The Dividend Cafe - Tariff Threats (LOL?)

Episode Date: July 7, 2025

Today's Post - https://bahnsen.co/45XWcrO Market Reactions and the Impact of New Tax Legislation In this Monday edition of Dividend Cafe, David recaps the past week's market activity, the impact of recent tariff threats, and the passing of the 'One Big Beautiful Bill Act' tax legislation. The DOW, S&P, and Nasdaq experienced volatility, primarily due to trade war-related announcements. Despite recent fluctuations, market internals remain healthy. Discussion includes the contrarian sentiment in investor behavior, and upcoming detailed coverage of the new tax bill. Other topics include economic data such as job numbers and ISM services index, alongside updates on federal student loans and oil exports. 00:00 Introduction and Weekend Recap 00:53 Market Overview and Volatility 03:49 Sentiment and Indicators 05:04 New Tax Bill Insights 07:45 Public Policy and Trade Tariffs 08:47 Economic Data Highlights 11:27 Conclusion and Upcoming Topics 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. I hope you had a wonderful holiday weekend, enjoyed your 4th of July, celebrating our nation's 249th birthday. I hope you had a chance to spend a little time with the Dividing Cafe that came out at the end of the week. An issue dealing with bubbles, not only the history of financial excess, but our current

environment and what to make of it as it pertains to where some think we may be in a bit of a speculative bubble and where I tried to provide a more nuanced view that I think will be useful and practical for investors. Check out the Friday Dividend Cafe if you get a chance. For today's Monday action, as you know, we're going to go through what took place in markets and where we are in the public policy front, some economic data. There's a fair amount to cover there. There's not much on housing this week, but let me just get right into the market action first and foremost, because the Dow had opened down about 100 points. And then in the middle of the day, it went down much further. It made back nearly a couple hundred points in the final hour or so of trading. The Dow closed down a little less than 1%, 420 points. The S&P down a little less than 0.8%. The NASDAQ, like the Dow, down almost about 1%. What had happened in the middle of the day was just enhanced volatility around more threats of tariffs, trade war related issues. The

president sending out via social media a copy of threatening letters he had sent to Japan and South Korea promising 25% tariffs, all the while extending the July 9th deadline that was supposed to be here in just two days, pushing it out to August 1st. So again, markets didn't respond that much unless you think 0.79% is that much after the markets are up 20% in the last few weeks, the last couple months. The markets didn't respond much because I think at this point, markets are aware that we're in the midst of these sort of public negotiations and threats and the notion of a lot of these tariffs ever happening is not something

markets take very seriously for very good reason. You're going to get some announcements and some volatility. It's the nature of the beast and why I would argue paying attention to this stuff day by day is borderline insane. The 10-year bond yield closed up four basis points today at 4.38%. There were a couple sectors that were positive territory in the market. That was utilities, which was just up 17 basis points, and consumer staples, which were up 11 basis points. So again, just a couple defensive sectors were in green ink today, but the worst performing was consumer discretionary down one and a quarter. And again, that would be rather tethered to some of this Japan, South Korea tariff noise. Yeah, the big tech rally that we saw in June had reversed a bit

in the early part of July. But what's interesting is the market internals are still overall pretty solid. You have about 80% of the S&P trading above its 50-day moving average. So you are seeing a little bit of rotation within markets right now, but on a short-term basis nothing really to write home about. Some noise today, some noise last week, but again, constructively speaking, market's still looking quite healthy, both in terms of total price level, but also just their internals. What I mean by that is how broad market returns have proved to be.

Now Peter Bookvar pointed out something this morning in his daily commentary, which I consume daily, that I wanted to share, which is you really had, I think Peter shares a certain contrarian impulse that I have. I go to bed with my contrarian impulse. It's embedded into my psyche as an investor. And I think that you have seen a pretty bearish sentiment, which I consider to be a bullish indicator, hence the word contrarian. A lot of the bearish sentiment has certainly moved more bullish. You right now have the highest spread in the AAII survey between bulls and bears. You have the highest spread there since January.

The manager exposure index is at its highest level since July of last year, so a full year now. And then the CNN fear greed index, which is actually quite a good little indicator despite having the word CNN in it, has seven different indicators it uses to put together an index, and it is basically coming up extreme greed level. So sentiment is extremely bullish right now. We'll see if a few Trump tweets on trade can change some of that. On the new tax bill side, I'm going to devote this Friday's Dividend Cafe to a really extensive

coverage of the One Big Beautiful Bill Act. I think that it's a little weird because the big beautiful bill thing was tongue in cheek language at first, I imagine straight from the president, and it's literally the official name of the legislation, which has now been signed into law as of July 4th by the president. So there's no more talk here in Divin cafe about what the Senate will do or what the House will do. Are they going to send it back or this or that?

