The Dividend Cafe - Thursday - July 24, 2025

Episode Date: July 24, 2025

Market Insights: July 24th Edition In this episode of Dividend Cafe, Brian Szytel reports from New York to West Palm Beach, Florida on a mixed day in the financial markets. The DOW was down, while the NASDAQ saw slight gains. The key discussion points include the volatility index hitting low levels akin to pre-February 2020 peaks, signaling a bullish sentiment. Positive trade rhetoric, declining interest rates, and strong US economic resilience are painted as reasons for the market's favorable outlook. Additionally, the episode dives into the Japanese and European market disparities linked to demographic and economic factors. The municipal bond market is analyzed with insights provided on its recent performance and future potential. The episode concludes with updates on economic indicators such as the flash PMI and initial jobless claims, highlighting improvements and ongoing challenges in various sectors. 00:00 Introduction and Market Overview 00:14 Equity Market Performance 00:40 Volatility and Market Sentiment 01:38 International Market Insights 03:08 Municipal Bond Market Analysis 07:05 Economic Indicators 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. Welcome back to Dividend Cafe. This is Thursday, July the 24th. Brian Sightel is down here from New York in West Palm Beach, Florida, office of TBG. On a mixed day, although more to the upside than otherwise. The Dow was negative. The Dow was down about 316 points, which is about 7 tenths of a percent.

S&P was essentially flat. NASDAQ was up, oh, about 0.18 percent. That puts the year to date numbers, by the way, on the Dow, a little over 5 percent. S&P a little over 8 percent%, NASDAQ a little over 9%. So markets have crept back higher. One of my comments in there is about the volatility index, which is the VIX, is back down in the 14 level, which I know is an arbitrary number for most listeners, but just relatively speaking, this is about where markets peaked back in February. So you get that low kind of volatility,

that fear index that comes down as markets tend to do better. As that happens, you get sentiment ultimately that starts to shift back towards more bulls than bears. And that's what we're starting to see here. So this thing's getting fairly priced in for positive upside doesn't mean it can't go higher. Just means that most people are starting to expect that at this point.

So you get more people on one side of a trade at some point that'll end. For now, the bias, as I've mentioned, is more to the upside in risk assets. The reason for that is positive rhetoric on trade. You still have a declining interest rate environment. You still have positive earnings that are coming out. And you still have overall just US economic resilience in there as well. We had another move higher in the Nikkei, which is the Japanese stock index

that was following yesterday's big move higher after the trade deal between the U.S. and Japan was announced and tariff rates and so on. I say that because there's follow through in the second day of movement. And even with those moves, as I mentioned, we're still at a discount here of about 35% from the S&P 500.

That's historically an all time high, more or less. And my comment in there is that I could probably paint a similar picture to what we see in the EU as well. There's also a big demographic reason with the declining population growth, a less diversified economy, and then just lower GDP numbers overall to back some of those equity returns.

I know in the podcast, I mentioned some of those things very briefly yesterday, but I just wanted to write them in there and be a little more specific with some numbers in there as well. For 2024, to put it in perspective, Japanese GDP was just 0.2% with the US at 2.8% respectively. So some pretty big difference behind those numbers. I think short term to most, what's a popular topic these days is there be this sort of recovery in international developed equities. I think those discounts can narrow because I think they're pretty wide.

So yes, short term, long term, you ultimately would rather be in an environment where fundamentals are more attuned to a higher growth rate of earnings. And I believe that will still be in the U.S. for the foreseeable future. That's longer term anyways. QSF was about the municipal bond market. A lot of clients own this. A lot of readers own this. It's a huge retail investment for tax exempt income for conservative investors.

Most, if not all people that own them for any period of time are down on them on a price appreciation standpoint just because of the total doozy that 2022 was. The bond market was down over 14% that year. So most people that held anything with a maturity date during that period of time have lower prices. They probably are still positive on a rate of return standpoint over that period of time because of all the income earned,

but they're still sitting on unrealized losses. The question was about will there be price recovery in the meeting market? Is it still a good investment today? The answer is yes, it's still a good investment. Historically, I could even paint a quite a positive picture for it. If you look at an A rated 20 year GEO bond with a 5% coupon, it's trading right around par, give or take, which at a 5% tax-free interest rate for a high tax bracket client or person, and specifically a high tax state, for example, California, you have an after-tax equivalent yield of something in the 8% range, which isn't that far from an equity price rate of return.

So yes, it's attractive. Yes, it's more conservative. It doesn't mean risk-free, but a default rate on a high-grade muni like that is less than 131% historically, so it's very low. I would even paint a positive picture in the high-yield muni space, and just remember that includes things like non-rated bonds. These are often, sometimes, munis that were issued out of development projects in municipalities that didn't want to pay for the rating as they did them. So think of like a housing development in a new area of a state.

They need to build sewers and schools and parks and such. They issue debt to do that. Those things can still be attractive. That high yield space, you have even higher yields and still very low default rates when you compare them to high yield corporate bonds for a fraction of the default risk as the high-yield corporate market in that space. And you can get yields in the high fives to low sixes. And on a taxable equivalent yield, you're pretty much at equity returns at that point. If you look at a relative pricing mechanism, which is munis priced to treasuries, longer-end munis are trading at 93%, meaning you're getting almost 93% of the total gross yield knowing that it's completely tax exempt.

That's pretty attractive paradigm. But what happened is over COVID, you had federal aid come into state coffers thinking there would be this big economic malaise and income would be lower in these states and that they needed to have federal subsidies. They got them and of course the economy recovered right away and this V-shaped recovery.

Property values not just recovered, but doubled from where they were. And so tax revenues from property taxes skyrocketed. And a lot of those state coffers are really stronger than they've ever been. There's still states that are mismanaged. California historically has been one, but particularly states like New Jersey and Illinois are a different story running big deficits. But for the most part, the credit quality behind the liabilities of these minis has never been stronger.

That's a good thing for an investor standpoint. On the price recovery standpoint, my comment is with the doozy that 22 was, I would not expect prices to just go back to where they were when interest rates went all the way from zero to five percent in a year. That's not going to happen again. Or it's not likely to happen again. So I would keep that part realistic.

And so far as an individual investor has gains that are recognized in a portfolio, there's definitely something to be said about harvesting losses, offsetting gains, repositioning those things into other communities in the short term and having the same sort of upside to it. That would be more of a tax planning strategy, very specific to individual people's goals and needs on that front. So there you go, a little long-winded of an answer, but obviously a topic I know a lot about.

On the economic calendar today, you had a flash PMI number for July that beat consensus. Services were better than expected, manufacturing was weaker. That's a theme that we've seen now for about a year and a half. On the initial jobless claims number, you had a beat. We're at 217 now for the week, 217,000. That's the lowest number that we've seen since April, which is a positive thing obviously for employment. And then new home sales for June were less than expected.

We're at 627. We thought it would be somewhere in the 650s. Again, housing remains stuck and basically anemic. Tomorrow, like I said, will be Friday and we'll have some durable goods orders that we can go through. You'll have a longer form dividend cafe in your inbox. But with that, I shall let you go for this evening. I wish everybody listening a lovely night and I hope to hear from you soon. Have a good evening.

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