The Dividend Cafe - SPECIAL EDITION: Four Major Stories – May 12, 2025

Episode Date: May 12, 2025

Today's Post - https://bahnsen.co/3SvJ30X Dramatic Market Movements and Major Economic Updates In this special Monday edition of Dividend Cafe, David discusses a significant market rally, with the Dow up over 1,000 points, the NASDAQ up 4%, and the S&P up 3.25%. The episode covers four major stories influencing the market: unexpected progress in US-China trade talks, the release of a draft tax bill by the House, upcoming peace talks between Putin and Zelensky in Turkey, and President Trump's executive order on pharmaceutical price fixing. Each story's potential impact on the market and the economy is explored, including detailed analysis of the tax bill provisions and expected changes. David also mentions additional insights and further extensive coverage to come. 00:00 Introduction and Market Overview 01:50 Unexpected Good News from US-China Trade Talks 03:20 House Releases First Draft of Tax Bill 04:33 Geopolitical Developments: Russia-Ukraine Peace Talks 05:23 Trump's Major Announcement on Pharmaceutical Prices 06:22 Market Reactions and Economic Implications 07:18 Details on the China Deal and Future Projections 09:35 Tax Bill Highlights and Potential Changes 12:37 Pharmaceutical Sector Reactions and Future Research 14:48 Conclusion and Final Thoughts 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 a very special Dividend Cafe on this beautiful Monday from New York City. For a lot of people, beautiful day in the market as the Dow was up well over 1,000 points, NASDAQ up over 4%, the S&P up 3 1⁄4%. And there are four major stories that happened basically overnight into the morning.

And so I want to spend our time talking about the market, which is largely related to one in particular of those stories that could be overlapped to some degree with maybe two of them. But it's one of those days where I just wanna start off by saying how difficult it is to do the Dividend Cafe on a day like today, because I believe that any one of these four things

could have warranted its own Dividend Cafe. And if there was not four stories, if you just had an up thousand point day in the Dow, that's a pretty big story. As far as a market commentary goes, having an extraordinary day like that in the market, that alone would warrant a little additional market commentary, obviously. And so when I say difficult, what I want you to understand is that, first of all, it is

true. I love using weekend time doing a lot of reading and research. And a lot of times I have begun writing things for the Monday Divinity Cafe, Saturday morning throughout Saturday, Sunday, and then Monday, there's a lot more to do as you get into the actual Monday itself. But this particular weekend, almost everything I would have done by Sunday night

became somewhat obsolete. Now I knew that there was a good chance of getting some news out of the China-U.S. trade talks in Geneva, Switzerland with Secretary Besant and the Chinese vice premier, but the markets obviously did not expect, and I did not expect, this level of advancement, meaning the de-escalation is not just the water cooler handshake, things went very well, we're feeling good about a deal type of talk. That's pretty good. When that level of announcement began to come out on Sunday as futures were opening, the market was up 400 points. There was a market relief from that. But then when the secretary was speaking, it was about three o'clock in the morning New York time, nine or 10 o'clock in Geneva. When they announced

that there was a total suspension of the reciprocal tariffs that had been announced, then markets obviously rallied up to another level because markets were not expecting that. And I believe that markets are always responding not to good news or bad news, but unexpected good news and unexpected bad news. And this was unexpectedly good news. So you have this story, and I'm gonna unpack more of it here in a moment, but then it's

going on at the same time that the House is releasing its first draft of the tax bill, which they wouldn't do unless they were confident they can get it out of committee and still is going to have to go through a full House vote. That has a lot of stuff in front of it, not to mention the Senate. But of course, different details are being leaked out, and I'm trying to tap sources of mine to hear more of what's going to be in there. And so I'm typing a bunch of commentary around what was known at the time, and then more gets known later, which raised some of my writing obsolete.

That's all fine. But then just less than two hours ago, then the House actually released the 389 page bill. So then you really figure why release it if it a cafe full of, well, we think it might have this and we're hearing it's gonna have that, but now we know it's there. Now, I'm gonna go through some of those highlights too,

but none of those things are final bill stuff. It's real. If I'm talking about it now in a moment, it's in the House draft bill, but the House draft itself is still subject to plenty of changes. Some changes that I very much expect will happen. And in addition to that, it has to go through the Senate.

