The Dividend Cafe - Tuesday - August 12, 2025

Starting point is 00:00:00 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 Tuesday, August the 12th. Brian Sightel with you here from our Newport Beach, California, TBG HQ, on a nice rally day overall in markets, actually, and one that we haven't seen here in a little while. The market was up over 1%. The Dow, closed up, 483 points on the day. S&P was up 1.1%. Nasdaq was up 1.3, almost 1.4%. So a big move higher across the board in stocks. Small caps, by the way, were up the most. And they're the most interest rate sensitive, if that alludes to the reason as to why equities were all up today. But small caps were up almost 2.5% on the day. Good move higher there across the Russell 2000. 10-year yields didn't move much on an inflation day, which is a good sign. You had yields on tens up a basis point, closed at 429. Call it a good day in markets. That's what I would chalk it up to. The reason is we had a fresh read on CPI.

Starting point is 00:01:11 We got an in-line figure pretty much across the bore. Headline was up 0.2% for the month of July, which was exactly what was expected, although year-over-year was at 2.7% and there was a 2.8% priced in. So the year-over-year number came down a little bit on headline. If you move out food and energy from it, we got a 0.3% for the month and puts us at a 3.1% year-over-year, which technically was basically in line. It was actually on the year-over-year number a little higher by about a 10th. This is the reason markets were up. It had nothing to do really with the fact that inflation was largely unchanged. It had everything to do with the green light that has now been given to the Federal Reserve

Starting point is 00:01:53 to now start lowering interest rates because inflation, the delta on it is no longer, it's not a positive. It's not moving higher anymore. It's marginally staying the same or moving lower. And so that gives them the opportunity to, with a weakening labor market, which is what we saw two weeks ago in the non-farm payroll report gives them the opportunity to now lower interest rates. So odds of a rate cut went from about 85% chance to 91% for a September rate cut. Remember, there's a Jackson Hole symposium that Powell will speak at in 10 days. And I believe he'll actually put something more formal in the statement, in the words, as to them starting off on their path to lower interest rates. But we'll have to see about that. But either way, if inflation is going to

Starting point is 00:02:37 end up averaging somewhere in the two and a half range over the next 12 months, I believe Fed funds can get somewhere near 1% over inflation, which would be a real rate of about 1%. And that would put Fed funds at 3.5, which is a lower rate of about 75 to 100 basis points. That's my take on where they're going to go with interest rates. The next non-farm payroll report, by the way, just keep in mind, isn't until September the 5th. And so that's really going to be the most anticipated report now at this point. CPI is out of the way. We earnings are now out of the way. So the next big deal is that employment report that is still a few weeks away. So all things being equal, I'd say risk assets are in an okay spot until then. There was a question in there.

Starting point is 00:03:18 today about the odds of the recession being much less than they were in April, about half as much. That's true. The odds were in the 60% range now. They're less than 20%. So it's even more dramatic than less than half. But the question was around, where did I get that information? Is it Polly Market, which is a prediction slash betting slash odds calculating site? And actually, yes, in this case, that was one of them. I get a lot of this stuff from four or five, six different sources as far as what is read behind the scenes. But when you think about just odds of something, it's very straightforward, less qualitative, more quantitative, in other words. Still, the New York Fed itself is a good recession. They have their own model. That's a good one to look at. FACSET

Starting point is 00:04:00 is the tool that we use at TBG for all of our stock quotations and a lot of the research. Obviously, WSJ is good. It's Tartigis. So all of those things are viable resources. Polymarket from an odds perspective, I think, is a pretty good one. They've got about a 90% accurate. rate. And so that's one of the sources that is used for something like recession odds over the next 12 months for whatever it's worth. I think probably most people actually don't care. But this person does, and I think it's a good question. So I appreciate that person asking it. Last thing on the economic calendar on the day, there was a small business optimism survey that was a little better than expected. We'll take it. The print was 100. We were expecting

Starting point is 00:04:37 99. Those numbers are arbitrary. Just for context, remember, the 58 year average is about 98. So marginally more optimistic is what I would describe the small business sector. So there you have it. That's my Around the Horn for today on Tuesday. I'll be back with you tomorrow, which is Wednesday from Newport Beach. I'm here all week on meetings. Reach out with questions, as always. And if I don't speak to you, have a good night.

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The Dividend Cafe - Tuesday - August 12, 2025

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