The Dividend Cafe - SPECIAL EDITION - Monday, April 7, 2025

Episode Date: April 7, 2025

Today's Post - https://bahnsen.co/4cjJgxq Monday Market Turmoil: Navigating Violent Sell-offs and Volatility In this special edition of the Monday Dividend Cafe, David Bahnsen, Chief Investment Officer at The Bahnsen Group, discusses the recent market turmoil caused by unexpected White House tariff announcements. He explains the subsequent violent sell-offs and significant volatility in markets, diving into the effects on various indexes, sector performances, and global markets. Bahnsen also touches on the lack of clarity in government messaging and its impact on market stability. Lastly, he offers insights on the importance of patience and prudence in managing investments during such tumultuous times. 00:00 Introduction and Market Overview 00:37 Market Turmoil and Volatility 01:02 Impact of Tariff Announcements 01:36 Sunday Night Futures and Market Reactions 02:10 Bear Market Indicators 02:46 Intraday Market Movements 03:11 Sector Performance and Selling Trends 04:43 Global Market Volatility 05:09 Mixed Messaging from the White House 06:49 Bond Market Reactions 08:45 Earnings Revisions and Market Sentiment 10:21 Trade Wars and Economic Impact 13:04 Tax Plan Vulnerabilities 13:51 Interest Rate Cuts and Economic Projections 14:39 Conclusion and Client Communication 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. Hello, and welcome to this special edition of the Monday Dividend Cafe. My name is David Bonson. I am the Chief Investment Officer and Managing Partner at the Bonson Group. I say special edition because we are in the midst of significant market turmoil, a violent sell-off in markets last Thursday and Friday

that looked poised to continue today on Monday, and we ended up, instead of getting a violent sell-off, getting a little bit more normal sell-off combined with some very violent volatility, some up-and-down gyrations that require our attention. As everyone probably knows by now, it started Wednesday after the market closed in the Rose Garden with a rather inexplicable announcement from the White House regarding a very different

set of tariff plans, not linked to reciprocity, but rather basically attempting to penalize those countries that we buy a lot from. And the pivot from the White House, the surprise change in how they were structuring proposed tariffs, really unsettled markets leading to a simply horrific sell-off on both Thursday and Friday. Then futures opening up on Sunday night, pre-market, back to the old days of financial destabilizations, the COVID moment, the financial crisis, certain key bank failures, things I've lived through many times in my career. I can remember many a Sunday afternoon and evening being ruined by such. But last night, continuing in the sell-off on Thursday, Friday, and the uncertainty around

trade war, futures were down about 1,600 points and really stayed down over 1,000 throughout the evening. And then into the very, very early morning hours today when I was up, we're down about 800 points at about 3.30 in the morning Pacific time. It moved around a bit. It did open down around 1,000. The S&P this morning ended up being down over 21%

from its high in February, the way we look at a bear market. The NASDAQ actually closed down over 22% from its February high, so in a textbook bear market. But then there was some comeback. And the only reason why I want to nuance this word comeback, where the S&P closed on the day, it is only down, please note the air quotes around only, 17.6% from where it closed at its high in February. But again, intraday it went down 21, and so that mathematical delta is obviously that there was a lot of intraday downside that was made up, but it was up, down, up, down,

up, down throughout the day to day, particularly with the Dow. And the fact that the Dow closed down 350 points, which was 0.91%, and that the NASDAQ was actually up a tiny bit and the S&P ended up only being down 0.23%, the NASDAQ was basically flat. It's worth pointing out here, a very important issue of what's going on in markets, that a lot of the things that are down the most, your MAG-7 names, your big cap household names that are down over 30%, big electric vehicle maker everyone knows and loves down 45% on the year, a lot of what happens in these types of violence sell-offs that don't happen very often, the

three phases I like to call it are selling what one wants to sell to selling what they ought to sell to selling what they have to sell. And a lot of the things that were down today, 1% or 2%, are actually up on the year or barely down. So people are just having to start selling off higher quality things because of the leveraged unwinding and some of the riskier things that have fallen much more. And it's a very normal, predictable part of the cycle. It's not necessarily something you can time exactly when it's going to end, but it is

not really a big surprise. But when you look at the zig and zag chart of the Dow today, it fails to graphically capture how tumultuous it was in terms of up-down movements. First there was a false report that hit the wire that the White House was pausing tariffs for 90 days and that really caused markets to rally, and then that came off. But then there was just up and down news throughout the day. Overnight combined with the US futures being extra volatile, the Nikkei in Japan was down

8%. The Hong Kong market was down 13%. Chinese market's down anywhere from 8% to 10%. They have a couple couple different major indices. So there's a lot of Asian market volatility, a lot of European market volatility, and of course the US has been taking the brunt of this. Now the mixed messaging from the White House is not helping, and people can debate if they think it's on purpose or not.

