Moneybeat - Buckle up for a bumpy market ride

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

NICK EICHER, HOST: A respected, private economic research group says we are in a recession, and that it took hold in February—even before the coronavirus lockdowns began.

The NBER, the National Bureau of Economic Research, typically waits until a recession is well underway before declaring it. And usually, it’s evident from government data. The accepted definition of “recession” is two consecutive quarters of negative economic growth. That is, half a year of economic contraction.

The group says it is breaking with past practice because the plunge in economic activity is so obvious, and because this recession might be very brief.

But regardless of how brief, the Congressional Budget Office predicted it might take a decade for the economy fully to recover.

Financial analyst and adviser David Bahnsen joins me now to talk about the economy. David, good morning.

DAVID BAHNSEN, GUEST: Well, good morning, Nick. How are ya?

EICHER: One step ahead of the economy, I hope!

Let me ask you about that NBER report. What are your thoughts on the idea that the recession began in February? Is it just kind of an interesting note for the history books or does it tell us anything?

BAHNSEN: I think it’s neither. I don’t think it’s interesting for the history books and I don’t think it tells us anything. I think everybody knew we were in a recession and it’s just the NBER’s job to officially declare it. So it is more or less, I think, redundant to the data we’ve already been getting. And, of course, what really matters a great deal is when the recession ends, what the shape of the recovery will look like, and a lot of other things that are reasonably unknowable and uncertain, given the really historically rare dynamics that we’re dealing with.

EICHER: All right, let’s talk about the Federal Reserve. Chairman Jay Powell gave his statement, assuring that he’s keeping interest rates at virtual zero, definitely through the end of 2021, and almost certainly until 2022 ends. Powell thinks that this year the economy will shrink 4 to 10 percent, and next year anywhere from negative 1 to plus 5. So that squares with the idea that we have a long road ahead to recovery. Any surprises there?

BAHNSEN: No, I think that Chairman Powell’s Wednesday declarations match the Fed’s outlook. There was a really interesting thing, though. In their projection that they’ll have a Fed funds rate at 0 percent all the way to the end of 2022, they also forecast in 2022, at the end of the year, that the inflation rate will be 1.7 percent, which is below their 2 percent target and the unemployment rate will be 5.5 percent, which is above their 3-4 percent target. So, either they don’t really believe that the rate will get above 0 at the end of 2022, or they don’t believe that the unemployment and inflation will be at that level then.

But it’s less of a contradiction when you really understand what’s going on, which is they’re trying to signal to the market that they’re going to keep it at zero percent as long as they have to. And that that won’t be any less than the end of 2022 and, oh, by the way, it really could be much longer. That’s what the Fed signal is, which is long-term accommodation to the labor markets in our country.

EICHER: All right, let’s talk about the stock market. Three week winning streak stopped. Big, big drop on Thursday, as big a drop as anything we saw in March on Wall Street. Media reports suggested maybe Chairman Powell’s idea of a long road to recovery contributed to it, or reports of COVID cases trending back up. That may have contributed to it. So do you think those reports are accurate—the Fed driving down the market or the COVID cases? What do you think?

BAHNSEN: Well, it was absolutely neither of those things. 

The reason stocks went down is because stocks had gone up 2,500 points in the nine days prior, and they were letting steam off. You just had what markets do in a volatile period, a sort of resettling of prices that immediately kind of stabilized into the next day. So, I think that we have to be used to this because that volatility is going to continue. 

We’re on track for basically what will end up being the most volatile year in history since the Great Depression. A third, 33 percent of market days this year have been up or down two percent or more in one day. It’s stunning. Three of the worst 10 days in history—I think it’s now five of the worst 25 days in history have been this year. Two of the best days in history were in the month of March. So, you just have incredible market sensitivity, market volatility. 

But the second wave theory about coronavirus, to me, is not matched in the data. It isn’t matched in the fact that more states that reopened earlier are seeing improved data metrics than the opposite. And the markets are really smart. They will not get fooled again. I don’t believe that the second wave talk is ultimately going to affect risk assets, including the stock market.

EICHER: OK and let’s hit jobless claims. We saw 1.5 million on the last week of reporting. So, again, it’s ticking down, trending down, on new jobless claims. It’s not where you want it to be, yet. So, what’s your read on it?

BAHNSEN: Yeah, it wasn’t a great number and the fact that the continuous claims were still at 20.9 million and we had hoped those might dip below 20 million. But, obviously the downward trajectory has continued. At this point, my concern with the weekly initial jobless claims is entirely just for the people who are filing them. And it isn’t about its macroeconomic sensitivity, which I think is reasonably priced in. 

The real next catalyst to improved labor data has to come when there’s settlement around what’s going to happen with this unemployment benefit from the federal government. Until there’s clarity on what’s going to happen to the $600/week supplement, I’m not really sure that you’re going to be able to get a meaningful move down in the initial jobless claims, because there’s still such tremendous incentive for people to double-dip from the state unemployment insurance fund and the federal government supplement, which is scheduled to go away in July. There’s a lot of political movement to extend it. There’s some political movement to modify it. There’s not that much political movement, but there’s some, to get rid of it. I don’t know what is going to happen with that, but that’s most likely going to have an impact on 5 or 6 million jobs. I think there’s that many people that would rather get the unemployment benefit and not work than go back to work. So that is going to have to get reconciled until we can see a little bit of clarity in the data.

EICHER: Financial analyst and adviser David Bahnsen. David, thanks!

BAHNSEN: Thanks for having me, Nick.

(AP Photo/Mark Lennihan, File) In this May 26, 2020, file photo, a man wearing a protective face mask passes the New York Stock Exchange, as employees arrive for the partial reopening of the trading floor.

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