So there's a lot in front of us there. But I mentioned four things. The third I will get into quickly was that Vladimir Putin and President Zelensky of Ukraine are supposed to be meeting in person on Thursday for peace talks in the country of Turkey. President Trump has even said today he may join him for the meeting. I don't know if that's going to happen or not. And of course, we don't really know that the Putin-Zelensky talks themselves will happen. But you go from refusal to have a ceasefire, the U.S. looking like it's ready to abandon being a role, playing a role in negotiating some sort of peace talk, and then now these two sworn enemies potentially being in the same room together in a few days. So that's a massive geopolitical story of a war that's now over three years old, that is at a level of peace talk potentially

we haven't yet seen. And then President Trump last week had said, I have an announcement coming, it's going to be the biggest announcement I've ever made. And then said yesterday, I'm about to send the biggest tweet or truth social post I've ever done. And then he did it. And then it was basically announcing that the federal government is going to be price fixing pharmaceutical costs and doing what is called a most favorite nation policy where they won't pay more than whatever the lowest price another nation might be paying. And at the time of the tweet going out, it didn't have details. How are they going to do it? What mechanism, what drugs are included, excluded? Is this just for reimbursements

to Medicare? Does it include Medicaid? Are they trying to do it even more broad than Medicare, Medicaid? And there were a lot of questions there. And that's the challenge when you're getting policy by social media, waiting for the actual thing. But then an executive order came this morning. by social media waiting for the actual thing, but then an executive order came this morning. So there's literally in that four major stories and that's why it's a difficult dividend cafe to write. But as I mentioned, the Dow closed at a high of the day up over 1100 points, 1161 points, which is 2.81%,

S&P up three and a quarter, NASDAQ up 4.3. So major risk on day. The sector up the most, by the way, was consumer discretionary. I'm assuming you can figure out that's largely related to the vast exposure to Chinese tariffs. And the only negative sector was utilities. So it was 10 out of 11 sectors that were up on the day, utilities down 68 basis points. The dollar was up 1.5% today, not a big surprise on announce of the tariff changes. The 10-year bond yield was up, not a big surprise on expectations of better economic growth, closing at 4.47%, up 10 basis points on the day. So what we know on the China deal is 125% reciprocal tariffs are now off the table for 90 days, coming back down to 10% and on an annualized basis, that additional tariff revenue or tariff expense, excuse me,

that is now off the table, annualized is equal to over $300 billion of tariff costs that now will not happen in the economy. Of course, though, what we don't know is what will happen in 90 days. What we don't know is what the currency impact will be, because currency has not been discussed as part of the framework of their deal. Secretary Besson is taking the lead in these talks. I consider that to be a very good thing for where this will go, and certainly markets consider it a good thing. I do not believe that this will be total smooth sailing from here, but I do believe the parts the markets need to know that the Trump market put is not dead, that market discipline

is alive and well. The Secretary of Besant is right now the grownup in the room. Markets are largely content to know that some of the tails are off from there and that within the bell-shaped possibilities of outcomes, there are some better and some worse, but they're livable, but it's the tails at which the markets feel has largely been subsided. I will say that I think you're going to see an ordering bonanza in the next 90 days. If you thought as an American importer or American manufacturer who imports unfinished goods in your process, and you thought you were about to pay 120, 140% more, and now you know there's a window at which that cost has come way, way down, and it might go back up, it might not, then it behooves you clearly to front run as much ordering as you can.

So there could be a lot of pulled forward economic activity in Q2, that it's gonna be something we're monitoring a great deal. I don't know how to weight the market movement today around these various catalysts, but I would say a significant portion is related to the surprise improvement in the US-China situation. On the tax deal, let me try to do this as quickly as I can.

