Moneybeat: Looking ahead to the new year

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

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen.

He’s head of the wealth management firm The Bahnsen Group and he’s here now to ring in a new year.

David, good morning !

DAVID BAHNSEN, GUEST: Good morning, Nick, and Happy New Year.

EICHER: Alright, well good thing 2023 wasn’t booked on Southwest Airlines or it might still be 2022, but let’s look ahead today. Your practice is to deliver a forward-looking white paper for your clients and the investing public, so in that spirit, we talked last week about the markets being down for the whole of 2022, and that’s precisely how it ended on Friday with the Dow, the S&P, and the Nasdaq all down about 10, 20, and 30%-plus respectively.

What’s your market outlook as we get to work on a new year, David?

BAHNSEN: Well, there's a lot, I think that when one looks at the market, they have to look at the stock market and the different aspects of it. But also look at the bond market, the dollar commodities, the Dow was actually down 8.8% Last year, so a little less than 10. And then the NASDAQ was down a little bit over 33%. With the s&p being in between, they're down almost 20, not quite 20%. So what you see in those three different indexes is that the riskiest stuff that was more tech oriented and more speculative, but also that had been up the most that had had the biggest kind of euphoric rise in the 2020 and 2021. Period, that was what was hit the worst, the most kind of Americana type stocks broadly diversified across our industrial, agricultural, financial materials, all of the different sectors. And it does include technology, but it doesn't center around technology. That's more what the Dow is like. And it did far better. A lot of people listening know that dividend growth stocks were actually up on the year, which happens to be the area that we focus on at my firm. And so it was a mixed bag last year, and yet the things that were most excessive, which by the way, includes housing, not just different elements of the stock market, but housing prices, if they were to drop 10% from here on a national average basis, they would only be back to where they were in October of 2021. If they were to drop 20%, they wouldn't even be back to their pre COVID levels. That's how much things had gone up. And that's what the asset price inflation is that the Fed is really trying to deal with. At this point, the regular inflation that people have seen with their day to day expenditures is far outside of the Fed's control.

EICHER: What trends are you looking for in the overall economy in 2023, are we looking at a relatively normal year? Normal being defined as we’re not thinking really about global pandemics and the residual effects of lockdown policies. So is it kind of a return to normal or what do you say for 2023?

BAHNSEN: Well, remember one of our kind of principles about assets and markets and economics is that there is no really such thing as normal, but in the context of your question is a good one, that the pandemic created a particular abnormality. And I think economically, a lot of that has been gone, but not in China. And so even 2023, there will still be a sort of pandemic-related abnormality, because of their reopening. And it's one of our major points, I have my 10 themes of 2023. And the fifth one is do not underestimate the China reopening, because I believe that they have a significant amount of pent up demand. They’re 1.2 billion consumers, and there could be a weakening in global trade around certain recessionary impact, but then a resurgence of global trade around China reopening. There could be a lot of upward pressure on oil prices around China reopening that’s certainly going to bring a lot more demand for global oil with China normalizing their economic activity in this long overdue process of reopening. So I think there will still be some abnormalities because there's two sides to the abnormal mountain. There was the abnormalities of shut down and then there's the abnormalities of reopening and we've experienced that in the United States.

EICHER: You know, David, I'm thinking about the abnormality of war. And I think of that in the context of the story that moved last week about President Putin of Russia trying to get around the price cap on Russian oil and I wonder how that factors in and whether that war winds down maybe in 2023, what effect that might have on the global economy?

BAHNSEN: Well, no, I don't see it winding down. And I don't think those are two of the same things. I think oil prices and war have different elements involved with them. And I think that the largest aspect on the oil price side that we do know about, you know, the way the war plays out, and the way on going foreign entanglements and complexities surface is by definition unknowable. Look, Nick, nobody knew at the beginning of 2022 that Putin was going to invade Ukraine, and no one knew that oil was going to go to $120 in the middle of the year. But did anyone know that the war was still going to be going on, and that oil would end lower than it was when Putin invaded Ukraine? So these things cannot be predicted - the events themselves, or the response in commodity markets to the events. There's two levels of variants that are unknowable. But the thing I would say about oil prices that we do know is that the strategic petroleum reserves are right now sitting at a level that they were at when the Cosby Show was the number one show in America. Okay, so, this is unacceptable, and it's unsustainable. And if you're going to have 400 million barrels have to be restocked in Strategic Petroleum Reserve, if China is going to be reopening, with another million and a half barrels per day of consumption, and if you don't get a deep global recession, then chances are there's going to be more upward pressure on oil prices, which still even with that massive draw from the strategic petroleum reserves have stayed right around $80. So I think that we have to assume two things - and again, these are two separate subjects. Geopolitically, I assume heightened instability, not normalization. I think Russia and China are formulating an alliance that is deeply unsettling for the West. And I think that there's very little concern about it in the West. And I include here the right in America; people are acting as if this is just no big deal, it doesn't affect us. Well, it does. But then the second piece on the commodity side is that there's a lot of supply and demand issues that we have gotten nowhere near to addressing to produce healthy equilibrium.

EICHER: OK, we’ve got a new Congress coming in—a bigger majority for Democrats in the Senate, actual control, even though it’s a narrow 51-49. Then a change in control of the House, also very narrow but in favor of Republicans.

You mentioned last week, 2022 showed us the benefits of divided government. Do you look for more such benefits in 2023, in terms of economic policy?

BAHNSEN: Well, the better way to say it is economic policy not coming out of Washington, because that's the point of divided government or gridlock. And I think that's exactly right. It was one of our themes in 2022 that I had stated that the political reality will underwhelm. And I gave myself an A plus on this particular account, because that's exactly what happened. The predictions of a huge red wave that then turned to, “No it doesn't look like that will happen,” then resurge to, “It will happen.” And then it, in fact, didn't happen. And through all of those ups and downs of 202, around political expectation, markets didn't care, the markets only knew one thing: there was going to be one way or another a form of gridlock. Now, I don't by the way, technically agree that there are Democrats that are 51-49 in the Senate, because with Kyrsten Sinema in Arizona re-registering as Independent, she sort of codified what was already the case, which is Manchin and Sinema are still kind of purple senators, and then you have a significant amount of red and blue around it. And it isn't anywhere near filibuster proof. And then to your point, the Republicans having a slight majority in the House, the reality is that certain things can get done - and some of them are going to be things I don't like. But some things that they could end up getting done theoretically, I might like. I doubt it. But the big things cannot get done. Something that could be market impacting around a categorical reforming of tax code, trade policy, etc. I don't care if they had 70 Republican senators, they're gonna spend way too much money. I don't care if there was a Republican in the White House. They're gonna spend way too much money; they spent more with the last Republican. So the issues that really matter to me about the financial health of our country are non-partisan. We, as a country, spend too much money and we as a country are okay with it.

EICHER: No question about that. Hey, David, thank you for last week's review. Thank you for this week's preview. Next week, we will get back to our listener questions and we'll look forward to that. David Bahnsen is founder managing partner and chief investment officer of the Bahnsen group, his personal website bahnsen.com. David, thank you so much and happy new year.

BAHNSEN: Well, Happy New Year, Nick, and I'll quickly plug that this Friday at dividend cafe.com this Friday the sixth is that annual white paper coming out about our projections for the year ahead.

EICHER: Perfect. Thank you.

BAHNSEN: Thanks, Nick.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.