Dear Valued Clients and Friends –
The primary theme today is tariffs. The market futures were crushed last night and into the pre-market morning after President Trump announced sweeping tariffs against Mexico and Canada, and to a lesser degree, China. Throughout the day today, markets recovered as the bark of those tariffs came off. There is a lot to say about all of this and, therefore, a little less to say around the rest of the horn. So consider this a special tariff issue!
I am proud of myself for holding back from writing the ten pages I was going to write at 4:00 in the morning, just having a sneaking suspicion the news would be very different by the end of the day. I even said so before the market opened on national television. And sure enough, the news changed a lot by the end of the day. Lots to say, still …
Dividend Cafe dove into the world of Artificial Intelligence and what the DeepSeek/China events of last week do and do not mean for the markets. The written version is here (my favorite), the video is here, and the podcast is here.
Off we go …
Market Action
- The market opened down -400 points today, worsened from there, came back to down roughly a hundred, and stayed about level at that point the rest of the day
- The Dow closed down -122 points (-0.28%), with the S&P 500 down -0.76% and the Nasdaq down -1.2%. All of these levels are substantially better than they were an hour or so after the opening bell.
*CNBC, DJIA, Feb. 3, 2025
- The dollar was up around 1% against most currencies earlier in the day but came off those levels as the tariff threats waned.
- 179 out of 500 companies have reported quarterly results so far, so not quite half of the S&P. Year-over-year earnings growth is, so far, showing up +11.5%, with revenues up (y/y) +4.6%.
- The ten-year bond yield closed today at 4.55%, down one basis point on the day.
- Top-performing sector for the day: Consumer Staples (+0.68%) - Utilities, Energy, and Health Care right behind them
- Bottom-performing sector for the day: Technology (-1.8%)
- Only about 2% of levered loans are in default, which is very low, whereas about 6% of the issuers who issue levered bank loans are in default. Why the discrepancy? Basically, it simply means that more loans that are smaller in nature from more issuers are in default, whereas fewer loans that are larger in nature are in default. I can summarize this paragraph by saying credit conditions are pretty healthy overall, not a surprise in economic expansion, but issuer selection and underwriting quality matters a great deal, and this spread between dollar defaults and issuer defaults is unusually high.
Top News Stories
- By far, the biggest story is the tariffs, and they are covered in the Public Policy section below at great length
- The votes for Robert F. Kennedy Jr. to be Secretary of Health & Human Services and Tulsi Gabbard to be Director of National Intelligence should be forthcoming this week. As of press time neither has 50 votes publicly saying they will support but neither are there 51 votes saying they will not. Both are expected to be among the closest and most uncertain of outcomes.
Public Policy
- President Trump announced 25% tariffs on all Mexican and Canadian imports coming into the United States effective tomorrow, Tuesday (with a carve-out for Canadian energy to be 10%). A new 10% tariff was announced on Chinese goods.
- Should all these tariffs have been implemented in these threatened forms for a full year, the annual cost to the economy would be $150 billion, equivalent to adding 10-11% to the corporate tax rate. The 2018 tariffs were $30 billion in total, so 1/5th the cost of those.
- President Trump is talking about using the International Economic Emergency Powers Act (IEEPA) to justify the imposition of these tariffs, and this will surely be challenged legally since it has never, ever, ever been done before. Who is going to bring the legal challenge? Well, those negatively impacted by the tariffs who have legal standing in the U.S., soooooo, take your pick.
- Two hours after the market opened, it was announced that the tariffs on Mexican imports were off as they agreed to send 10,000 troops to the U.S. border
- And then right after the market closed, Canadian Prime Minister Justin Trudeau announced that President Trump had also agreed to delay tariffs against Canada for thirty days as more negotiations played out. Shocking.
- I thought one of the most telling things over the weekend was President Trump tweeting that there would be pain before gain in planned tariffs. His line had previously been, well, different.
- A big thing to watch if tariffs do ever get implemented against anyone is what sort of exclusions process will be incorporated into all of it. Regarding 2018, people talk about how the tariff impact was less than feared but rarely talk about how a gazillion companies and sectors were granted "exceptions" from the announced tariffs. I find it telling.
