The Dividend Cafe - Thursday - April 10, 2025

Episode Date: April 10, 2025

Market Volatility and Trade Tensions: April 10 Edition of Dividend Cafe In the April 10th episode of Dividend Cafe, Brian Szytel discusses the market's volatility following a historic rally and subsequent downturn driven by increased US tariffs on China. Topics include fluctuating VIX levels, deflation in CPI, positive movement on tax bills, rising bond yields, and widening high yield credit spreads. Szytel also addresses key questions regarding the impact of tariffs on the Chinese yuan, recession indicators, and the importance of sticking to long-term investment strategies despite market turbulence. 00:00 Introduction and Market Recap 00:24 Impact of Tariffs on US-China Trade 00:37 Volatility and Economic Indicators 02:01 Bond Market and Credit Spreads 02:57 Recession Concerns and Jobless Claims 03:44 US-China Trade Imbalance 06:09 Investment Strategy and Long-Term Planning 08:09 Conclusion and Upcoming Content 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. Welcome to Dividend Cafe. This is Thursday, April the 10th, Brian Zietel with you here on a give back day from yesterday's historic rally where the Dow is almost up 3000 points. We did give some of that back today and largely around an enhancement of a tariff amount the US is going to attribute to China instead of 125 going to 145%. So that is ongoing.

There's a 90 day pause on all the other countries to negotiate and to get to a final trade deal. But the China-US relation, at least on trade, continues to deteriorate. So that caused some more volatility. Yesterday we had the VIX go from 57 down to 35. Today we were all the way back up to 47. So volatility is still here. And it will be, frankly.

This isn't behind us yet. And keep in mind, today's economic numbers on both inflation, CPI actually deflated versus again a 0.1. It was down 1 tenth of a percent. So that was good inflation data and we also had some positive movement in the house. These things need to get worked out but there was some positive movement in the house around a potential tax bill and reconciliation and getting that process going to hopefully offset

or to sterilize some of the impact of tariffs, which is essentially a very large tax increase on the American consumer. All that to say markets were down. We gave up another thousand points on the Dow. So if we were up, call it three yesterday, we lost one today. So we're still higher. And I still think that Trump put was put back on the table as it exists. And I was asked about that on CNBC actually, not too long ago.

I did think there's a threshold in which that administration will give at least to some degree, a softer tone, openness to negotiate more readily, things like that. And I think that's what you saw yesterday. So the fact that markets sold off again today, the action that lasts two days. It's hard for me to call it positive. Okay. all yesterday. So the fact that markets sold off again today, the action, the last two days. It's hard for me to call it positive. Okay. I think it's a shame that it's so volatile based on headlines essentially. But the fact that we didn't give it all back, I suppose is encouraging.

You did get yields up on the day, but we used to call the bond vigilantes that would come out and sell along into the curve. They appear to be back the 10 year his rising here. So it got down to just under 4%. We're now They appear to be back. The 10-year is rising here. So it got down to just under 4%. We're now back up to 441 on 10s. That's a rise of 10 bips. So that's a decent move higher. You also have high-yield credit spreads blowing back out too. This was at the high of the equity market on February 19th. So equities were at all-time highs. Call it 6,000 plus on the S&P. That was almost 20% ago.

But credit spreads then were about 260 basis points. They're now up to 480. And I was saying this all along that once you start seeing those spreads, last time I wrote about it, there were something like 60 basis points. We're now 200 basis points. So this is what happens. You get real stress start to get priced in the system. Credits spreads are a sign of potential default for high yield borrowers.

That's what happens during recessions. There was a jobless claims number today that was right in line at 223,000. I will say this. Recessions don't print jobless claims of 220,000. They print jobless claims of 370,000. So as far as being in recession now, I'd say no, as far as this becoming a self-fulfilling prophecy and turning into one, I think that we've got about 30 to 60 days, it's a short period of time.