I'm exhausted by the theories that all this is four and five dimensional chess, largely because I know better. But also it's these non falsifiable things, by definition, no one can disprove. And so if there's some sort of master of the universe genius behind everything, then you have no plausible explanation around anything. And I find that, shall we say convenient. But certainly you are hearing different things that were said today from the Treasury Secretary

Scott Besson versus the National Economic Council Director Kevin Hassett versus the Commerce Secretary Howard Lutnick versus the President Special Trade Advisor Pete Navarro. And I would say that you're not gonna get a lot of clarity in markets when there's not a lot of clarity in the messaging, but you're not gonna get a lot of clarity in the messaging when there's not a lot of clarity in the messaging, but you're not getting a lot of clarity in the messaging when there's not a lot of clarity in the policy or the intention. And so to the extent anybody is upset that I'm saying this critically, I don't know what to tell you. If you believe there's a lot of clarity coming in the messaging, then you're hearing something

very different than I am, but there isn't. Now you could say, that's a good thing. I love the chaos. Then fine. I'm not saying that you don't have a right to like the chaos. I'm just simply saying it's chaos and like it or don't like it. But it is very much what is driving this and the just very vast differences between what many market actors, including ones who are pro-tariff and even pro a certain degree of economic protectionism, which I am not in favor of, but even those who are pro-tariff and even pro a certain degree of economic protectionism, which I

am not in favor of, but even those who are have been really quite mortified by the way in which this was done. Now today, bonds sold off. And that also reiterates the point I was making about a significant change in market behavior where you go from selling what you have to sell, what you want to sell, to selling what you have to sell, and you really have seen some of the higher quality things have to sell off. The 10-year got as low as about 3.85% on Friday. It hit 4.2% today, up 21 basis points today. So that's a big sell-off in bonds, obviously driven by forced sellers selling out of bonds

as equity markets are selling off. Real estate was the worst performing sector today, down 2.4%, probably very much correlated to the 10-year bond yield moving higher. The best performing was communication services up 1%. That comes though off of the utter decimation in that sector over the last several days. The MAG-7 by the way gets 50% of its earnings overseas, which is far more than the 40% the S&P 500 gets and far more than the 10 to 20% some highly domestic oriented companies get. So you could argue the Mag7 selling off more

is understandable in lieu of the global nature of all this, but that doesn't make it a great thing. And of course, their valuations were quite elevated to begin with. The average stock in the market is down 26%. On an even weighted basis, individual stocks are down 26% from their peak, from their 52 week high.

But the S&P, like I mentioned, is closed today basically down 18% from its closing day basis. So the semantics around bear market and not bear market and all that, I just have no time for. The other thing you really got to remember is that there is going to be earnings revisions downward as we get ready to go into earnings season next week like you can't believe. It's just that those earnings revisions are going to be as fallible and unreliable as they've been since COVID when we didn't really know what was going on with the whole world. There's no way for companies right now to be guiding what they believe about their full

year profit projections with the kind of uncertainty going forward. So they're going to try and they're going to be to the downside and yet they're also going to be subject to high amounts of revision later because they just simply can't really see right now. These optics are highly suboptimal in terms of clarity for business conditions. Interesting tidbit, the S&P briefly this morning hit a point where it was in January of 2022. And like I mentioned, it closed higher than that level.

