Moneybeat: Optimism and uncertainty

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

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David.

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

EICHER: One last bit of economic policy personnel to talk about. When we left off, David, we weren’t sure who’d be heading up the National Economic Council in the new administration, and now we know.

BAHNSEN: Well, since we recorded last week, President-elect Trump did name my good friend, Kevin Hassett to be the National Economic Council director, and I really can't say enough good things about this appointment.

Kevin served twice in his first term, both times as the chairman of the Council of Economic Advisors. This is a role that was previously filled by Larry Kudlow and has a little bit more to do with taking public-policy priorities and working legislatively with Capitol Hill, and working with business stakeholders to try to bring things to reality. It's going to be a very important role.

Kevin's a very smart guy, but he's a first-principles guy.

I've worked with him at National Review for many years, and Kevin and I have spoken together at conferences all over the country.

I'm really pleased with the way a lot of these economic appointments have come together. The question will be the chemistry of the team. Then, you know, where exactly tariff considerations trade immigration, energy—all of these different policy things that overlap but have separate components—are going to be integrated. I would just describe my own mood right now as cautiously optimistic.

You have to be cautious because there's a lot of unpredictability with President-elect Trump, but you have to be optimistic because there are a lot of good personnel behind some of the policy.

EICHER: Alright, let’s turn our attention to the markets, David: What’s your assessment?

BAHNSEN: Well, I mean, I think that it's rather clear that markets have had a tremendous optimism undergirding them.

I think that there is an awful lot of momentum in risk assets. And, you know, even on the half day of barely anybody really working on Wall Street last Friday, you saw markets go up another couple hundred points.

So you're sitting at all time highs in the markets and and I that isn't really all that relevant when you consider that every price markets have ever been at on the way up is an all-time high. But it’s valuation, and I continue to believe that there are certain elements of markets that are quite expensive. The challenge in that is it's not necessarily time-able. Valuation always reverts to the mean eventually, but it doesn't do it on anyone's given timeline. The S&P 500 has traded at an average of 16 times its own earnings, the combined weighted profits of all the companies in the index for over 30 years.

It's right now trading it over 22 times next-year's earnings. But if you were to take out the so-called Magnificent Seven—the major really big in some cases, multi trillion dollar big cap tech companies, which are trading about 50 times earnings put together—then the market is trading at a little bit more reasonable valuation.

And so we're looking at things right now, very selectively, that the overall index is very expensive and is due for some what we call mean reversion. But there are other elements that we think are more fairly priced, and that's what we think the challenge for investors is right now is to find value.

EICHER: And, again, we’ve been so busy with politics and personnel, it’s been a little bit since we discussed the broader economic indicators, David, so whether it’s jobs, manufacturing, housing, economic growth … how are you seeing the overall economy these days?

BAHNSEN: Yeah, I think that there has continued to be for some time a bit of mixed messaging in the data, which is net positive, even though there are some elements that are cautionary. Again, we're kind of talking about a short-term outlook here when you look at the jobs data—wages, corporate profits, when you look at manufacturing, housing—there's a lot of different elements that one could look at to get a feel for what the overall state of the economy is. And I've been critical for quite some time of those that feel the need to constantly politicize this.

It isn't so much a political issue for me as it is objectively assessing what is looking good and what is looking challenging in the economy.

But the reason why, Nick, it's important to differentiate between the short term and the longer term is that the longer term still suffers from something that I think is mostly unfixable right now—which is the overhang of excessive government debt that takes away from future economic growth.

I think that manufacturing has been contracting for some time. Yet we're producing more from less manufacturing. There's obviously a lot of question as to what AI and other technological advancements may or may not do for productivity. But most people who want a job have been able to find one.

It is certainly a better economic climate for people with more advanced job skills than more remedial work. But nevertheless, even at the more remedial work level, there aren't a ton of income brackets where there's low access to jobs.

So that's a good thing.

But of course, prices have been high and that is not so much these days concentrated in terms of ongoing price growth in consumer goods.

It's mostly concentrated in housing. I think the notion of middle-class families having to devote 45-50% of their after-tax pay to rent or a mortgage payment is totally unsustainable.

And I don't think those people are going to see 30% pay increases anytime soon. Therefore, I think housing prices have to eventually correct.

So long answer, but short term, I think that's the biggest issue is the affordability problem in housing.

It can't be solved by government intervention; government intervention is what's caused the problem. There's too much impediment to building new supply and we desperately need more supply, particularly of single family residences.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David’s excellent Dividend Cafe is available to you free at dividendcafe.com. Sign up there with your email address and you will receive it in your inbox as often as he writes. David, thank you, and we’ll talk next time.

BAHNSEN: Looking forward to it, thanks so much, Nick.

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