Dear Valued Clients and Friends –
I have written a full normal “Monday edition” Dividend Cafe today, but the podcast and video comes from Brian Szytel, as I am on the train coming back to New York City from Washington DC right now. I spoke at the Senate Hart building to an audience of a couple hundred electeds and staffers on tariffs this afternoon, and will be in our New York office the rest of the week.
Dividend Cafe on Friday looked at the disastrous AOL-Time Warner deal of 25 years ago. There were lessons to be learned, and we intend to learn them. The written version is here (by far my favorite), the video is here, and the podcast is here.
Off we go …
| Subscribe on |
Market Action
- The market opened up nearly a hundred points and got up over two hundred points before giving all of that back.
- The Dow closed down -19 points (-0.04%) with the S&P 500 up +0.14% and the Nasdaq up +0.38%.
*CNBC, DJIA, July 21, 2025
- Earnings results are not likely to outperform expectations this quarter, but what they need to do is at least meet expectations. The P/E is a bigger issue for stock prices than the E, right now, as long as one believes the E is okay (if the E were to drop from expectations, which I do not suspect will happen this quarter, look out below – as the E and the P/E would both drop at once). But the multiple, the valuation, the P/E ratio – are back at cycle highs, basically 23x best-case full-year expectations – and on this data point, the current hopes for index investors turn.
- Euphoria levels hit the highest level since early March in the Citi Panic/Euphoria Index last week, having spent most of the last year in the euphoria territory, the exception being the tariff-laden April and May stretch of a few months ago.
- The ten-year bond yield closed today at 4.38%, down five basis points on the day.
- Top-performing sector for the day: Communication Services (+1.90%)
- Bottom-performing sector for the day: Energy (-0.96%)
- Cyclicals vs. Defensives in the S&P 500, equal-weighted, are at an all-time high (the relative relationship between the two).
- An important point I often overlook when highlighting the heavy concentration in cap-weighted indices like the S&P 500 is that it is one thing to say that ten companies now account for 40% of the index, or that tech and tech-adjacent companies now comprise over 50% of the index. That speaks to a certain risk of what IS in there, often not considered by investors. But the inverse reality of this is that “defensives” have historically been 30-40% of the S&P 500 and are now sitting at barely 15%. Not only is the “risk on” massively higher than has historically been the case, but the “stabilizers” of the index are, shall we say, a lot less. This is tautologically true, but still warrants mentioning both.
- An important point regarding semiconductors, which as a sector hit a new all-time high on Friday. When was the last high for the group, the one that the sector just surpassed? Last July – a year ago. In other words, while it is en vogue to talk about the semiconductor space as a hot, high-growth, high-momentum area, investors who entered a year ago have seen a return on their investment of exactly 0%. This is the common norm in “range-bound” markets that prove to be flattish over time. There are zigs and zags along the way that grab attention, including 10-20% runs that give one the impression of robust bull market vibes. But math is math, and zigs are not zags, and very often, over time, these markets create a math-like return that is different than the narrative.
Public Policy
- Commerce Secretary Lutnick has said that he is very confident a deal is coming together with the European Union before the self-imposed deadline of August 1. There remains no assurance a deal will be struck, or that final deals are coming by August 1, or what the deals will entail.
- I don’t think people read the Dividend Cafe’s Public Policy coverage for the latest and greatest in Japan, but the election results there yesterday warrant some mention. Prime Minister Ishiba lost his governing majority but has said he will not resign. There is a lot of chatter that Japanese voters do not like the fiscal state of things, and that the good old days of Japanese deflation and 0% growth are the need of the hour. The Prime Minister’s party secured 47 seats in the House elections, but needed 50 seats. There is no clear majority, consensus, outrage, or mandate in anything electoral taking place in Japan. Rather, there are decades upon decades of apathy and complacency with the status quo. And while the Prime Minister lacks incumbency support, this seems less true in Japan than it has been all over the world for several years now. The Yen is exactly where it was one year ago, which seems to contradict the narrative that it has strengthened a lot, or I mean weakened a lot, in recent months. The Yen is currently at 148, has briefly touched 155 on occasion, and has also briefly touched 140 on occasion. And that range seems to be exactly what Japanese policymakers want, at least the ones keeping their jobs.
