And if this is moving forward

in good faith, then they will probably extend past the July 9th deadline that the president imposed. They're not going to have a final bill by next Tuesday or Wednesday, whatever the ninth is, but be in a good faith place where they're close enough that they extend for a little further negotiating room. That came out later in the day today. The Treasury Department, this is a big deal, announced that there's a deal with the G7 countries that will enable US companies to be excluded from certain taxes some of those countries were imposing, and therefore take

away the need for the so-called revenge tax, Section 889, that was a big part of the House bill. So Secretary Besson asked the legislator to take it out. It had been very controversial. It would be damaging to certain multinational companies, but because of this progress Secretary Besson made with G7 countries, markets breathed a sigh of relief that this revenge tax is coming out. And then Canada ended up agreeing today to drop its digital service tax on certain big American tech companies in exchange for resuming trade talks and trying

to avoid some other tariff increases. That had been, there was some perception that they were digging in their heels on that digital tax, but they capitulated today. So number of things moving in the right direction to get to some better closure on the trade and tariff side of things. In terms of the economic front, the PCE number came in 0.1%. Prices moved on the month 2.3% year over year. Goods prices again, dead flat year over year, 0% inflation with goods.

So that was the May PCE number that came out in late June, but it always comes a couple weeks after the CPI number came out. On the housing front, single family home sales were down a absolutely stunning 14%, 13.7 to be precise, in the month of May. They're down 6.3% versus a year ago, but those year over year drops are much more pronounced when you consider that what was done a year ago was down from what was done a year ago from what was a year ago. So you've time up three years in a row.

So this base effect is magnifying the reality of how much we have seen transaction volume decline in housing. From an inventory standpoint, you would think we're on the verge of that getting better. We're up 21% the national available inventory year over year, but the problem is the base effect there is very distortive. We're up 21% from what was a very low number. We are still right now 300,000 less homes in single family residents than we were in 2019. So, national inventory, available inventory for sale is still far lower than it was pre-COVID, but it has picked up a lot from the lower levels that ought to help soften prices and lead to greater volume of activity. I've alluded to this number in past

months, but I got a more recent update and I just want to bring it up again because I cannot believe this data point, but it speaks to so much of what is really going on in the affordability aspect of housing. 2010, that's a modern era number. That's a post-financial crisis number. That is not an ancient history number. In 2010, 50% of homes being bought of all home purchases were first time home buyers. Fast forward to today, it is 24%.

That number has collapsed. 76% of home purchases going on right now are people who have already bought a home before. That speaks to the affordability issue for first time homeyers being so severely hindered right now. Okay, what else? Oh, by the way, the median sale price of homes has held in there, but it's important to point out that the average size of a home selling has dropped. So what you really want to look at if you're looking into an apples-apples comparison, is the average price of a home selling has dropped.

What you really want to look at if you're looking into an Apple's Apples comparison for the price side of things, because I'm more focused on volume and transactions, but on the price side of things, the price per square foot has dropped. It's just that the overall median price is hanging in there, but those are of average home price that is smaller. But really houses individually sell on a per square foot basis. That number has in fact declined. I don't say that as a negative.

I say it as a positive because some degree of home price softening is going to be necessary to boost activity. Okay. 19% chance of the Fed cutting rates in July, which means of course 81% chance that there'll be no change, but we are really near 100% chance of a cut in September right now. Oil was basically flat today, but it was down over 12% last week. And then the Ask TBG today, somebody wanted to know if I believed the Fed was being political and not cutting rates yet.

And I pointed out that while I disagree with them to have not cut yet in 2025, that I believe they do not need a tightening posture, but a neutral posture, which would probably suggest the Fed funds rate from three to three and a half percent, that even though I'm in disagreement, I am unwilling to classify their decision to not cut this year as political or to have cut near the very end of 2024 as political the other way. If Chairman Powell was trying to help Vice President Harris or before that President Biden, that is the strangest way to help I've ever seen, to wait till right before an election to cut when you had raised rates, record speed and magnitude in the modern era from 0% to

5.5% from the middle of 2022 to the middle of 2023. Almost risking a recession and doing all of the monetary tightening damage, it's just outside the realm of possibility that there was a politically beneficial motive. If one wanted to help the Democrats by cutting in 2024, they would have helped the Democrats a lot more by not raising rates so violently previously. It just doesn't make sense. Chairman Powell can be wrong on things, and in fact, I think he is in this current moment without it being politically motivated. That's my objective and honest, and by the way, accurate assessment of things. I'm going to leave it there. I've told you what's coming out this week. Our Dividend Cafe will be here Thursday, not Friday.

Talking about bubbles. But Friday is the 4th of July and markets will be closed and the Dividend Cafe will be closed. But we're going to have a great edition coming out Thursday. In the meantime, reach out with any questions you have. Have a wonderful evening. Thank you for listening. Thank you for watching.

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