The Dividend Cafe - So Much Market Info, and Senate Plans for the Bill

Episode Date: June 9, 2025

Today's Post - https://bahnsen.co/4dVYgCC Market Rundown and Insights on Policy, Valuation, and Small Cap Opportunities In this Monday edition of Dividend Cafe, the host provides a comprehensive market analysis, noting flat to modestly positive performance across major indices and sector performance. Key topics include public policy developments, valuation metrics, and the impact of trade tariffs. The episode also highlights long-term investment lessons with reference to top-performing S&P companies and offers insights into small cap vs. large cap dynamics. Updates are provided on U.S. Senate's work on the significant bill, employment trends, and economic data from both the U.S. and China. The episode concludes with a preview of upcoming topics and encourages viewers to access further resources on the Dividend Cafe homepage. 00:00 Introduction and Market Overview 00:24 Market Performance and Sector Highlights 01:17 Encouragement and Resources 02:18 Valuation Metrics and Market Analysis 05:03 Small Cap vs. Large Cap Performance 06:07 Trade Tariffs and Company Strategies 06:58 Interest Rates and Employment Trends 08:03 Currency Movements and Market Leaders 10:14 Public Policy and Legislative Updates 14:16 Economic Indicators and Housing Market 15:56 Conclusion and Upcoming Topics Links to mentions of Apple and Amgen: https://economictimes.indiatimes.com/news/international/us/apple-stock-drops-1-5-after-wwdc-2025-keynotedid-apples-big-ai-reveal-and-siri-upgrade-fail-to-meet-investor-expectations/articleshow/121734860.cms?from=mdr https://www.barchart.com/story/news/32784272/how-is-amgen-s-stock-performance-compared-to-other-pharmaceuticals-stocks 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 this Monday edition of Dividend Cafe. We are going to go all the way around the horn today. Lots of market stuff to discuss. A reasonably exhaustive update on the public policy side. Some thoughts on where the Senate is with the big, beautiful bill. And then the normal things with housing and the Fed and so forth.

As far as today's market action goes, when I say dead flat as a percentage, the Dow was up 0.00%. So, I'd say that's pretty flat. It was technically down one point, which didn't even register as a basis point. The S&P was pretty close. It was more or less flat, up nine basis points. Then the NASDAQ was up 31 basis points. So either flat to modestly up day across markets. The bond market was up a tiny bit. The 10-year was down three basis points, closing at 4.48%. And the top performing sector for the day was consumer discretionary, up a little over 1% sector for the day was consumer discretionary up a little over 1% utilities with a bottom performer down 66 basis points. Before I go into some of the fun market stuff I want to discuss, I want to encourage you to check out the Dividend Cafe from Friday, where I dedicated it to a little updated letter

for young adults, high school graduates, college graduates, those seeking or about to embark upon some sort of life change, life reboot, et cetera. I think there's some helpful financial, economic, investment, professional, vocational counsel in it that I would not only encourage you to check out, but to send far and wide if you're interested. The other thing I'd point out is that our homepage at dividendcafe.com, we do have a new library of content added where all of the dividend cafes are archived and you could scroll through and see past words of wisdom that may be easier to find and useful for you in that regard. I just wanted to draw to your attention.

So, I'm going to go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and go ahead and And you could scroll through and see past words of wisdom that may be easier to find and useful for you in that regard. I just wanted to draw it to your attention. Okay, there's a chart in today's dividend cafe that I want you to look at and pretend that we haven't had a trade war, that we're not in the middle of ongoing uncertainty around tariff policy, that we're just basically living in a world where there's a pretty good earnings environment. Most company earnings are growing this year versus last year as expected. And without any kind of geopolitical or monetary policy surprises,

you just say, what do we make of the market? And you look at this chart where across every valuation metric, price to earnings, price to revenue, price to book value, price to free cash flow, or the enterprise value divided by the EBITDA, that all of these metrics are at and near extreme levels and draw your own conclusions. Basically, the point I'm making, of course, is if you do remove the vulnerabilities of what's in the headlines right now, which there's no reason to do, they're in the headlines, that stuff is what it is. Headlines are never really a major part of our investment process. What you have regardless is the question of evaluation story. And as I've written about time and time again, that doesn't force a timing issue, but it forces process around your own discipline,

evaluation, expected rates of return going forward, and so forth. Speaking of the S&P 500's valuation, let's just talk about the current state of affairs. It has not yet made a new high from its February high levels. I think for the S&P that was February 19, but it's about just 2% away from that level, having been down about 20%. But the chart just shows the steep drop in the aftermath of Liberation Day and then the steep rebound whereby it's recovered about 90% of that drop.

