The Dividend Cafe - Tariff Relief or a Headfake?

Episode Date: March 24, 2025

Today's Post - https://bahnsen.co/421P9e4 Market Movements and Insights from Washington DC - Dividend Cafe Monday Edition In the Monday edition of Dividend Cafe, the host reflects on the five-year anniversary of the 2020 market bottom. He discusses the significant market rally since then, recapping the market's recent performance with the Dow, S&P, and Nasdaq all posting gains. The episode shares insights from the host's recent meetings in Washington DC, providing takeaways on tariff policy, potential conflicts between the Treasury and Commerce Departments, and the focus on making the 2017 Trump tax cuts permanent. Other topics include total shareholder yield, asset allocation trends, and the varying influences on market behaviors. The host also shares a quote on learning from crises and highlights the importance of asset allocation strategy in current market conditions. 00:00 Introduction to Dividend Cafe 00:13 Market Recap and Anniversary Reflection 01:55 Current Market Trends and Insights 03:39 Shareholder Yields and Sector Performance 06:58 Global Asset Allocation and Market Sentiment 10:26 Insights from the Treasury Department 12:41 Tariff Policies and Economic Implications 14:18 Tax Reform and Financial Deregulation 21:10 Federal Reserve Policies and Market Impact 24:06 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. Hello and welcome to the Monday edition of Dividend Cafe. Rainy day here in New York City. Back from Washington, D.C. and excited to get back into this with you because there's been a lot going on. I dedicated the Friday Dividend Cafe to the five-year anniversary of the COVID craziness of March 2020. Today is March 24th. Technically, the market bottom was March 23rd five years ago, but because that was a Sunday this year, we'll you know use today as the five-year

anniversary of when the market bottomed to get into the low 18,000s, which is really surreal to think about that. The drop we had five years ago over that two or three week period was so incredibly quick and violent, but that the recovery has been so incredibly profound. The market was up almost 600 points today. It had started the day at 42,000 and ended the day near 42,600. But five years ago today, we were talking about flirting with 18,000 so 130% move higher from that bottom level in five years. The story of what took place five years ago was Fridays Diving in Cafe.

If you're listening right now and haven't checked out Fridays, I would encourage you to do so. There's some lessons, kind of five key takeaways that I offered from the insanity of what happened five years ago. But for our purposes today in the Monday Dividing Cafe, we're mostly just gonna kind of go through the here and now. And I wanna share a few takeaways from my time at the Treasury Department last week in DC.

In terms of today's market action, we opened up about 200 points and then just sort of steadily went higher from there. It kind of sold off a bit from its high levels in the middle of the day, but the S&P was up 1.76 and the NASDAQ up 2.27. So he had a big risk on rally day, mostly driven by, there were stories yesterday in the Wall Street Journal and Bloomberg that the administration is expected to come in on April 2nd with more targeted tariffs than had been previously believed and president himself today was sort of talking about certain areas that he might get to later, but they're not doing right away.

And so you're going to hear some of my comments in a moment where I think a lot of the action today is very much in line with what I am seeing and forecasting. And not all of it is bullish but all of it is susceptible to these up and down swings. I'm going to share more in a moment. The market had been in a four week losing streak coming into last week and it was up half of a percent last week but was still below the 200-day moving average. I don't know if today's market action took it above its 200-day moving average or not, but the key point being there's a lot of uncertainty, there's big updates, big down days,

and still certainly a meaningful move lower from where things had been. An anecdotal comment that I think you can do with what you please, there's this expression called a total shareholder yield that I'm not a big fan of the expression, but it is intended to combine the dividend yield, which is very measurable, and the buyback yield, which is I think less measurable, into one yield that is intended to measure how much capital is being returned to shareholders as a percentage of the share price. The problem with that is that the buyback yield can't account for the shares that are being bought back merely to

replace shares that had been issued in compensation. So there's a bit of a moving target there. But even if you took the gross amount of dollars spent in dividends and share buybacks, combine them together, you still have technology and consumer discretionary total buyback, your total shareholder yield of only 2.3% and over half of that is somewhat, shall we say, unreliable. The sector with the highest total shareholder yield is energy at a 7.4%. So I continue to believe that capital return to shareholders is best measured via dividends, but nevertheless, even various modestly flawed attempts to measure the impact of capital return

via buybacks still speak to a very paltry return of capital to shareholders in consumer discretionary and technology. The 10-year bond yield today closed at 4.34%. You had quite a sell-off in bonds with the yield jumping eight basis points, close to nine basis points on the day. The top performing sector was consumer discretionary. It was up over 4% on the day. And then utilities were flat. And so 10 out of 11 sectors were positive.

