Dear Valued Clients and Friends –
The bombshell jobs number on Friday created a huge rally in bonds Friday and substantial re-pricing of expectations for Fed rate cuts. Then, as best I can tell, that substantial re-pricing of Fed rate cut expectations created a big market rally today. If that sounds to you like “stock markets were down on bad news Friday and up on the same bad news Monday,” you wouldn’t be totally wrong to be confused. But I would say a sightly more logical way to look at it is that markets saw elevated volatility in the aftermath of some shaky earnings results, some huge earnings results, a hawkish Fed press conference, a bad jobs report, and now dovish Fed expectations, and when all was said and done, with some big up and down days, have not really moved a lot. But today we will go around the horn and cover it all, per usual.
Dividend Cafe on Friday looked into the reality of President Trump’s tariff plans now that a lot more is known than was known a few months ago, and made some suggestions for analyzing the economic impact, not in one month or one quarter, but several quarters and several years. The written version is here (my favorite), the video is here, and the podcast is here.
Question I have been asked lately: Is the video and podcast just a reading of the written Dividend Cafe? ANSWER: No. I generally have the written version open and near me when I am recording, and sometimes I reference it more than others, but the video/podcast is not a recitation of the reading – it is unscripted commentary on the same subject of the written Dividend Cafe.
Off we go …
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Market Action
- The market opened up about +300 points today and went higher throughout the day.
- The Dow closed up +585 points (+1.34%) with the S&P 500 up +1.47% and the Nasdaq up +1.95%
*CNBC, DJIA, Aug. 4, 2025
- Despite the big sell-off in markets last week (S&P down -2.4%), the market closed July up +2.2% (though as Friday was August, I suppose the S&P gave most of July’s return back but not quite all on the first day of August).
- Large-cap stocks were one of the best-performing asset classes of July, though “frontier markets” (really, really emerging markets) were the top-performing, with MLPs second (more on MLPs in the Oil and Energy section below).
- Foreign bonds were the worst-performing asset class (both Emerging and Developed) as the dollar’s comeback rally weighed on all such counter instruments.
- The ten-year bond yield closed today at 4.19%, down three more basis points on the day (after a huge drop on Friday).
- Top-performing sector for the day: Communication Services (+2.59%)
- Bottom-performing sector for the day: Energy (-0.44%) – only sector in the red
- I was taken aback by how many things I read over the weekend referring to “seasonal” conditions. Expect “seasonal volatility” in the VIX … This is a “seasonally challenging time for credit spreads.” The “August season is historically difficult for stock markets.” Even “August in the second term of a Presidency is historically a rough month.” These various “almanac indicators” are all perfectly true, except when they are not, which is a lot, and even when they perform in line with some historical average, do so above or below a mean that is, well, worthless. Almost as worthless as even talking about it.
Public Policy
- The President’s decision to have the head of the Bureau of Labor Statistics fired on Friday represents a policy decision that I believe will prove more consequential than people currently realize. I hope I am wrong. The fact that monthly jobs report from the BLS use seasonal adjustments in their model and then are revised later as finalized data comes in is (a) Nothing new, (b) Not even remotely partisan, (c) Has no precedent in recent history of helping one party over another, (d) Has ample precedent of providing BOTH upside and downside revisions to BOTH parties, and (e) Perhaps frustrating, but consistently applied in model and methodology.
- The ADP private payrolls report shows a three-month average of 37,000 jobs per month, whereas the six-month average was 67,000 and the 12-month average was 130,000. I do not imagine anyone is advocating for the firing of the payroll data processors at privately owned ADP.
- While there is some greater clarity on a “framework” of a deal with places like Japan, the UK, Vietnam, and the European Union, one country where things remain very unsettled is Canada. Tariffs are supposed to now be 35% with ally, Canada, and 39% with ally, Switzerland. And 20% tariffs are supposed to now be effective with Taiwan. There does not appear to be any constructive talks with Brazil at the moment. It would be inaccurate to say that those countries are the only ones that will suffer from these confusingly punitive taxes.
Economic Front
- The jobs report Friday was a bombshell, period, point blank. Not only was the July BLS number of 73,000 jobs (vs. a weak 104,000 expected) terrible, but the May and June numbers were revised downwards by a stunning 258,000 jobs, basically leaving us right now with a three-month average of just 35,000 jobs created per month (the lowest since COVID). The unemployment rate reached 4.2%. The household survey saw a drop of 260,000 jobs. The labor participation force dropped to 62.2%.
- The most concerning data in the jobs market right now is in the small business data. The NFIB survey shows plans to add new jobs and increase wages, down to levels not seen since 2016.