But you basically, at one point today, were looking at a 40-month period of a dead flat return in the S&P. You basically, at one point today, were looking at a 40-month period of a dead flat return in the S&P. Now that's totally convenient bookending because you had a huge drop in the S&P in 2022 and a huge drop in the S&P in the last six weeks, and then a big rally in the S&P in 2023 and 2024 in between. But my point about that flat line is something I've talked about for so long, being in this post-2021 period of a flattish, choppy, directionless market, subject to big periods down and big

periods up in the middle, and I think you're seeing it play out right now from an index standpoint. All that to say, the Friday market sell-off exacerbated as China announced 34% tariffs retaliating against President Trump's 34% tariff announcement. Low tariff, no tariff type countries like Switzerland, Vietnam getting hit in the President's announcement last week. Where are these different trade deals, conversations, et cetera are going to go, what off-ramp the president may or may not try to find. I am mystified by how many people are telling me, hey, you said he might be looking for an off-ramp, but I just listened to him or I just read his tweet and he said he's not

looking for an off-ramp. And thinking that therefore that is, I told you he's not looking for an off-ramp moment is really missing the point. I do not believe he's looking to telegraph what he's looking to do. I'm thinking he's looking to do it, and he could very well go the other way. That was my point Friday of 50, 50 odds. I would probably argue they're not exactly 50, 50, but that's somewhat unhelpfully the way, so I won't clarify further.

What you have is a lot of ambiguity and total full discretion. That's the one consistency from Hassett and Besant today, is they both said the president's going to do what he wants to do. So you're not following a playbook, you're not following a policy intentionality, you're following the gut of the president. And there's a bunch of people hearing this right now that say, that sounds great. I trust him, he's going to pull us through it. My point is along the way, you cannot expect markets to gather clarity when that is the stated state of affairs from the president's closest advisors and counselors, that they

don't know exactly what he's going to do. China has a significant hand here. You can say their economy is worse than ours. That's true. They don't have reelections. They don't have legislative branch separation of powers. They don't have a people that are used to a standard of living that is parallel to the United States.

So I'm not sure that we have the better leverage politically, but both countries have economic issue at play. I would argue that if this had been isolated to China and all the complexity has to go into negotiating deals with China and that the entire rest of the world was left out, that friends and foes were not on the same playing field and that those who just simply sell us a lot of things were not on the same playing field with those who tariff us a lot, that markets would be far more clear and comfortable, and that the economy would have much less clarity, therefore less of a hit to capital goods orders and less of a hit to investment plans and hiring

plans, if those things had been separated, parsed out. But we are where we are. And in the meantime, I continue to believe that there's a lot of vulnerability in the tax plan. On one hand, my friends at the Strategist Research are reiterating over and over, they now have to get it done and get it done in May more than ever. And I don't think they're wrong at all. But I also believe that if the president's approval ratings drop, there's less political leverage

with needed votes in a razor thin majority in both the House GOP and Senate GOP. That there is less political arm twisting that can be done if the person doing the arm twisting has less leverage. I would still bet on a tax deal getting done. I'm not willing to bet that it's going to be the deal the market wants, but even the bet that one at all gets done is vulnerable around the political tea leaves right now. We are looking at four cuts, 100 basis points now priced in, 75% odds in the futures market from the Fed. There's a 38% chance now of five interest rate cuts, 1.25% between now and the end of the year.

We were at one cut priced in three months ago, two cuts priced in two months ago, three cuts priced in one month ago, four cuts priced in now, and getting closer to five. That is not happening for good reasons. It's happening as economic projections and forecasts go down. Similar to oil prices hitting $60. It closed about 61 today. Again, on fear of demand deterioration and economic softening. There is not one but two questions answered in the Ask TBG section today, and there's

so many more questions coming in. We're probably going to have two each day this week, and I'll be doing my What's on David's Mind in your daily blurb at least tomorrow, Wednesday. We'll see how each day of this week goes. I want to stay in heavy communication with you, particularly clients. Any questions you have, please reach out. We're well aware of the vulnerability of the moment. We also are adamant that this is no time

to be doing something drastic, that this is a very good time to remember that this is why equity risk premium exists, because you get a better return over time by having to put up with stuff like this. And whether it's trade wars or global pandemics or financial crisis or election uncertainties or terror attacks or natural disasters,

all of these various horrible things that happen and then sometimes get exacerbated with selling be getting selling. All I could tell you is that I'm confident that the path our clients have is the right path. We are actively managing it with wisdom and patience and prudence. And we hope all of you, even if you're not clients of ours, will exercise discipline because that is going to be a far more important element than what happens next in the White

House or what happens next in the White House or what happens next in the NASDAQ, et cetera. Reach out with questions. We'll be staying in touch with you throughout the week and, of course, a very extensive Dividend Cafe on Friday. As always, 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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