Moneybeat: Dow at 50K

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

The Monday Moneybeat.

NICK EICHER, HOST: It’s time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning, David. 

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

EICHER: Well, David, big milestone for the markets at the Friday close, the Dow Jones Industrial Average topping the 50-thousand mark for the first time ever. And I do think it's worth noting how quickly it got there—up about twelve percent year over year, and moving from 40,000 to 50,000 a lot faster than it did the previous ten thousand points.

So when you see a milestone like this, David, what do you think the market is telling us about the economy?

BAHNSEN: Well, I don’t think that the market is there to talk about economic growth, per se. I think that economic growth is ultimately what has to drive things that happen in markets. But markets are measuring a more limited aspect, but a very vital one, over time; it’s profit growth.

And of course, market prices along the way are a combination of the weighing of profit growth with sentiment. And so, sometimes sentiment can get too frothy, and sometimes sentiment can be way too pessimistic. But at any given time, markets and the real economy can be disconnected. That’s not a criticism, it’s a point some make that I never think should be discounted. And yet, over time, that delta contracts quite a bit. 

The reason that the Dow was at 10,000 in the late 1990s—and I remember very well much earlier in my adult life people celebrating this milestone round number of 10,000. You recall it was in the one- and two-thousand range back in the ’80s, and when Black Monday happened in 1987, 10,000 was a big number!

And then, what’s interesting is ten years later, it was at 6,500 at the bottom of the financial crisis when we were at March of 2009. By that point, I had been professionally managing money for ten years. And to say that in this time span we’ve gone from 6,500 post-crisis to now having closed over the weekend above 50,000—it is a tremendous celebration of recovery, of economic resilience, but really specifically of the profit growth that represents.

And profit growth only comes from companies innovating and companies producing goods and services that meet the needs of humanity. And that’s happened with tremendous revenue growth, tremendous hiring, tremendous wage growth, but also, higher margins. They’ve been able to cut costs along the way and do things more profitably.

So it’s been good for investors, it’s been good for workers, and as a pro-markets guy, I want people to understand the mechanics of how this works and why it’s a wonderful story.

Now, 50,000 could end up proving, just like the 10,000 in 1998 proved to be, a number that stalls and it drops from that number for a while, because that investor sentiment number you know comes in as well. You have periods, Nick, where profits keep growing but sentiment goes the other way, and stock prices can come lower too, so. 

A lot of investors are probably too used to markets only going one way. They do go both ways at given times. But certainly the testimony of the last 25-plus years—and, of course, 100 years before that—is that the profit motive works. A country that celebrates rule of law and free exchange is a more prosperous country, and the U.S. markets, I think, are a blessing to our economic story.

EICHER: Well David, you used the term “froth” in the market a couple minutes ago, and I wonder how much of that is tied to AI and the amount of money companies are pouring into AI. Do you think that the froth is really about artificial intelligence itself—or might it be more about how much investors are assuming that it’s going to deliver somewhere down the road?

BAHNSEN: Well, I think that the AI story has certain stocks, both private companies and then public, that have very frothy valuations, and a lot of those got hit pretty hard over the last few months, and we’ll see where some of this stuff plays out.

It isn’t just AI, though. I mean, the whole large-cap growth, which is very correlated with tech, has had elevated valuations for a while. 

And I think the assumptions of spending—you know, it's interesting, the last couple weeks, we’re in earnings season right now, and it’s the first time that you’re seeing companies punished—this happened with both Microsoft and Amazon and Google—announce larger-than-expected spending plans on AI, and their stock prices went down, not up.

Because when you’re talking about $80-, $100-, $130-billion of spending in a year, now you’re talking about spending all of your company’s profits for a whole year on investment in AI. And I think investors right now are just trying to figure out what all this money is going towards, and what's going to be the return on all that money, and nobody’s getting very clear answers.

EICHER: David, I'd like to switch gears here a little bit: Treasury Secretary Scott Bessent was up on Capitol Hill last week, he was giving testimony before the financial services committees in both the House and the Senate, speaking on financial stability and systemic risk—basically, how the government is thinking about threats to the financial system.

And what stood out to me was a pretty clear shift in emphasis administration over administration: less focus on things like climate risk, and more emphasis on growth and capital formation.

But, let's set aside the moments of political theater that always happens whenever there's testimony given before a Senate or House committee, but when you listened Secretary Bessent's testimony, what struck you as genuinely important—for better or for worse—about how the administration is thinking about markets right now?

BAHNSEN: I think that, as has been the case with Secretary Bessent lately, it was mixed with certain things I really love hearing him say, and then other things that I really wish he wouldn’t say.