Housing & Mortgage
- It is hard to find good economic data in the housing market (sales volume is anemic, mortgage rates are high, unaffordability is high, and new construction has stalled), but the homebuilding sector in public equity markets seems to be moving off its lows. Markets are discounting mechanisms, and if the subtle solidification in the space is a sign that the worst conditions have been put in and new housing stock is coming, that will be worth celebrating.
Federal Reserve
- The odds of two rate cuts this year went from 48% after Chairman Powell’s presser last week to 81% this morning in the aftermath of that jobs data Friday. The short end of the yield curve dropped an absolutely stunning 25 basis points on Friday, the biggest one-day rally in short-term bonds I can recall seeing, besides in significant crises.
- More intriguing is that we are back to a 50% chance that there will be three cuts by the end of the year (or one half-point cut and one quarter-point) as the market now shows a 50% chance of 75bps coming out of the fed funds rate by the December meeting.
- Fed governor, Adriana Kugler, resigned on Friday, giving the President the chance to replace her with a new governor, and potentially one who he may want to make the next chairman.
Oil and Energy
- WTI Crude closed at $66.14, down -1.77% on the day.
- While it is hard to make a case for $75-80 oil any time soon short of a supply disruption or geopolitical event (which certainly could happen), it also appears that sustained demand has put a $65-70 low end range in and something in the 70’s as an upside (as opposed to a couple months ago where OPEC supply questions and demand erosion concerns were creating $60 or lower expectations). U.S. year-over-year production is likely to be LOWER soon for the first time in over four years, and I promise you that is not happening because the administration wants it to. Companies are operating with significant discipline around supply, capex, and drilling levels, and that has put a bottom in the price that protects margins, gives them capital discipline, and candidly, trumps some of the policy considerations that had different plans for the sector.
- Midstream was up over +1.5% last week as the market dropped -2.5%. Some names did better than others as a barrage of earnings results came, and midstream stocks largely traded as their results dictated. Another 20+ names are reporting in the week ahead.
Ask TBG
| “I would be interested in your thoughts on the following two aspects of the use of tariffs. 1) To the extent tariffs are designed to right the wrongs of other countries using unfair trade practices (high tariffs they charge on U.S. products or flooding markets with below cost products in order to decimate competing US manufacturing), what would be a better response to attempt to correct these practices by other countries? 2) To the extent tariffs are a tax for much needed revenue to fund U.S. government spending, are they not a more efficient source of revenue than direct taxation to the extent the tariffs are partially or fully paid for by the foreign producer rather than passed on 100% as price increases?” |
| Let’s start with #2. There is absolutely no sense whatsoever that they are “fully paid by the foreign producer.” There are many times I believe they are ZERO percent paid by the foreign producer, but regardless of the apportionment, they are quite literally paid by the domestic importer, always. As my Dividend Cafe on Friday pointed out, this tax EITHER erodes demand, or increases prices, or both. There is no world in which that cost imposition is free money to the treasury. It is borne by the economy. And they are the opposite of “efficient” for all the reasons we have already seen: Total executive discretion, ample carve-outs, exceptions, and waivers, specific targeting of certain sectors for the benefit of favored groups, etc. An efficient tax code is broad-based and limited in opportunities for political cronyism and favoritism. As for the first option, the “market flooding” issue is one that is hard to look at now since we have spent four months discussing tariffs on things which no one believes are being flooded to hurt domestic producers. Coffee? Chocolate? Watches? No discussion of tariffs has ever been pinned on what the mean Canadians are doing with aluminum (making it cheaper than we do) or the Brazilians with coffee (which we can’t make), etc. So, on one hand, I like the question a lot, but it is very important to acknowledge that in the current reality, it is a huge red herring. That said, I always and forever favor market solutions to market challenges. If one country is hurting its own importers and citizens by charging tariffs on our exports, I can’t fathom why we would want to remedy the damage they do to their people by turning around and doing it to our own people. But again, as we learned on Liberation Day, reciprocity was NOT part of the agenda of this tariff regime, so it is less pertinent to the present policy debate. The very simple principle to govern it all is this: Buyers and sellers freely exchanging do not transact when they believe they are getting ripped off. Onerous terms are self-correcting because they cancel the transaction or incentivize finding a replacement. The challenge is believing that central planners, who are the ruling political class, are better qualified than buyers and sellers to determine what is fair than the actual parties in a transaction. |
On Deck
- A lot more earnings results to come this week, though we are certainly into the later innings now after the last two weeks.
That’s enough for now. The news, the data, the company results, and all sorts of market action are coming lightning fast. Reach out with questions. And have a good night.
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.