In both cases, you're dealing with an incredible rapidity, a very fast drop and a very fast recovery. The speed of these things speaks against the folly of timing. The problem with big drops in the market and the speed issue, timing question, et cetera, is that that is becoming the rule, not the exception, that there are very fast drops, very fast recoveries that are leaving a lot of people out that make poor decisions. This has happened several times, and I think the chart there illustrates it well. Small cap underperformance relative to large cap is at a point now where I don't even like

talking about it that much because it's impossible to predict when it's going to reverse and it's become so baked in. This has been so many years now. I would say as a contrarian that there's a kind of exhaustion level to this underperformance of big caps versus small caps, but that level of exhaustion, how long it's gone on, the fact that flows into small cap are abysmal. There's no attention being given to the space. The valuation deltas between the way big cap is priced and the way small cap is priced are borderline absurd. The problem is that when it reverses and it reverts to the mean, as anyone's guess, I bring it all up without any attempt or willingness to try to time it merely to point out the

contrarian opportunity, but some people want to really time it well. An interesting issue I'll bring up for your thought, which I think is often the case in these types of things, is that right now I'm pretty confident that the long-term winners out of this trade tariff war are going to be those companies that were quite adept and proactive in passing on the impacted tariffs to their customers, they then end up receiving tariff relief later because of trade deals, because of reversal of policy, what have you. And where that pricing power remains sticky, margins can expand. And for it to play out that way organically over time represents not only my base expectation of a lot of this, but

where there's probably the best opportunity set. Another chart I'd bring to your attention, Dividend Cafe, looking at low interest rates and the amount of hiring that was going on in the Mag-7 companies, and then when interest rates reversed in 2022, the amount of hiring has taken place since. Now I cannot perfectly correlate with a cause and effect those two things. It is just that, a coincidence of timing that nonetheless you are reasonable to assume has some degree of causation, if not entire causation. And that the go forward realities for some of the names will be different than go-forward realities of other names.

They have different revenue models. They have different growth strategies. Some of them even have different valuations. But nevertheless, the employment aspect alone causes us to believe that there is some connection to the rate environment that has been pertinent. And MAG7 is such a meaningful part of our employment picture, market capitalization, and certainly the valuation story that we talked about all the time. A couple other market things I want to move on, big strong currency action vis-a-vis the

dollar around the trade and tariff issues. Taiwan up over 11% against the dollar. Australia, seven. Mexico, seven. South Korea, five. The UK, five. The Euro, four. Canada, four.

The muted movement to most, I mean, I think it's up one, one and a half percent has been in the Chinese yuan relative to dollar. That probably speaks to the uncertainty about where that trade deal is going, where the others speak to a little more confidence that some weaker dollar is expected to be part of that. Okay, final market thought. I just was a little shocked for myself as a long, long time owner in the company. The top performer, and there's a link at different cafe talking about this, the best performer

in the S&P the last 40 years, you would think it'd be Apple, right? And Apple is second. It's compounded at 21.6% for the last 20 years, and it had an 83% drop along the way. But the top performer is Amgen, a 22.7% annual return for the last 40 years, and it had a 64% drawdown. So regardless of whether you're surprised or not surprised about Amgen, Apple, at the top of that pack, again, there's a lot of companies in the S&P that weren't there the whole 40 years, so we won't go there. But for those names that have been there 40 years, the top 20 names have an average drawdown from their high to their low along the way.

The average of 20 top performing names is 72%. So there is a real meaningful lesson in the fact that first of all, most people are not going to write out an 83% drawdown in a name, and yet in Apple's case and these other names, 72% drawdown would have been rewarded. But that's the point I'm making is timing of those things hasn't helped. In fact, has undermined pretty massive returns. So we know that Secretary Besant, Secretary Lutnick, Trade Representative Jameson Greer are in London meeting with Chinese counterparts as we speak, as they go through the second round of

