Moneybeat - Stock market woes

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

NICK EICHER, HOST: Time now for our regular conversation on business, markets, and the economy. Financial analyst and adviser David Bahnsen is here. Morning, David.

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

EICHER: Let’s talk about the markets—that seems to be where the biggest news is—all three of the major stock indexes—the Dow Jones Industrials, the Nasdaq, the Standard & Poor’s 500—those indicators we hear about on a regular basis. All three of them dropped for the third week in a row. For the Nasdaq and the S&P 500, it was the worst week since October of 2020. The Nasdaq is now by definition in a correction. What do we need to know about this?

BAHNSEN: Yeah, this has been a pretty big theme of ours for some time, you have the majority of dividend stocks actually up on the year, a lot of value stocks up on the year. Energy Utilities up on the year. But then those things that we refer to as ‘shiny objects’ at our firm, that are a bit more popular, have a lot more momentum, are a little more exciting, and of course, can be very susceptible to just people acting a little bit crazy. And so a lot of the, well, not only crypto stuff has just gotten hammered, it's now down 50% from its very recent high, and that's in a quick period of time. But a lot of the tech side, you mentioned the NASDAQ—a correction is over 10%. The NASDAQ is now down about 13%. It's still up roughly 6% from where it was a year ago. But it's given back a significant amount of the gains it had from last year. And all of these things essentially come down to one of two things. First is things like the broader S&P, the FAANG stocks, the big tech, large cap growth stocks, some of which are just very profitable companies, very well-run companies. But what's happening right now is that they were just overpriced, there was just purely a matter of valuation. And many people believe valuation doesn't matter when it continues going higher. My view has always been valuation always matters. It's just that you don't know when it will matter. Well, it seems to be mattering right now.

EICHER: Let me stop for just a second. You mention the FAANG stocks—that’s a common acronym in the markets—but not every listener is going to know it. Maybe take a quick minute and explain what you mean when you talk about the FAANG stocks.

BAHNSEN: Yeah, I apologize. The acronym FAANG has become so common even outside of our vernacular that I sometimes take for granted, everyone uses it. And of course, you're right. Many people don't. FAANG is a reference to some of the really big brand name, large cap growth stocks that became some of the leaders in the stock market over the last 10 years. And it stands for Facebook, Amazon, Apple, Netflix and Google. So once you say all five of those names, everybody has heard of all five of them and knows what they're about. But that but that kind of acronym was meant to capture the sort of this ‘us versus them', that there's kind of like these five stocks, and then there's everything else, and it’s happened throughout history that you've had a few names become disproportionately powerful or impactful in market performance. And then that tends to come to an end. So these names are a bit different than all the other things I've been talking about, just simply because of their size and their their profit-making capacity. Yet again, the valuation story, I think is a real concern there as well.

EICHER: All right. We’re talking about the rough patch the market indexes have run into here—I interrupted you—but you were explaining that it comes down to one of two factors and the first you mentioned was valuation.

BAHNSEN: The other element outside of valuation, it has more to do with companies that may not make any money at all, they may not have any definable value, even things in that crypto space, for example, just various things that are much more speculative than they are investment oriented. And again, you can have sustained periods of time where those look very good, feel very good. And in fact, it can look and feel very bad to not be participating. And yet I think the laws of logic, the laws of mathematics, the laws of economic finance always catch up. So we may be going through one of those periods now. It certainly has felt like it the last few weeks. But it could also reverse back the other way. You know, you'll get to a point where all of a sudden speculators want to come back in and think that they have an opportunity to bottom fish on some of these things. You have a company like Netflix that was down over 20% just yesterday alone. But my point is that that speaks to how challenging the environment is. Because Netflix beat expectations on earnings - they outperformed expectations and the stock dropped 20% in one day. How's that possible? Because it's priced for something better than perfection and perfection itself is very difficult to achieve. And when any, the slightest glance of forward looking, disappointment could be out there, it causes the whole thing to kind of tumble. So risk assets have had a great day. The Feds pumped a lot of liquidity out there. A lot of people have felt good in a speculative environment. You're up against a very easy comparative investing environment, meaning interest rates are very low. safe assets have not been attractive. Yet here we are a couple weeks into the new year, and emerging markets are performing great and oil is performing great and and commodities are performing great and all the fun, exciting stuff is not. So this is the way 2022 has at least started off.

EICHER: All right, David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group. He writes at DividendCafe.com—daily email newsletter on markets and the economy. You can sign up there. David, thanks for this. See you next week.

BAHNSEN: Thanks for having me.

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