Moneybeat - The only certainty is uncertainty

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: I know I’m a week late to the first-quarter-market-review party, should’ve done that last week, but better late than never, right? So, first three months in the books. How do you size things up in the markets?

BAHNSEN: Yeah, the first quarter was actually quite interesting because you ended up with a negative quarter in the Dow, S&P and NASDAQ. And yet in all three cases, they were down half as much as they had been down. And so there was a recovery in the middle to end part of March that cut a lot of that downturn in half. You know, even as we're sitting here talking now, the Dow is up 500 points from where it was the day before Russia invaded Ukraine. So we're really not looking at anything all that extraordinary. The vast majority of the NASDAQ's downturn came before the invasion. And so you could argue that what we see as a correction in markets is really mostly related to the tech froth and the kind of overvaluation that existed in some of the consumer discretionary and technology parts of the market.

So one of the points that I've been making is, if the Dow is down 5% from its all time high, well, the market has gone down, on average, five to 10%, at some point in the middle of the year, 99% of the time, going back, you know, 100 years. So there really isn't anything that out of the ordinary this year. And yet the first quarter, I think most people would say that they perceived it to have been a really bad quarter for markets, and maybe blame it on Russia, Ukraine, or maybe blame it on energy prices. I think actually, at the end of the day, primarily what we have is this correction that it actually started in fourth quarter of last year around the overvalued technology stuff.

EICHER: And then the hypothetical critic will pipe in and say, “well, there’s always uncertainty.” To which you might reply, “the only certainty is uncertainty.”

BAHNSEN: Yes, you sound like someone who read my Dividend Cafe last Friday. That's exactly right, Nick. So the things that are uncertain change. People weren't talking about Russia, Ukraine a year ago, but they were talking about something else. And now it happens to be Russia, Ukraine. There's issues with the Fed.

One thing I would point out, so people don't think I'm being overly optimistic on where we are. It is very rare that stocks and bonds drop together. And bonds are down quite a bit, you know, this first quarter as interest rates have risen. And so, you know, when you have both stocks and bonds down together at once, that very rarely happens when you're not in a recession. And in this particular case, we're nowhere near recession. And I think that the work that the Fed has done to markets, you know, by causing people to sort of reprice and revalue assets, it does seem to me a lot of that has already been done. The question mark, now, again, it's another uncertainty that exists and there's always something uncertain is when the Fed starts tightening its balance sheet. Will it surprise markets that it came out in the minutes last week from the Fed that they're talking about doing $95 billion a month of tightening and by the end of the day, the markets are up and they were up quite a bit the next day? So I don't think the markets are looking at even that as a surprise and it's hard for me to understand how they could be surprised when pretty much everyone has known something in that range was coming. But there will be other uncertainties ahead and we live in, you know, certainly volatile times.

EICHER: And we’re always watching how the central bank will act or not act as the case may be. What’s your sense on the Fed? Obviously, it’s poised for some normalization, moving off the zero interest rates and moving off of quantitative easing—as we read and hear—tightening things up to try to head off recession.

BAHNSEN: There's a tension, Nick, as to will they normalize (which I would consider to be a very good thing - I want the Fed to normalize) versus will they create a recession from getting to normalization? And the different camps on this are A) those who think, “Yeah, they're gonna create a recession, it's a foregone conclusion,” versus those who think “No, the Fed is just going to hit this right down the middle and find that sweet spot.” And then there's those who would say, “They won't even end up doing it,” that the Fed is going to end up chickening out before they get to that point. And I'm sure you can find another camp as well. But there's sort of those are probably the three major camps as to what could end up happening with the Fed: either recession, capitulation - which is probably the camp I'm in - or perfection, they just somehow nailed it. And, and so that's an uncertainty - nobody can say at this time what will end up happening. Those are forecasts as to where it will go.

EICHER: Well, before we go, why do you place yourself in that middle ground? Why are you in the ‘Fed-will-capitulate’ camp?

BAHNSEN: It is because of history combined with prophecy. I don't I don't believe that the Fed can - even in the recession camp, I would be surprised if that many people thought that they were going to create a recession and then continue in their normalization, I think at the point in which people think that they tighten credit so much, and extract liquidity so much, that it ends up creating a wave of corporate defaults and substantially increasing the amount of money that the government pays to finance their own debt, and that they would continue in that, it strikes me as politically unfeasible, and unprecedented. And so the capitulation camp is based on history, but also the personality and the ideology of the Fed. The way in which people these days define price stability, which is one of their alleged mandates, and full employment, all of it is defined these days in the context of general stability in financial markets. And I don't believe it is part of the Fed mandate, but I believe the Fed believes it as part of the Fed mandate. And when you combine that with the overwhelming ‘underfundedness’ of pension funds in the country, then the just very practical matter of an overly indebted society having to finance its debt, I simply believe the Fed has cornered itself. So I can't time it and I can't say exactly how it plays out. But do I believe that in the end, they will end up leaning more dovish than hawkish? I most certainly do.

EICHER: All right, David Bahnsen, financial analyst and advisor, head of the financial planning firm The Bahnsen Group.

David writes daily at DividendCafe.com. Sign up there and receive his daily newsletter by email. David, thanks as always!

BAHNSEN: Thanks so much, Nick.

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