Moneybeat: No recession in sight

MARY REICHARD, HOST: Today is Monday, June 3rd. Thank you for turning to WORLD Radio to help start your day. Good morning. I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher.

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: Good morning. Good to be with you.

EICHER: David, you’ve been on this theme of uncertainty and volatility in the economy generally and in the markets specifically, but as we go into a new month is there any reason to think that’s going to change?

BAHNSEN: Well, yeah, the month of May ended with quite a bit of volatility. And there's been a lot of volatility so far, in the second quarter. In the month of April, most of that volatility in the market was to the downside, and you ended up on the month being down about 5%. And then in the month of May, a lot of it had been upside volatility that hadn't reversed last week, a lot of it came back quite significantly, this week, so the month of May ended up being a big positive in markets.

So there's kind of two things I think, that are worth noting on this. One is that the total volatility, meaning where the markets were at one point all the way to whatever the lowest point it's gone, has really not been very significant. I mean, what we call a drawdown, which is the peak point of where a market was to the low point it goes in a given period of time, it's only been about 5%, and the markets average a 10% drawdown every year - on average. And yet, I would say it's worth pointing out that the week by week volatility, meaning how it's going up and down, has been enhanced. And I think that speaks, Nick, to the fact that there are different instabilities right now, everyone loves talking about what the Fed's going to do and when they're going to do it. But you know, now we are getting closer to the election. And I don't think that the election is going to be something that markets can say, “Oh, we're going down this week because of this,” or “We're going up this week because of this.” And what I mean by that is there's going to be a lot of uncertainty, there's not going to be a lot of, “because of this,” because it's going to be a close election. And you have the Senate, the House and the presidency that are all three different outcomes, that all three have a relevant market implication. But it just adds to uncertainty. And when you have uncertainty, when there's a “will they-won't they” with the Fed, when you have uncertainty with the election, and then you have uncertainty with all the geopolitical things out there, combined with a market that is already trading at 25 times last year's earnings, and 21 or 22 times next year's earnings, it makes for a more vulnerable, and certainly kind of edgy, market environment. And so I think we're gonna see that, at least in the stock market for the remainder of the year.

EICHER: We did receive a key economic report on Friday on measuring inflation. What’d you take away from it?

BAHNSEN: Well, the market, certainly the Dow, was up 574 points on Friday, one of its biggest days of the year. And you've got to remember that the April PCE number coming at the end of May is always a little anticlimactic, because we already got the CPI number. Now, I wish it wasn't that way. Because I think the PCE number matters a great deal. But again, you're only looking at a PCE right now, and what that is, is the Personal Consumption Expenditures. It's the inflation metric that the Fed says they use and prefer - and I certainly believe them and agree that it is a superior metric, but it was up 2.7% year over year. Health care is a bigger component in the PCE than it is the CPI and shelter - housing - is a much lower allocation in the PCE than the CPI. And there was an energy gain month over month, but there was a pretty nice drop in food prices in the PCE on the month and so overall, markets responded I don't think it was only to that. But nevertheless, the PCE came in with data that I think the Fed would have liked seeing even more than what they saw at the CPI earlier.

And I should point out, because we talk so much about the stock market, it's the more fun story all the time, but it was the bond yields that really matter. You know, the 10 year Treasury came back to 4.5%. Earlier in the week, it had been getting closer to 4.7. And so it's stayed between 4.3 and 4.7 for months now, and bond yields dropped quite a bit on Friday, and that caused bond prices, of course, to rally higher.

EICHER: The Wall Street Journal reported that the US economy is continuing to lose momentum … there was a story over the weekend saying the Fed might have more than inflation to worry about, and that is the cumulative effect of years of inflation catching up with consumers. What do you think about that?

BAHNSEN: So yeah, I think a theme that many are bringing up right now - and it's not just in the media, I mean, it's something that all of us have to be watching, as well - is not merely where inflation is, prices are and ultimately where the Fed wants to bring interest rates, but just, you know, what the byproduct of all this is in the economy. And that was the big story of 2023 is that so many people predicted a recession from Fed tightening, and it didn't happen. And now there are questions of, “Okay, the Fed’s keeping rates higher for longer; is this going to end up having an economic impact?” And there's certain data points, you know, certainly GDP growth is not at the high rate it had been in the second half of ‘23. It wasn't expected to be. But there were downward revisions in Q1 GDP, it only ended up growing about 1.3% annualized.

You know, there's two stories at once here, though. I mean, there's everyone looking to the quarter by quarter economic growth, to try to get some feel for where output and productivity are now. But there's also just the longer term structural story that I've been talking about for years, and I will be talking about for years, which is that the economy is not going back to 3%-3.1% real GDP growth year over year, where it had been for seven decades, prior to the financial crisis. You know, we haven't had a single year, so we're well below trendline growth. Right now, I think that there are data points that are a little concerning with the overall economy. But there are more data points, I mean, again, you just don't have a recession, Nick, when corporate profits are growing, jobs are growing, wages are growing.

EICHER: Right. So David, for defining terms, you noted the PCE, the Personal Consumption Expenditures, it's part of that package of government economic reports we like to look at for clues around the health of the economy. And we talk a lot about consumption, but not as much as what we have to spend on consumption, which is to say, our incomes. The government has a measure for that too. And I'd like for you to touch on the personal income component that the government publishes each month.

BAHNSEN: So every month the Bureau of Economic Analysis, the BEA, which is the Department of the Commerce Department, so this is under the federal government, an official branch of government, the BEA is tasked with putting out key economic data. And one of those things that we follow a lot and talk about in the podcast, we talked about today, was personal consumption expenditures, which is essentially a way in which they're measuring consumer spending. But every month, we also get a report on what is called Personal Income, and it's a governmental data point that is in the analysis, but it is a little different than just counting wages and salaries. It is including all sources of income, which, of course, is primarily wages and salaries, but it also can include government payments, Social Security, unemployment insurance, you know, even direct payments from Medicare and Medicaid and things of that nature. And so it gives a holistic understanding of how much income people are receiving.

Now it is, again, if all of personal income were coming only from the government, then, you know, you'd have a pretty big problem because you have to figure out where the money is being earned to get to the government to then come back to other people. The portion of personal income that comes from wages and salaries is very important to differentiate the transfer payments from what is being earned in the economy. But nevertheless, gross personal income is a way of measuring how much is getting into people's pockets across the country. And so it's an important data point, like so many others. The BEA is a nonpartisan group; I think their data has held up well over time. They also measure the personal saving rate in addition to. like I mentioned before, the PCE, so those are the major data points that they produce for us every month.

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

David is author of Full Time: Work and the Meaning of Life, fulltimebook.com is where you can find out more.

Thank you, David!

BAHNSEN: Thanks so much Nick. Enjoyed being with you.

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