I understand politically that he feels a need sometimes to go make defenses of the president’s tariff policy that I don’t think any serious economic mind could possibly believe. But then at the same time, making the point that Fed models are outdated and inaccurate in the way they assume growth to be inflationary—that was, to me, the highlight of some of what I heard from him in this recent testimony.

So, you know, he can be a mixed bag for me. I’ve known him for a while, and I’m glad he’s been there. As far as the whole cabinet goes, I have my own rankings of cabinet, and he’s one of the higher-ranking ones relatively speaking. But he does understand how markets work, and I thought he defended the things that ought to be defended well in his testimony to both Senate and House in recent times.

EICHER: Well David, one of the moments I thought that really cut through the technical language was when Secretary Bessent warned against trying to engineer a zero-risk financial system. He said that the result could be stability, but what he called “the stability of the graveyard.”

So, a pretty dramatic phrase there, but I think he's getting at something important, that is, the economic danger in trying to eliminate risk altogether. But can you explain why that can leave an economy weaker rather than safer?

BAHNSEN: Well, when I wrote at Dividend Café uh, I think maybe six months ago now, where I made the analogy to Europe: that where a geographic region decides to focus on eliminating risk, they essentially do—I didn’t use the graveyard analogy, but it’s the exact same concept—you know, it’s very hard for a dead person to feel pain, and unfortunately, the crassness of the analogy sort of works economically: that you get countries and geographic regions that don’t feel any pain because they just don’t have any life. They don’t have any vibrancy. And risk-taking is a very important element. 

And Bessent does understand this, and I want all WORLD listeners to understand it, because the Parable of the Talents in the New Testament is really speaking to this: Economic gain comes from taking on the risk of economic loss.

And when a central bank or a political body—central planners—someone decide to focus entirely on how you mitigate loss, they inevitably will suffocate the upside of growth. And finding a prudent balance for risk mitigation with growth and upside and investment and risk, is the need of the hour.

But a lot of places have so intervened to mitigate risk that they have basically created an economic graveyard. And most of Western Europe has been living in that for over 30 years, where it just sort of skirts by, there’s no vibrancy, there's no new exciting companies or technologies. 

And I think we ought to be very concerned about that ever happening here in the United States. It hasn’t, but there's plenty of people who would like it to.

EICHER: Well David, I would like to end today by pointing to a column in The Wall Street Journal by Kim Strassel. It's about our friend and former WORLD Opinions writer Russ Vought, he is now the director of the Office of Management and Budget.

And Kim Strassel gave Russ Vought a pretty generous attaboy and argued he may be doing something Republicans rarely manage to pull off—actually bending the spending curve.

But when you look at the scale of federal spending and what the OMB can realistically do, where do you think Vought is really having the most meaningful impact right now?

BAHNSEN: Well, I don’t agree with the term “bending the spending curve.” And she, in her article, gives you the numbers as to why the language is pretty hyperbolic.

It’s very difficult when you talk about a $5 billion pocket rescission—which I’m very glad they did—but in a $7 trillion budget to talk about 5 billion as bending the spending curve, there is a few other things here and there they did on a regulatory basis. 

And I always said Congress can come in and redirect money elsewhere, and Strassel points out they didn’t do that. And so, net-net, you’ve got five here and nine there; and that’s money saved. And I don’t want to limit or belittle the idea of $10- to $18-billion, it's just in the level of mandatory spending increases we have and a total budget of $7 trillion, you know, we're talking about a family that is spending a few hundred thousand dollars a year they don't make, cutting their popcorn butter budget.

But either way, it’s better than not doing it.

What Russ deserves a lot of credit for, though, and Miss Strassel alludes to it in her article, but I would like to pile on some credit, is the deregulatory aspect. When he can prove that certain government agencies are not needed or can function just fine without a lot of the froth, to use that term again, that has a chance of sticking even when he’s gone and a new administration's there. 

Like his taking a machete to the Consumer Financial Protection Bureau—nobody feels that they are less safe right now in the financial system since we got rid of just a ton of bureaucrats, and a ton of spending, and a ton of wasted resources. 

So this deregulatory messaging, I think, has a little bit more staying power. And yet, yeah, to say bending the spending curve—that can't happen from anyone like a Russ Vought. It’s going to take Congress to be serious, and we’re just nowhere near there. Yeah.

EICHER: All right. Well David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes regularly at DividendCafe.com and at WORLD Opinions. 

David, I hope you have a great week. We'll talk to you next time!

BAHNSEN: Thanks so much, Nick, good to be with you. 

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