- U.S. dollar strength is one way that the impact of tariffs would be felt, as Canada and Mexico see their currency weaken to absorb the impact. A stronger U.S. dollar hurts the competitiveness of U.S. exporters. Of course, how retaliatory tariffs play into the currency impact of all of this is going to matter, too.
- What would be informative is for all of these things to go into effect, to stay in effect for a sustained period, and for people to judge for themselves whether or not they push prices higher and disrupt markets. So much of this subject has been riddled with conjecture and hypothesis for years whereby supporters of tariffs threaten to do tariffs, don't really do tariffs, then say, "look, everyone was wrong, tariffs didn't have a bad impact." If Edmund Burke was right that "example is the school of mankind, and they will learn at no other," and if Smoot-Hawley was too long ago for that example to be readily recalled by a population not fond of history, it does seem a great clarifying moment will be to let all this play out exactly as threatened and see who is right and who is wrong about how tariffs impact an economy, from wage-earners to producers to consumers. The school of example, indeed. Alas, I fear we never get that lesson ... Bark is easier than bite.
- It continues to be my belief that no matter what has been said and done, what happens today or tomorrow or throughout the week or the next month, that the intent of the administration is to flex, puff, and threaten with the aim being accomplishing other policy objectives, and that in the end the administration will either back down on tariffs and claim (perhaps truthfully) that they achieved their objectives, or see an impact that reverses the pollyannish narrative and be pushed to a different course. Time simply has to play out here. This entire sequence of events is 100% within my theme #1 for 2025 regarding tariffs.
Economic Front
- Headline PCE was up +0.3%, as expected, and Core PCE +0.2%, also as expected.
- With a h/t to Peter Boockvar, many have said "prices didn't fly higher after the 2018 trade war" - a trade war that (a) was very, very small, (b) saw millions of exemptions and carve-outs, and (c) never actually happened with ally nations. But whenever you hear that the economic impact of the 2018 tariffs was benign, note this chart (especially those who claim to care about U.S. manufacturing):
- 43% of U.S. imports come from China, Canada, and Mexico - close to half of all imported goods
Oil and Energy
- WTI Crude closed at $72.25, just down a pinch (it had been up earlier in the day when tariff talk was still all the rage)
- The tariffs President Trump announced over the weekend made a carve-out for Canadian energy imports (i.e. 10% vs. 25%). I wonder why that would be? =)
- Oil prices were up around the tariff talk before subsiding. We must also remember that in addition to the risk of a global trade war, we have OPEC+ production decisions lingering, sanctions on Russian exports, and questions around U.S. policy that may or may not push supply higher without corresponding increase in demand.
- Midstream was down over -4% last week, while natural gas was down -24%. However, January still saw the sector up over +5% (with MLPs up over +8%). Midstream companies report quarterly results en masse this week, so it ought to be a full week.
Ask TBG
| “Has TBG started to consider what impact, if any, the growing MAHA movement could have on the core dividend portfolio, and which companies are best positioned to take advantage of MAHA? I suspect that the answer is probably "it’s too early to tell” …. but It seems that the concept of making consumer products and food more healthy is gaining traction. One could argue that there are parallels to the (thankfully declining) ESG movement, but it seems that this is an area where there is growing support across the political spectrum and this issue impacts every American on a daily basis.” ~ Steve A. |
| Yes, we have analyzed all of it a great deal and have no concerns whatsoever about the so-called "MAHA" movement and any of our portfolio positions. There is a lot more I could say here about what this movement is and isn't, what it is capable of doing and not doing, what I think will come of it all, and why we do not see a long-term impact to our portfolio positions, but the question is pretty simple and hopefully my bottom line answer is what you are looking for. The ESG analogy is a good one. |
On Deck
- Clients will receive a very elaborate Weekly Portfolio Holdings Report on Wednesday as a dozen companies will have reported quarterly results in this week's report.
- 30 days for "negotiations" with Mexico and Canada ... Onward.
Reach out with any questions, any time.
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.