I believe the 10th out of 11 best performing was consumer staples, which was up 66 basis points. So not only were all 10 up, but they were up quite a bit, but utilities facing the downward pressure, probably in line with the sort of bond proxy. There's a chart at dividendcafe.com today that I think is very useful, but I use it to point out a figure of speech, a line summary, a maxim, if you will, that I think is very effective. I had forgotten the line, but all bear markets start with a correction. Not all corrections turn into bear markets. And then there's a list of all of these

different downticks in the S&P over time and you can see that a bunch of them got to the 20% plus level on the downside. Let's call it roughly 10 of them and then there's another 20 or so that didn't and you can take that as you wish and it shows where today's correction stands in the relative measure. It's a good visual chart. I encourage you to look at it, DividendCafe.com. I think an increasingly important question for investors is whether or not the global bias towards US-based assets is indeed coming to an end.

It has been a very strong trend for a long time, dollar-based assets, since the financial crisis, more or less. And valuations, earnings growth, multiple expansion, not to mention just sentiment characteristics have all favored American assets over international assets, particularly European, but also Asian emerging. China's stock market is crushing the US this year, and Europe's is outperforming in a way that it hasn't seen that kind of a bid for quite some time. Now, is this a pump fake? Is this a paradigmatic shift? There has been a lot of moments on the way where people said, okay, this is the time that now Europe is going to revert to the mean relative to US and it

hasn't happened. And that kind of indication and inability to deliver has taken place quite a bit over the last 15 years. Are global asset allocators now re-Europeanizing their portfolios? If they are, I would suggest the American unwind is not over. But if this premature call is yet just another one here, then we shall see. Contrarianism, excessive bearishness would be just as much a contrarian call as I believe excessive bullishness is. And right now, do we see this sort of absolute purging of euphoria and ridding of all such optimism where there are just no dip buyers and you are really looking at an excessive amount of bearishness that you could argue is a good contrarian call. No, not everyone is bearish. The everyone is bearish moment

is indeed a very contrarian dynamic that I love. But in this case, I don't think you could argue that there's imminent reversal on sentiment alone. There's dip buying all over the place and we'll see how much of it lasts and where this goes. These things are difficult, but I do not think you see a washout in markets and so we'll let that play out. Finally, on markets, the most positive thing I could say as an asset allocator is that asset allocation

is performing like asset allocation, that there is a lot of non-correlated asset classes behaving differently than equities. You do not have a peer risk on risk off environment. Unlike many moments of the last several years, I've talked about over and over again here in the dividend cafe, stocks and bonds are not behaving with a high positive correlation. In fact, they become quite negatively correlated, which is much, much healthier for asset allocation. And so the strong reverse correlation, I think, is preferred. Bonds have done their job. A day like today, stocks were up a lot, bonds were down. We've had mostly days like that,

a lot of them in the opposite direction of each respective asset class. My point being that is really why people ask to allocate, to not have everything correlated together on one side of the boat. And that has been a worthwhile, healthy dynamic in this recent market, stock market sell off. So when I talk about my time in DC last week, understand there are some things

and specifics I can't necessarily get into and certain things that would be inappropriate for me too, but the reason I do the meetings is to get information, some of it to drive our own macro view and some of it to be able to share with clients where it is appropriate, where I have permission. And look, my comments on Secretary Besson are that I consider him, I hold him in very high regard. And I don't necessarily agree with everything he has said publicly over the last few weeks, but I don't envy the position that he's in.

And I'm respectful of the fact that there is an agenda a Treasury Secretary ought to have. There is leadership he has to exert. And there is a deference to his boss, all the while attempting to move the policy framework in the direction you believe is best, and yet also serving at the pleasure of the President and his agenda. And if you get to a point where the President and his agenda are not something you can be comfortable with, then it's your job to consider stepping away. But I believe that Secretary Besant is trying to thread a needle. Okay, that's my own view and I have reasons I believe that. And I don't think I could do it. I don't believe that. And I don't think I can do it. I don't believe that I possess the diplomacy or tact, or some could say gamesmanship, necessary

to kind of do both these things at once. And also I think too that my own views on some of these things and my views as I would articulate them, if I worked for President Trump, would likely mean I wouldn't be welcomed in that position, and that's okay. But my point being, I respect the secretary and definitely detect his respect for his boss and that agenda, but all the while see a lot of this in the context of a tightrope he's walking. And so I want to share a couple of my takeaways. And I

will probably end up needing to write more in the dividend cafe this Friday because there's a lot more to be said and I expect more coming out here this week. Here's my first takeaway I'm going to share. I'm going to do these as quickly as I can. Number one, I don't think there's clarity in markets, in the media, in the public about tariff policy and what is coming in tariff policy on April 2nd, because I do not believe that there's clarity in the administration around tariff policy or clarity in the administration about what they're going to do April 2nd. And that was very abundant to me in my conversations last week. Number two, I do believe that they're doing a good job keeping this out of the public eye, but I think there is a bit of dissent or conflict between the Commerce