It's hard to waste your time with a lot of these things, but I think you want to know where things stand, but I just want to be abundantly clear that it's all a moving target. It's going to change. They did come out and say the salt cap deduction would go up to $30,000 from $10,000, but it would be capped, nobody would be eligible above a $200,000 income or $400,000 for a married couple. So I do not think they're going to be able to get the votes from certain House moderate Republicans in New York and California that have already said $30,000 was insultingly low, but then throwing in the income limit, I believe,

is going to require more negotiation. Speaker Johnson seems prepared for the fact that it's gonna take more negotiation, but we shall see. That is what they've come out with in this first draft of the bill. The size of the tax cuts is down to four trillion. It had originally been four and a half trillion. The size of spending cuts is down to one and a half trillion, it had been two trillion. So

about five hundred billion on both fronts got taken out. Many of the pay-fors for the bill come from rolling back some of the tax benefits for electric cars, clean energy production. The idea of a higher marginal rate for top earners was not included. And there was some back and forth that President Trump went and he tweeted about it. Oh, I'd be able to do it, but they probably shouldn't do it. But in the end, it wasn't there. There's a higher tax on stock buybacks. There is a tax on investment income for endowments. It is a little complicated, the formula in there, but looking to tax private university endowments. There is language and no tax on tips. There is

language and no tax on overtime, but it expires in 2028, so just three years. So we know how well those sunsetting provisions seem to go. It does not exempt taxation on social security income, as I've said all along, they wouldn't have room to do it, but it does include a $4,000 addition for seniors to the standard deduction. So it gives them an additional standard deduction of 4,000. And then it raises the estate tax exclusion to 15 million, so 30 million for married couples. And then for closely held businesses, it increases the deduction from 20% to 23%, the amount that you reduce taxable income on these closely helds for. I mentioned the executive order on pharma, most favorite nation status. I don't know that they can get it through the courts. They had a provision they tried to do in

2020. The courts threw it out on procedural grounds, but then the Biden administration tried to run with it. This similar thing the Trump administration had done before that the courts threw out, and they weren't able to get it through courts, even trying to fix some of the procedural issues. The market was up 400 in futures when I went to bed. It was up 800 when I woke up. It was up 1,000 when I went to bed. It was up 800 when I woke up.

It was up 1,000 when I got back from my run. And in all three of those scenarios, Pharma was down 2% to 3%. Then a bunch of the big Pharma names today were up 5%, 7%, 4%, 6%. Big moves moves higher. So how did Pharma reverse when the actual executive order came versus the announcement of the tweet? Well, there's a 30-day deadline for companies to negotiate lower prices before this governmental price fixing kicks in. So maybe markets expect that certain deals are going to keep this from happening.

There's also the sense in which the market just may not believe it deals are going to keep this from happening. There's also the sense in which the market just may not believe it's actually going to happen, that either certain parts are going to require Congress, Congress is going to do it, the courts can punt it, kick it out, they've already done that before. We're working on additional research we'll make available when we get there, but that's where things are. So an announcement that was pretty surreal for how outrageous it is in terms of pharmaceutical price fixing from the federal government, and then a positive response in the pharmaceutical sector, which could signal any number of different things.

I've already mentioned the Russia-Ukraine deal Thursday. In the interest of time, somebody in the Ask TBG asked me what my take on the carried interest issue was. At first, let me say they didn't make any changes to the carried interest loophole in the House Draft Tax Bill. And I tried to give a very nuanced answer at dividendcafe.com as to what I think about it, why I believe there is an argument for the carried interest loophole, why I believe there is definitely an argument for getting rid of it, but why the bigger issue to me is not about carried interest,

but rather a flatter tax code in terms of the way capital and labor are respectively taxed. So I encourage you to read my answer. I'm going to save you the time here on the podcast and video from getting into it, but if you want to read it at dividendcafe.com or at the homepage in the Ask TBG section, it's there. Let's leave it there. We've covered a lot of ground.

I'm going to have more to say in What's on David's Mind tomorrow on Tuesday. It's drinking through a fire hose right now for me, and I feel guilty if I'm doing the same thing that you all. I'm trying to be as concise and succinct as I can, and yet still give you the information you want in summary form. But if all you want to know is markets are up big today, markets are as I can, and yet still give you the information you want in summary form. But if all you want to know is markets are up big today, markets are up big today, and if all you want to know is why, it's because the US and China have gone into a least a 90-day suspension of their escalated trade hostilities and a whole lot of other big things are going on around it.

And hopefully we're getting closer to a tax bill. And in the meantime, I hope you will reach out with questions. Thank you for listening. Thank you for watching, and thank you for reading The Dividing Cafe on this very special Monday. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered

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