negotiations getting to a deal. We'll keep you posted on what we hear along the way. As it pertains to the big, beautiful bill, we know the Senate is in session looking at the changes they want made. My thesis continues to be that there will be some changes at the Senate, but not enough to dislodge the needed votes for approval at the House. So I would assign about an 80% probability that this thing is headed to passage and that there will be some improvement, but that it will be modest along the way. That's towards getting a July or August passage of the thing. So, in terms of what might happen at the Senate level with the bill as it stands now. I talked to two different US senators directly, about four staffers and a significant amount

of other resources at the Hill, a couple of people in Treasury and one in particular, the National Economic Council, and then of course heavy discussions with the public policy analysts that are in our orbit. In some cases, this information can't be all infallible because some of it is contradictory from itself. There's one person saying up and another person saying down, and it can't be both. So again, none of it is infallible, but what I've tried to do is put together a list of about six or seven changes that I think will come at the Senate level.

For speaking of these things that are disputed, the Senate seems to want to make the business expensing, the 100% business expensing, so-called bonus depreciation component that I like, not set to sunset in four years, but rather permanent. That adds some costs to the total bill, and there has to be other offsets elsewhere, but that to me would be a very positive thing if it were to happen. But again, multiple sources saying the Senate

does want to prioritize it. This section 899 thing, which is starting to get more and more press, the so-called revenge tax on foreign countries, I had assumed there'd be senators that wanted to push back on it upon being lobbied, but what I'm hearing is that they do not want to budge on this. And the Senate parliamentarian has now approved it, so it is likely to be part of the final bill.

We do know that there are some senators that very much want to lower the House's salt deduction limit, which is in their bill set at 40,000. The problem with that will be the politics of it because there's other House members saying they're a no vote if it comes down and there's senators saying they're a no vote if it doesn't come down. So I don't know how that gets resolved. I am hearing, and this is probably the most disputed thing from various sources of mine, that there are some in the Senate that want to kill the pass-through entity tax deduction, which is a work-around assault for pass-through businesses, for LLCs and S-Corps.

But then I'm hearing from the National Economic Council and from some senators that they want to preserve the PTT and not throw it out as the House bill does. So we will see what comes to that. I really don't know what to expect. The hydrogen tax credit that the House killed, I believe is coming back in. The university endowment tax that the House bill dramatically increased up to, I think, 21%. I hear they want to bring that down to 10 or 15. So still increase

different current levels, but not to the same degree the House does. And then you can count on the fact there'll be some changes at the House level around Medicaid and the clean energy tax credits. I think some other budget cuts seem inevitable, but which direction is not even clear and certainly not the magnitude of it. So we will see what happens on the budget side. So we know that jobs report came on Friday, 139,000 jobs created in the month of May. It was a little higher than expected, but then there was about 100,000 revisions downward from the prior two months.

So a mixed bag, some stuff a little better expected, other stuff definitely worse. The unemployment rate stayed flat right in the midst of that at 4.2%. Manufacturing employment did decline, government employees did decline, but not that much, and gains were most pronounced in health services. The labor force dropped 0.2%, which is a meaningful amount in one month. That's now at 62.4%. That's the lowest level it's been since the end of 2022. China's consumer prices fell fourth month in a row.

That's just part of their deflationary reality. On the housing front, first time home buyers now make up 24% of all home purchases, down from 50% just 15 years ago. Number's been cut in half, dealing I think primarily with the unaffordability of housing. And there is a section in housing and mortgage at dividendcafe.com I'll direct you to, dealing with the realities of office as a subset of commercial real estate, I think is very worthwhile. Fed funds rate, again, 4.25 to 4.5%, about, what is it, a 30% chance of only one cut and a 60% chance of either two or three cuts between now and the end of the year and then a little

chance of more, a little chance of either two or three cuts between now and the end of the year, and then little chance of more, a little chance of none. But basically those are the options there. Check out the rest of Dividend Cafe if you want. The Ask TBG, someone asked what another element I would like to see in terms of a pro-growth agenda and dealing with national debt. How can we drive more revenue and drive growth? And it's something I didn't cover in the dividend cafe. I did on this subject two weeks ago.

So I threw out another possibility that I encourage you to check out. And with that, I will see you at the dividend cafe on Friday where I will be doing an issue dedicated to the subject of value investing. My partner and co-CIO Brian Sightel be bringing you next Monday's Dividend Cafe as I'll be out of the country for a few days. And if you have any questions in the meantime, we're here all week in our Newport Beach office. Questions at thebonsongroup.com anytime. Thanks so much for listening.

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