Dear Valued Clients and Friends –
It was another rally day in the market, and we will cover the whole normal deal today in the Dividend Cafe.
Dividend Cafe was a deep dive into the impact AI is having, and will continue to have, on jobs. It goes to a different place than the consensus view, and it is worth the read (which you can do here), or the watch (which you can do here), or the listen (which you can do here). I think you know which format I prefer …
Off we go …
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Market Action
- The market opened up +250 points today and steadily moved higher throughout the day.
- The Dow closed up +516 points (+1.12%) with the S&P 500 up +1.07% and the Nasdaq up +1.37%
*CNBC, DJIA, October 20, 2025
- I read a lot about distress in regional banks last week and further market distress, and I am certainly one open to the [rather inevitable] time where markets do capitulate in the face of over-stretched valuations and/or an undermining of the present AI/capex thesis. But that said, in this very short-term moment, the S&P 500 actually remains above its own 50-day moving average, and credit spreads have stayed quite tight. It certainly appears to markets (for now) that the China/U.S. tensions of ten days ago are not going to escalate, as feared.
- The ten-year bond yield closed today at 3.98%, down 2.7 basis points on the day.
- Top-performing sector for the day: Communication Services (+1.52%)
- Bottom-performing sector for the day: Consumer Staples (-0.10%)
- It is interesting to note that Japan’s Nikkei is off to brand new highs and a genuine bull market. I’d add that India’s stock market has rallied substantially over the last few months and is a whisker away from a new all-time high, despite the lack of a new bilateral trade deal in the aftermath of Liberation Day
- Of further interest, and I think reinforcing the nature of the recent market rally: Companies with NEGATIVE earnings in the Russell 2000 (i.e., small cap publicly traded companies that LOSE money) have substantially outperformed companies in the Russell 2000 the last four months that do make money. Losing money > making money? Beware the low-quality rallies, my friends. They always end a certain way.
Public Policy
- I confess to being somewhat fascinated by President Trump admitting in a Fox Business interview late last week that the tariffs he threatened on China are “not sustainable,” acknowledging the toll they take on both economies. This rhetoric is very different from prior assertions that tariffs make the U.S. rich and that they do not damage U.S. interests. Markets went higher on the claims from President Trump that he has high confidence a really good deal with China is coming.
- Speaking of which, Secretary Bessent is meeting this week with Chinese Vice Premier He Lifeng in Malaysia, with a stated goal of de-escalating trade tensions.
- Oh, one more thing about leverage in U.S.-China negotiations. A framework for a U.S.-China TikTok deal has been agreed to – not the final deal. The framework itself, shocking to many in the U.S., allows China to hold on to its algorithm of the social media app, even though it is to be analyzed and evaluated by U.S.-based Oracle. The meat on the bone of this deal is a licensing fee that China will receive for this algorithm they will continue to own. But that algorithm is subject to export controls. This means Chinese regulators have to approve the license, and this means they are holding another Trump card as all these things try to get across the finish line.
Economic Front
- The fiscal year deficit came in at $1.775 trillion, which is $41 billion less than the prior fiscal year’s $1.814 trillion. I am sure you all are dancing in the streets! I will say that I took a lot of flak for this prediction made here at the beginning of the year, but it was very clearly connected to the idea that it would NOT be because of any spending restraint, but rather that income tax revenues were going to come in higher than expected from 2024 capital gains. And that is what happened.
Federal Reserve
- We sit at a 96.3% chance in the futures market of two rate cuts between now and the end of the year. The odds are very high (75%) that we will have four cuts (or more) between now and July 2026.
- The Fed’s balance sheet has long been an obsession of mine, primarily because I view it as a far more powerful tool for monetary policy than is commonly understood, and definitely a less understood tool, making its comprehension doubly important to a diligent student of monetary policy. The Fed Funds Rate that most market observers focus on remains the Fed’s primary policy tool; it remains very easy for people to understand (did rates go up or down), and it also can be evaluated relative to various objective benchmarks or formulas (the Taylor Rule, for example, or even a short-term market rate like the 2-year Treasury yield). The Fed’s balance sheet, on the other hand, and the Quantitative Easing (QE) or Quantitative Tightening (QT) that cause it to go up or down are not seemingly subject to discernible rules or even reference points. Balance sheet operations are a major policy tool for the Fed, but they do not exist within any discernible policy framework. The experimental nature of all this is, shall we say, concerning.
Oil and Energy
- WTI Crude closed at $57.52, flat on the day.
- Midstream was mixed last week, with MLPs up +1.8% on the week but Canadians and U.S. corps negative. The substantial drop in oil prices (down -2.4% on the week and down over -12% in recent weeks) has weighed on total sector sentiment.
- Earnings season begins for the sector this week with the old-line name, Kinder Morgan
Ask TBG
| “I’d like to hear your thoughts regarding current and possible future political events in the U.S. There has been increasing talk about the potential of actual kinetic conflict between political factions, perhaps exceeding what happened in 2020. First off, how likely do you think that is? And is there any investment advice if it does happen? I am wondering what you think would be a good safe haven.” ~ Ken S. |
| I think the odds that there will be “future political events” in the U.S. are 100%, and I think the idea of future geopolitical conflict or domestic disturbance is 100%. And my investment advice when it happens is to not just do something, but stand there. A good safe haven will be the properly constructed portfolio that an investor has before the inevitability of future disturbing events. Dividend growth, in particular, strikes me as especially anti-fragile. ~ David L. Bahnsen |
On Deck
- This week, Dividend Cafe will focus on the state of index funds: what has changed, what has not, what matters to all of us, and what doesn’t.
Have a wonderful Monday night and reach out with any questions!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