It's a done deal. It's signed into law. And so there is a need for me to objectively cover what is good about the bill, to objectively cover what is concerning about the bill, and objectively cover what is just practically relevant about the bill in terms of new tax code and implications to investors. So it's going to require a full Divinity Cafe, and it's going to be a lot of fun, and you're going to love reading it this Friday in the Divinity Cafe. So I'll leave that alone here for today.

Although I'll skip ahead real quick because the question today and asked TBG is someone had said, you know, now that it's passed with the impact of budget deficits, do you think that this is a short-term positive or negative that maybe markets can get past the sort of instability? And what I say was that I don't think there ever really was an instability. Therefore, I don't think there's now a relief of stability. Markets are down 400 points today right after the bill was passed. Who didn't know the bill was being passed last week, but who at any point has not known

that the tax cuts from 2017 were not going to be extended. So it's a point I've been making for months and months, have shared at client dinner events all over the country. There was never a time that markets did not know the Trump tax cuts were going to be extended. Some of the details around all of it were unknown, although increasingly priced in with probabilities to markets over the last several months. But look, the extension of the tax rates for 2017, even though I believed it was always inevitable, is a positive. The lack of interaction with long-term deficit spending levels, the lack of any meaningful

activity to deal with the deficit is a negative. There are certain business aspects, business tax aspects of the bill that are a positive. I'm going to cover all of this in Friday's Divinity Cafe, but I appreciated that question. On the rest of the public policy stuff, the trade tariff deadline for some of these other countries has been extended. My expectation is that the 10% rate you see on some products with UK is in a service of four in most of these country negotiations. And the 20% level you see with Vietnam, we run a trade surplus in the UK, we run a trade deficit in Vietnam, very good reasons for why we do both in both country situations. But all I had to say, I imagine

10 being a four and 20 being a ceiling where countries end up coming to the table, but then that doesn't even capture the fact that there's a significant amount of waivers and exceptions and exemptions and things like that along the way. So with that said, markets took that dive down today on the announcement. It wasn't very much, and then it came back a little from there. And he also had threatened another 10% additional tariff on the BRICS countries if they do anti-American stuff. Not a lot of clarity what that means, but the president does still believe the bark of tariffs is somewhat meaningful.

Finally, just briefly on some of the economic data, the jobs number that came out Friday was really not as strong as the headline looked. 147,000 jobs created in June was above the 106,000 consensus, and the unemployment rate did come down to 4.1%. But most of those gains were in the governmental sector, and that surprises people who thought Doge layoffs were a real thing, but state and local governmental hiring was the big reason. We also had a decline in private sector hours worked, and then the labor participation force

dropped 130,000 jobs on the month, which is the mathematical reason why the unemployment rate went lower, that you had less people looking for a job. So kind of mixed bag in the overall numbers. ISM services, the so-called non-manufacturing index, came back into positive territory. It had dropped into contraction in the month of May. In June, it was barely back in positive. You had pretty good expansion in new orders, but the employment index and supplier deliveries had declined.

So just a modest increase in ISM non-manufacturing. And then I just thought I'd share with you that 45 million people in the United States of America have a federally managed student loan, and 24% of those 45 million are currently delinquent. How much that delinquency is related to hardship and how much is related to that there hasn't been a lot of enforcement around those things, and now there will be, and so there's a sort of incentive to get kind of square, we'll see. But I thought the data was worth sharing.

We're getting very close to pretty much 100% odds of no rate cut in July. We're at a 65% probability implied in the Fed Fund's futures for a September rate cut. We're at a 75% probability that there will either be two cuts by the end of the year. That's at 44% or three cuts, which is at 28%. So combining the two together, nearly 75% of two or three cuts by the end of the year. Oil up 1.5% on the day. The US was a net exporter of petroleum for the 39th month in a row. And I will add that midstream energy, even though it had a positive June, it was up about 2.5% in June, but because of what it was down in

April, it did end up having a negative Q2, a negative quarter, and it had had 11 positive quarters in a row before that. So it just barely missed its 12th positive quarter in a row in the midstream energy space. I'm going to leave it there. I will look forward to seeing you Friday. The Divinity Cafe, a lot of coverage on the One Big Beautiful Bill Act. Reach out with questions anytime. Thanks for listening. Thanks 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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