Moneybeat - Making sense of the markets

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

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen. He is on the line now. Good morning.

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

EICHER: Alright, so last week we talked about the bear market on Wall Street that happens officially when a broad market index falls by 20 percent or more from its most recent high. And that happened with the Standard & Poor’s 500. But no sooner did that happen than the very next week the S&P 500 rose almost seven percent. The Dow and Nasdaq indexes also had a strong week—up 5 percent and 9 percent respectively. So do you think the market has found its low and this is the beginning of a bounce back?

BAHNSEN: Well, I get asked that quite a bit. And I was hoping you wouldn't have to ask me. But, you know, it's a pretty fair question right now. But I gotta say the same thing to you that I say to everyone. Nobody knows, you know, for sure. And I think that a week like this, the Dow was up 5.4%, that, you know, when the Dow was down a couple 1000 points, and then comes back a couple of 1000, there's a tendency to want it to have been a bottom. But unfortunately, there's two different variables that we're having to look at. One is whether or not we washed out all the excess valuation, and all of that froth and so forth, the kind of euphoria that had built up in some of the shiny objects of the market. And I think it's possible that those valuations have gotten low enough, at least in some elements, certain things, you have to remember down 70-80%. But then the problem is the second element is the earnings themselves. Do we go into a recession? Do we go into a prolonged one? Is there significant macro economic challenges ahead that could actually hurt not just the valuation of risk assets, but the underlying fundamentals, which up till now have not been substantially impeded. In fact, earnings growth is still on track to be up about 10% this year. So I don't know if markets go lower, particularly from their low of a week ago, like you said, it was a very impressive rebound this week. But you get what's called bear market rallies all the time. And my thought is the same as before this period of market turmoil and during it, and will be the same into the future. Trying to predict exactly what the market will do when is unhelpful. And yet focusing before, during and after on quality, focusing on those things that can be properly understood that are not rank speculation, I think that's the best place for people to be.

EICHER: Before we go, though, David, I do want to ask about this consumer sentiment measure. This is from the University of Michigan, consumer sentiment survey and we read that it has hit the lowest level on record. So is there ever a reason to put much stock in these reports?

BAHNSEN: Well, first of all, it is backward looking by definition, what a consumer feels about something at a given point in time is almost entirely driven by something that just got done happening. Consumers are no better crystal ball holders than anybody else. And so when you're referring to what some of the price levels have been, it's very interesting to see retail spending go higher. And consumer confidence, say it went lower, like people feel worse about the purchases they just got done making. I've never cared about this data metric. I've never paid any serious attention to it. We see it every month. The media loves talking about it. But do I think it has any predictive value? I do. I think it has contrarian predictive value, that basically consumer sentiment generally does get its lowest at the end of recessions. And so as a forward looking indicator, it tends to indicate that things might even start to be on to an upswing. The issue here is there's just a lot of unknowns, you know, what will the Fed end up doing? What will its impact be on certain things. By the way, the consumer is not going to suffer from them succeeding and breaking down housing a little bit, to the extent that higher interest rates help lower housing prices and and bringing back some realm of affordability which is totally lacking right now. That could end up being very positive for a consumer. What has been negative for a consumer is having the percentage of their income that they're spending on rent and mortgage be the highest it's ever been in history. So there's moving parts here, Nick.

EICHER: All right, that's David Bahnsen. He's a financial analyst and advisor and head of the financial planning firm, the Bahnsen group. David writes daily at DividendCafe.com. You can sign up there to receive his daily newsletter, the DC today. David, thank you so much, and we will see you next week.

BAHNSEN: Thanks so much, Nick.

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