Moneybeat: Markets update

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.

David, good morning!

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

EICHER: Well, David, since that big September interest rate cut of half a percentage point, we’ve not really talked about how it’d affect the markets, and now we’ve had a little time to see.

BAHNSEN: Well, the Dow made a new all-time high last week.

Prior to that, the market had been bouncing around a bit. There’s definitely been a fair amount of up days since the Fed rate cut, but some down days as well. The bond market has actually moved lower, and rates are higher since the Fed began cutting rates.

Some people think this is counterintuitive, but you’ve got to remember, there has been some strong economic data since the Fed cut rates—a very strong employment report.

The bond market is always, and forever, on the long end of the curve. Things like a 10-year bond are always trying to price in what they expect economic growth and inflation will be together. I believe that it’s not a surprise we’ve seen this movement, but I also believe that equity volatility will be around for quite a while.

EICHER: There were some new economic data points from last week on inflation, specifically both consumer and producer prices. You always look under the hood on those, David. When you look closely at the components of the consumer price and producer price indexes, what stands out? And begin with the CPI from September.

BAHNSEN: Yeah, it was interesting because energy prices came down a good deal, and food prices were up a little month-over-month.

The volatility in apparel was odd, as there wasn’t any particular reason that clothing prices would have gone higher on the month, but they did.

The inflation rate came down to 2.4 percent year-over-year. Now, the PPI - producer prices - which I think generally is a leading indicator for consumer prices, showed 0 percent movement month-over-month and is down to 1.8 percent inflation year-over-year. But that’s the total PPI.

When you look at non-processed intermediate goods, they are down 7 percent year-over-year. Processed intermediate goods are down, I believe, about 2-to-2.5 percent year-over-year. So there is outright deflation in certain parts of the producer prices.

The fly in the ointment for consumer prices continues to be shelter. I believe that’s largely related to bad data, as the way it’s measured doesn’t reflect the reality on the ground when it comes to rent prices.

Some disagree with me, but either way, to see a significant drop in the headline number, the housing market will likely need to decline. For a third of CPI to result in a 1 percent drop, it means you’d need a 3 percent decline in housing prices.

I think that’s coming, as the Fed eventually unthaws the housing market, and you start getting more transactions. That will eventually put downward pressure on prices—at least, that’s my outlook.

Overall, the CPI and PPI data last week showed numbers around where the Fed wanted them. I think they would have even liked them to be a bit cooler.

Notice that the futures market went from pricing in a good chance of more half-point cuts to now almost no chance of further half-point cuts, with a quarter-point cut in November and another quarter-point cut in December now being priced in.

So, the trajectory is still in place, just with a slower pace.

EICHER: The inflation narrative seems really to be driving a lot of dissatisfaction with the incumbent, which may explain why so much of the battle this time around is, “Who’s the incumbent?” That’s a staple Kamala Harris line, “I’m not Joe Biden.” But as you consider the economic climate, David, what do you see at the intersection between that and electoral politics here in the final weeks?

BAHNSEN: Well, because it’s so tight, I think almost everything has the potential for a marginal impact. Nothing is huge, and yet everything could marginally move the needle.

Kamala Harris announcing she wants a bipartisan coalition is kind of crass politics, but could it help a little with undecided voters? Maybe.

Elon Musk’s support for former President Trump—could that help marginally? Yes. But no, the vast majority of the economic narrative is already baked in.

If someone says, “I’m going to vote based on my assessment of the last few years in the economy,” they’re likely not voting for Harris. If someone says, “I want to vote based on who I thought did a better job with the economy,” they’re probably voting for Trump, simply based on a higher-level affinity for deregulation, tax cuts, and energy independence.

Job data being better, inflation being better—does it help a little for the incumbent candidate? Sure.

But I don’t think it will be meaningful. I think the bulk of the narratives are baked in, and it will probably be other issues that end up deciding this very close race in at least a handful of states.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

If you aren’t subscribing to David’s regular market writing, you can find out more at DividendCafe.com. It’s free and you can receive it in your inbox. DividendCafe.com.

Thanks for your analysis this week, David, we’ll see you next time.

Have a great week!

BAHNSEN: Thanks so much, 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.