Moneybeat: Trade tremors, tax tensions

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. David, good morning.

DAVID BAHNSEN: Well, good morning, Nick. Good to be with you.

EICHER: So last week, the president made headlines with an announcement on tariffs—but instead of imposing new ones, he directed federal agencies to study reciprocal tariffs. Markets reacted positively to that, seemingly relieved that no immediate action was taken. But overall, there seems to be some confusion around the administration’s trade policy. Is this kind of uncertainty an intentional negotiating strategy, do you think, or does it reflect a lack of clear direction?

BAHNSEN: Well, there was a good progress made last week—at least in terms of their ability to get out of budget finance committee—the framework of a package whereby assuming the whole house passes it, they do have a vision for a one bill approach and the dollar amount they’ve settled on is $4.5 trillion.

However, that requires $2 trillion of spending cuts to the mandatory spending category, which would likely mean some form of reform or kind of changing around of how certain Medicaid and Medicare items are funded or certain growth expectations are taken back—things like that.

For every dollar they don’t cut of that $2 trillion, that comes off of the $4.5 trillion of available tax cuts.

So there are three concerns.

The first is, are they able to get this through the House and get it reconciled at conference with the Senate? Because if that falls apart politically, then they likely go forward with a two-bill approach that the Senate is pushing.

But assuming they thread the needle and get this done politically, Nick, the second concern is, will they come up with those spending cuts? Will they be able to do that?

Third, is even the $4.5 trillion large enough?

That basically leaves enough room to extend the Trump tax cuts from 2017 and maybe pass the no tax on tips, a little bit of SALT cap increase (the state and local tax deduction). But it certainly doesn’t come close to leaving enough room for no tax on overtime wages, no tax on social security, some of the other business tax reductions.

House Ways and Means Committee chairman Jason Smith was critical that the $4.5 trillion won’t be enough and that’s not even guaranteed.

So there’s still more wood to chop here for sure, not the least of which is whether or not they’re going to even get this through the House.

EICHER: The administration has been pushing hard for and moving fast on government restructuring and efficiency reforms—Department of Government Efficiency leading the charge. But in recent days, DOGE has faced criticism for inaccuracies in some of its claims about agency spending. Elon Musk took some of that criticism and said, you know, nobody’s going to bat 1.000. But all this does raise questions about whether the rapid-fire approach is actually delivering results or just generating headlines—and now some bad ones. Do you see these efforts leading to meaningful reform, or is there a risk of spreading too thin and losing focus?

BAHNSEN: Well, there are going to be some things that they accomplish. I think that when you find government employees who are not performing, not going to work and they quit or leave, or you force them out, then that accomplishes something.

But trying to drive a more efficient process from the people who work for government is different than actually reducing line items in the budget.

But I do think that they are shining a light on certain things that are inefficient. One of the risks when you take a “blow it up”-type approach and go after 5, 10 things a day is it is sort of like drinking through a fire hose for people to process what’s going on. But also to appreciate some of things that get done. In trying to do too much too quickly, you do run the risk of none of it really resonating.

So I think that they’ll be better off to focus on three big victories and hit those points home. It feels a little bit chaotic right now, and people can say, “well, that’s because of the way the media is covering it.” But the media are covering it that way—you know, on purpose. So it’s up to them to message it in a way that offers clarity.

EICHER: And we haven’t talked markets in a few weeks. We’ve seen a fair amount of market volatility one month into this quarter, but stocks are still up overall. What’s driving that, and what’s your outlook going forward?

BAHNSEN: Yeah, it’s been an interesting start to the first quarter in markets—with a fair amount of volatility. But what they haven’t really had is significant downward pressure. Markets are up on the year, even where some of the big tech and so-called Magnificent Seven names (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) have not been leading the way.

Other aspects of the market are still doing quite well. Nothing is really breaking out per se, but I think that the earnings results of first quarter are going to show, you know, about 11% profit growth year over year, about 5% revenue growth.

There’s no question that that kind of economic activity that is evidenced in both top-line sales and in bottom-line profits has gone well. I will continue to reiterate as much as I have to: The bigger question is not really company performance fundamentals as it is valuation.

It’s whether some of these good things already priced in and perhaps priced in and then some? That’s the big question in markets.

Bond yields were all over the place a little bit here this last week. I think the ten-year bond yield becomes a big question for both valuations in the stock market, but also some sort of indication of where growth and inflation expectations lie.

So there’s a little bit of volatility there in the bond yield. By the way, uncertainty about tariffs and uncertainty about what our tax reform is going to be, that is connected to some of the volatility in the bond market as well.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at dividendcafe.com and regularly for WORLD Opinions. David, thanks! Have a great week!

BAHNSEN: Thanks so much, Nick.

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