Economic Front
- For all the questions about the state of the labor market, the weekly jobless claims number continues to be very low, refusing to budge higher to a higher running average. At 221k on Thursday and a 4-week average at 230k, it is just right in the range it has been for a long, long time.
Housing & Mortgage
- Single-family housing starts fell to an annual pace of 883,000, the lowest level in a year. Permits for new construction declined. And home builders said in the latest NAHB survey they are cutting prices and increasing incentives to move product. Multi-family starts were much higher, and the delta between single and multi-family activity is widening.
Federal Reserve
- Obviously this issue of what the President’s plans for Jerome Powell are and who might replace him (whether when his term ends in May 2026 or sooner) is becoming one of the biggest issues in markets (and in politics, for that matter; the indispensable 2Way platform has covered it every single episode for two weeks in a row). Kevin Warsh seemed to be auditioning for the role on CNBC last week (disclosure: I adore Kevin and would love to see him at the Fed). But not to be outdone, current Fed Governor Chris Waller came out late last week encouraging a quick interest rate cut, followed by Fed Governor Mary Daly echoing the same on Friday. Are these Fed governors being asked to set the stage for an earlier-than-expected rate cut by Chairman Powell? Or are they going rogue to angle for his job? Or, and this is where I suggest we land, is it all irrelevant, because the President is going to do what he is going to do, and it doesn’t involve anyone he doesn’t really, really, really know and trust?
- I continue to believe that Secretary Bessent has wisely convinced President Trump that firing Jay Powell before his term ends would backfire and not accomplish what President Trump wants it to accomplish. The legal appeals and so forth would very likely take the rest of his term, anyway, and the President would be unlikely to prevail in such legal deliberations. So the White House would be unlikely to get what it wants, short term, yet would invite collateral damage (instability, delegitimacy, etc.) that it does not want.
- I will say that we are up to a 24% chance of a THIRD rate cut between now and the end of the year.
Oil and Energy
- WTI Crude closed at $67, down half a percent on the day.
- Midstream was up +1% last week, even as oil was down a bit and the S&P was up half a percentage point.
- Natural gas demand and LNG exports are the two main stories in the midstream space right now. Earnings season is about to pick up substantially for energy names, and we will see what companies indicate in these areas soon enough.
Ask TBG
| “I’m having a tough time grasping the ‘tariffs are inflationary’ lingo. We’ve never called tax increases inflationary before, have we? Inflation is more money chasing the same goods and services. Tariffs are a tax on top of a product cost, increasing price and reducing the amount of product that can be purchased for any given wallet – shifting the demand curve left, as well as the supply curve left as producers have to produce less for the same cost. This is not inflationary, but normal supply and demand at work in a manner reducing economic output. Same money level, Lower output, higher prices, just recessionary, right?” ~ Jeff S. |
| It is semantics. Tariffs obviously push prices up on the things being tariffed. That is what most people believe inflation is – “higher prices.” But tariffs do not increase the money supply, and inflation is a monetary phenomenon, so if one is being more technical, tariffs create targeted inflation (“political inflation,” I call it), but not broad inflation (because inflation is always monetary). However, inflation is “too much money, chasing too few goods.” And if one believes that tariffs put downward pressure on supply, they can be said to create backdoor monetary inflation, as well. The lower output you refer to can (and I believe, would) reduce goods and services, thereby altering the M relative to the T in the monetary equation (MV=PT), pushing P higher (money supply * velocity = price level * total supply). Conclusion: “Political inflation” is inevitable with particular price hikes from tariffs, and “Monetary inflation” is likely if sustained tariffs actually happen and put downward pressure on the supply of goods and services. |
On Deck
- I will be on Varney/Fox Business tomorrow for the opening hour of the show (9 am-10 am ET)
- Clients will receive their Weekly Portfolio Holdings Report on Wednesday per usual, and we are moving deeper into the heart of earnings season.
- A big Dividend Cafe Friday on the real story regarding U.S. manufacturing
To all, a good night! 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.