Department and the Treasury Department. I don't think it's out of control. I think there's a functional working relationship, but I think the optics communications and to some degree the ideological approach is different. And you could argue there's some of the NEC, National Economic Council, Treasury Department, and then the Commerce Department, where Secretary Howard Lutnick and US Trade Representative James Ingalls reside. And I don't think that's fully understood in the public eye that this conflict exists. I feel comfortable sharing that that's my view. And yet I don't

have a perspective on how it all gets settled and how it gets reconciled or resolved if it gets reconciled or resolved. But I will say that the Commerce Department is driving the specifics of April 2nd. And so if those particular trade deals and policies are under the portfolio of Commerce and not Treasury, I would view that with a negative bias. Okay. Number three, the Secretary has a far bigger priority on making permanent the 2017 Trump tax cuts, the TCGA bill, than I previously believed or understood. I came away last week very impressed with the intensity they have for prioritizing it and the recognition, as I've written about time and time again in Diving Cafe, of how

difficult it's going to be legislatively, reconciling it to a difficult budget process, and maintaining both House majority support and Senate majority support. I do not know that they'll be successful. I do not know that they will fail. I know it is complex and challenging, but I do not doubt the intensity and focus that particularly Secretary Besson has here and whether or not this can get done in a timely manner, I'm more optimistic than I've been that they will get this done. I do not believe getting it done in November and getting it done in April or May are the same thing. So if it does fall to later in the year that there's

going to be some issues there as I've talked about, but that was probably the most encouraging part of my meetings, is the laser focus that the Secretary has on extending the Trump tax cuts. If I were a betting man, I would say the following two things about where we go from here. This is my fourth and final point. Subpoint A to point four. The biggest thing I can see where all this is going is that on April 3rd, I don't think there'll be a lot more clarity than where we were on April 1. I think where we're going is a place of high presidential discretion.

What sectors, what companies, what rates, what countries, what tariffs on, again, off again, there's a certain chaos, putting it more pejoratively, a certain discretion, putting it more diplomatically, that I think is going to be the likely outcome. And I don't think that's necessarily the same as clarity and policy cohesion. Number two, I do not believe that markets have moved enough yet to alter the president's approach to this,

but I do believe there's a point at which markets could move enough that the president would move because the president moving does not require a mea culpa, does not require an admission of wrongdoing. It simply requires an off ramp. And he may be one of the best I've ever seen at finding an off-ramp, finding a way to claim victory. So let's just say that market alteration is 20% and we're now less than 10% in terms of that correction. It may very well be that regardless of what pivot takes place, a recession could happen. Even if the president pivots, even if he finds an

off-ramp, a 20% bear market could lead to a self-fulfilling prophecy. So I do not believe that the president is willing to let the bottom fall out of the market. I do believe that there's a point at which he would pivot. I also do not believe that point has been reached yet. So reciprocity, cheating, these are the things I'm gonna cover in the Friday Diving Cafe. Are we looking, what does it mean that we're looking for reciprocal tariffs, fairness?

Let's just try to unpack where things stand and I'll share my view more on some of this on Friday in the Dinity Cafe. Until the announcements more, let's say the last 28 hours of more targeted tariffs in the mix and again no one has the exact you know working document the Secretary Lutnick is working off of, the strategist research was estimating that the cost of the tariffs set to go into fact April 2nd would be $233 billion, which is 0.7% of GDP. However, that very surely came down in the last 24 hours based on some of the backtracking

administration has done. All right. There's a lot that you can look at at DivingCafe.com. There's a little more elaboration on some of these bullets there. I do think the theme of financial deregulation that we've had all year continues to be a big one. I think that there is more coordination going on between the Fed and Treasury and other regulators to create a less adversarial regulatory apparatus. Deregulation is a tailwind for the sector, but also for M&A. And I think financial transactions

dropped 40% in the Biden administration, largely on an increased regulatory apparatus. I believe that the secretaries call for more coordination around the and just a more collaborative approach to regulation indicates that this is still an agenda for the administration. Finally, you have to understand on the tax reform piece how important this thing called policy baseline is. Right now some of the key stakeholders in this process are meeting with the Senate parliamentarian to get a feel for what is going to be on the table in the budget reconciliation process. What does it mean if you assume the current policy, okay, where these

