The Dividend Cafe - Tuesday - March 4, 2025

Episode Date: March 4, 2025

Understanding Market Reactions: March 4th Recap and Insights In this episode of Dividend Cafe, host Brian Szytel provides a detailed recap of the market performance on March 4th, highlighting significant drops in the Dow and S&P, with the Nasdaq faring slightly better. Szytel attributes the market movements to factors such as tariffs, interest rates, and growth expectations, noting a meaningful drop in interest rates and implications for future Fed rate adjustments. He discusses the potential impact on the housing market and the rotation from growth to value investing. Szytel also touches on upcoming economic data releases and promises a deeper dive into the implications of new tariffs in an upcoming write-up. The episode concludes with a brief mention of the day's sparse economic calendar and encourages listeners to send in their questions. 00:00 Introduction and Market Overview 00:45 Factors Driving the Market 00:51 Interest Rates and Economic Outlook 02:50 Recession Concerns and Market Sentiment 03:03 Housing Market and Price Discovery 04:04 Inflation, Tariffs, and Bond Yields 05:44 Upcoming Economic Data 06:15 Conclusion and Viewer Engagement 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 Tuesday, March 4th. And Brian Seitel with you here at West Palm Beach. On a day that closed lower, although quite a bit off of the lows for the day, but it was still an ugly day. The Dow was down 670 points. S&P was down almost 1.25%. It's a big drawdown. Nasdaq was the upper former technically, which has been the opposite of what we've seen lately, which was only down about a third of a percent. So we started off the day actually positive and lost momentum

and it ended up closing lower. We made a run at positive territory by basically about 30 or 40 minutes before the close and then just fell off into the end. And a lot of this has to do with tariffs. It has to do with interest rates. It has to do with growth. I think those three factors right now are what's driving markets the most. Interest rates have come way down.

Two year was below 4% meaningfully. Ten year is at four and a quarter. So we're off quite a bit. And the Fed expectations, just so you know, have started to move up as far as more rate increases for the year of 2025. So blessing in disguise potentially, at least on that front with interest rates, if that's something that you're paying attention to. But just remember, if they're decreasing interest rates more, it's because they see lower growth

and they're going to try to make policy more accommodative. So that is definitely not a good thing. We're trying to get to, in my view, something around a 2 to 2.5% inflation rate and something around 3.5% to call it 4, say 3.5% roughly, Fed funds rate. That would be a good terminal rate, which puts it at a 1% real rate, meaning 1% above inflation. If inflation is 2.5% and we're at 3.5%. So that's ultimately where I think markets want it to go. And the question is just whether earnings can hold in there and the economy can hold in there and whatever goes through on monetary policy with the new administration

is additive and accreted to the economy rather than against it. And so all these factors are being baked in right now. For the year, we're only off of the highs, about 6%. So this isn't really that big of a drawdown at all, is the other part I would say. We have had some high yield bond spread widening, but to talk about a 40 basis points blowout, quote unquote, jokingly, on high yield spreads where we're at a total whopping of 288 wide over treasuries. That's nothing. Anything closer to say 450 basis points over treasuries might be attractive for a pound

the table, start buying high yield or something real sinister in the economy is going on. But that's not at all where we're at. So are we in recession? Not by any of these metrics, absolutely not. I think growth is slowing down and we're seeing that, yes. Interest rate expectations for cuts are coming because of that, so on and so forth. So there you have it.

Part of the interest rate paradigm, by the way, what will be interesting to see, and this is a big part of the economy, is if we start to unfreeze the housing market. I think it will be tough if we're really talking about a six handle on mortgage rates to really have it move the needle. But I think if you get into the low fives and certainly in the high fours, you could start to see some activity pick up there and people start to move and some transactions

actually happen. And in that environment, I suspect that you'll get some price discovery at some slightly lower price levels than what you're seeing today on whatever you think your house is worth or whatever Zillow thinks it's worth. The rotation from growth to value has been real in 2025, but it'll be interesting to see if that sticks. And we had different years where it did, like 2022, and we had other years where it didn't, like 2023 and 2024. So it's been give and take here last couple of years.

So it'd be neat to see where that goes. And then of course, there's some tax reform still coming and things like this through a reconciliation bill. One of the questions in there that I thought was a good one was that inflation expectations should be moving higher because of tariffs, but why are bond yields going lower? Those two things seem at odds. Just remember bond yields are pricing in growth expectations, meaning nominal, so inflation is a component of that. And what we've seen in the tip spreads is inflation actually is sticky, it's hanging in there at a higher level. So if bond yields are coming down, the reason then in that two-part equation is that growth is coming down. And so you have lower growth, you have lower interest rates.

Those two things are perfectly intuitive. That's why tariffs can potentially be inflationary on new prices. I'll have a write-up tomorrow in Dividend Cafe about tariffs and breaking it down a little bit more and putting it in terms of what they mean now versus prior time period where this administration was in office and enacted some of these tariffs and what it means for overall economy and what it means as a percentage of total tax revenue, things like that. Are these tariffs really meaningful?

Are they moving the needle or not? Yes or no? The answer to that is that they are meaningful and they are starting to move the needle a little bit here, especially since they've just been enacted. So all of this is somewhat new. And while it rhymes with some of the things done in previous tenure of this administration, it's quite a bit more. And I'll talk about that a little bit tomorrow as I write

about it. Today on the economic calendar, I wish I had something to go over with you, but I sure don't. Tomorrow we'll have some employment numbers on ADP, we'll have some ISM services numbers, and we'll have some beige book information along with some services PMI. So with that, I'm going to let you go for this evening. Again, I wish you well. Reach out with your questions. They're always great. And I hope you have a good night. Thank you very much. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC member FINRA and SIPC with Hightower Advisors LLC member FINRA and SIPC, with Hightower Advisors LLC,

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