We need resolution on trade one way or the other, and we need something that gets through Congress on the tax front to extend permanently, hopefully the tax cuts that were originally put in. It potentially provides some other benefits. He's talked about no tax on tips and some other benefits like raising the salt deduction and things, but those are the two, two factors at hand. And largely trade is really the big one. Question today was about why the Yuan, which is the Chinese currency,

moved lower as a result of tariffs in the U.S. The Chinese economy is based on exports. So that's how it runs. That's the fuel that drives it. The United States is its largest trading partner by far, meaning by double. All 16% of total exports out of China are sold to the U.S. We buy a lot of widgets from China. We actually buy less than we used to,

but it equates to something close to $450 billion a year. In turn, they buy about $145 billion of stuff from us. So they buy our less expensive and more expensive widgets and things like you would guess it and electric cars and technology and all that kind of stuff. So there's a big trade imbalance there. And the goal of this exercise, try to write that and to change it. The tactics being used and the strategy is debatable, but that's the goal. In the process of the US increasing tariffs, that's essentially increasing the costs of

Chinese widgets in the US. So technically we would buy less because they're less competitive. And that's why the yuan was lower because technically that means lower growth. It means lower inflation. It means lower interest rates. It means more stimulus in China to offset the dampening economic effect. So you get a depreciating currency.

But more than that in China, and this has been the case for 20, 30 years, the central banking government in China is intentionally manipulating its currency just to always be a little weaker than the dollar or otherwise it would have appreciated because all of those things are related. You have a higher cost structure with tariffs in the US, so we're going to buy less, but then you have a yuan that depreciates magically by the same amount as the tariffs are. And then of course, the price of those widgets is the same and we're all on Amazon buying them nonetheless.

So that's the back and forth that we're dealing with. Those are the two factors. It's definitely a currency play in China too. And I suspect the road to the Yuan is lower, not higher. I can write a whole book about what I think that means for Chinese equities and things, and it's actually not all negative, but that aside, that's where we're at. The other question in there was actually to David. The first one was mine.

He's reiterating something similar to what I said earlier, which is that we will find out some point in this year if we have entered a recession. Likely yes, just because the conviction level of something actually happening with certainty on trade in the next 30 to 60 days is pretty low. So I think we know you should be prepared for it, but just keep this in mind, and this is me talking, not David writing the answer, that equities will bottom before that. I included an important picture of a chart. For perspective, it's important to me that people know this. It's not just lip service. When we talk about sticking to a long-term plan, sticking to your asset allocation, understanding that day-to-day movements cannot be timed. If you look at the 50 best trading days in the last 30 years, the 50 best, half of them happened during bear markets,

meaning likely recessions and drawdowns in markets of 20% or more. Bear market rallies you just can't miss them. If you miss them, you miss the top 10, your returns drop by 54% over time. So you give up half your total return. So if you're thinking S&P will give you 10, you've just went to five, just by missing 10 days out of 30 years. If you missed the top 20, it drops by 73%. And then the top 30 drops by 83%.

So basically you get to a cash type of return. And in that environment, you're not keeping up with inflation. Your financial goals are not met over time. And the dream is off the table. So this is what we call equity risk premium. You can't have it both ways. And I know it sounds crazy, but down days that are nuts are the norm.

That's what we need to get an outsized return on the positive side, too. You can't have it just a one-way street. That's probably a tough pull to swallow. But as much as you can celebrate the down-craziness with that perspective, I think you should. And it helps you, I think, remove anxiety, and I think it helps you make proper decisions, which is add to the portfolio when it's down. It may not feel easy, but sometimes you just have to hold your nose and do the right thing.

I personally don't view this as that bad here in this market. I've been through a lot of these things. Doesn't mean it won't become that, but a 20% drawdown is exactly what I'm just saying. You've got to be in the game. You can't time it. And yesterday the market was up 8% on the S&P and 12% on the NASDAQ. That's one of those best days out of the next 30 years. So there you have it.

I hope it's helpful. It's Thursdays. That means Friday, we're going to have a very nice long dividend cafe in your inbox. David's been writing that all day today, and I know finishing it tomorrow. So that'll be enjoyable for you to read over the weekend. Reach out with your questions. We're getting a ton of them and they're so good. So keep doing it and we appreciate it. With that, I'll let you go. Have a good evening. Thank you. The Bonson Group is a group of investment professionals

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