Trump tax cuts, the taxes have not come back. And so that's the policy baseline from which you're doing additional tax work and budget work. That is a much more benign outcome in terms of your suggested deficit impact than if you assume all of the Trump tax cuts come back and then you take them back again. That's trillions of dollars that have to factor into the way the reconciliation process would work. It's a big unknown how this will play out. But from a, and I know this gets a little wonky, but from a parliamentarian standpoint, that specific factor is maybe one of the biggest factors we face in what the bandwidth for future tax cuts and tax reform is going to be this year. I have a chart at Diven Cafe showing how inflation expectations had been very high for

Republicans and had been much lower for Democrats. And then since the new administration came in, Republicans forward inflation expectations have collapsed and Democrats inflation expectations have gone higher. There's a very teeny tiny part of this that is somewhat rational on the way people in their own partisan hats might expect tariffs to be an impact, but the vast majority of it is probably not tariff analytics as much as just rank partisanship, both before and after. And I find it all embarrassing. So we know the Fed last week announced that the quantitative tightening of

their balance sheet was going from 25 billion a month in treasuries down to 5 billion. I predicted it goes away altogether this year. And I think holding onto 5 billion a month on a, you know, almost $7 trillion balance sheet is a way for the Fed to just keep me from being perfectly correct in that forecast. I'm just almost perfectly correct so far, but you know, in the meantime, their mortgage-backed securities that were being reduced via roll-off, they say they're keeping that $35 billion a month cap, but they've only been're keeping that $35 billion a month cap,

but they've only been rolling off about $15 billion a month or so. So look, they have $2.7 trillion of mortgage-backed securities on their balance sheet. Had they been rolling off the full amount of their cap since quantitative tightening began, it'd be down to $1.6 trillion. began, it'd be down to 1.6 trillion. So they've only reduced 500 billion, but they would have reduced 1.5 trillion. So the difference between what market conditions are letting the Fed tighten and what is actually their intent in tightening or stated intent are very different. Right now we're at a 72% probability for a rate cut in June. We're at a 55% probability of three rate cuts by December, but we're at an 85%

probability of two rate cuts by December. So we're still in a two to three, much less so three to four now. So that has moved again in terms of rate expectations. All right, oil up 1.4% today. Note that the S&P was up half a percent last week, but midstream energy was up 2.5%. The spread between midstream energy and the S&P coming into today was 10% on the year. And then we've added to dividendcafe.com Monday, a glossary,

where I'm gonna start trying to use every Monday to add one investment term, one expression, phrase, word that I use a lot that I might take for granted. People know what it is and I'm gonna try to define it. Today it is roll off, which is this word for when the Fed is tightening, what it means is they have bonds that they're letting mature. When they just want to keep the liquidity the same in the financial system, they reinvest

it. A bond matures, they get cash, they immediately turn around and buy another bond. Fed's balance sheet hasn't moved, the cash at bank reserves hasn't moved. Roll-off means they let the bond mature, Fed gets cash, the banking system has less cash, the Fed's balance sheet goes down. Now the roll-off is a passive way of tightening. If you want more unpacking of what tightening and easing and all that means, that's fine, but I want to explain what the term roll-off means to get there. So I hope that's helpful. All right, that's fine. But I wanted to explain what the term roll off means to get there. So hope that's helpful.

All right, there's a wonderful question and ask TBG about tariffs. And so at DivenCafe.com, you can see the question. And then finally, I just want to read, I got an awful lot of feedback on the Friday Diven Cafe. And one who is a friend of mine and became a friend and someone I knew, we traded a friend of mine and became a friend and someone I knew. We traded a lot of information together back during the COVID days had emailed.

And I wanted to read you what he had said. Both COVID and the financial crisis were extended periods of learning about the mechanics of how the world really works by watching what happens when it stops working. really works by watching what happens when it stops working. And his follow-up note, I wouldn't wish for a similar situation, but I have to admit they were among the most dense periods of learning for me. And I think this is a really important thing, and it tags on a little bit to what I said on Friday in the Diven Cafe.

Two of the most difficult experiences in my life, the financial crisis and COVID, were absolutely two of the most educational and informative. And there's always a bright side. So I hope that is interesting for you to reflect on. Appreciate my friend sharing it with me. I'm going to leave it there. Thank you as always for listening, watching and reading the Dividend Cafe on this rainy Monday. I look going to leave it there. Thank you as always for listening, watching, and reading The Dividend Cafe on this rainy Monday. I look forward to being with you throughout the week. And I will be in New York all week until I head back to California.

At the very end of the week, I'll be in our Newport Beach office for almost two weeks starting this coming Friday. Thanks again, and thank you for being a part of The Dividend Cafe. 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.

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