Moneybeat: Uncertainty principle

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. David, good morning.

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

EICHER: David, I know you’ve observed a shift in the way investors are responding to President Trump. Specifically, his economic moves in the first months of his second term compared to his performance in his first term. Namely, markets seem less convinced now that the president is committed to pro-growth policies. Would you walk through what you think is causing investors to question that?

BAHNSEN: Well, the argument I make is there’s two pieces going on. One is tactical—that the sequence of how they went about doing it in the first term versus now is categorically different: scoring and realizing significant gains first in certain elements of your economic agenda enables you to move to your riskier and perhaps more volatile and even controversial economic agenda item second.

That is what was done in the first term.

People cannot understate the significance of the 2017 tax cuts passing into law. We’re talking about all these Trump tax cuts that are expiring.

The business tax cuts are not expiring. The largest reduction of corporate income tax from a 35%, very non-competitive rate to 21%. That was done and then after a huge year of economic growth in 2017, the achievement of the tax reform, significant victories in both energy policy and deregulation, then moved in the second year to some of the tariff-oriented issues, all of which I basically disagreed with then, too.

But the point was the expression that he was playing with house money. There was already banked, you know, the political victory, but also economic optimism baked in the cake. This time, we are essentially doing it in the reverse order. What he’s trying to do is much more significant on the tariff front.

You know, there were really very little actual tariffs that happened before. There were tons of exceptions. You know, China was able to wait a lot of this stuff out.

And now he’s talking about things that just the market doesn’t know what he’s referring to. What exactly is our policy for Canada? What are we trying to get out of it? Is it a different trade deal? Is it more cooperation at the border? Do we really think Canada is our problem with fentanyl?

Or is there just this fundamental desire to not buy things from other countries anymore and to disincentivize that type of trade?

The market’s dealing with all that uncertainty and not doing it with a major tax package already passed, not doing it with a clear success under the belt of DOGE. So I think that the sequence is different and the substance is different.

EICHER: And you’re measuring that, specifically, by the swoon in the markets, the Nasdaq is down 7% since inauguration day, the Dow by almost that much, and the S&P 500 down 2-1/2% in just a few short weeks.

BAHNSEN: That’s right, and there’s a difference in how it gets perceived in the presidency when, let’s say, you have a 10% drop after you already had a 25% increase. In 2018, the stock market was down 5%. It had gone down more in the middle of the year, but never did it come close to going down what it had gone up the year before to start off with essentially this kind of drawdown is very different.

Now, if this drawdown in the market had happened without this tariff war, just because the market was expensive, it was due for a correction. There were other Fed issues or geopolitical issues that caused a market drop. I don’t think that would be the same category.

Right now, nobody really has anything else to blame for the market drop other than the tariff war, because that’s the only factor that has really changed things. Then the reversal of the optimism that was there after the election, President Trump saw this huge surge in optimism around tax reform, around deregulation, around energy policy. These are the categories I refer to as the supply-side, Reagan categories, that moved markets higher, moved economic optimism higher.

All of that has reversed and reversed substantially, and not just in the stock market.

That’s why there’s line about, “Oh, Wall Street and the globalists are going to have to take their licks.” Well, tell that to the NFIB (National Federation of Independent Businesses) small-business optimism, which is right now at the highest uncertainty level it’s ever been.

Those are American mom-and-pop small businesses. This is not a big business versus a small business thing. This is the whole economy, the real economy.

EICHER: In your Dividend Café writing this weekend, you sent me to the reference library to look up and understand a financial term I’m not terribly familiar with, the “put”—the “p-u-t”—and so I’ll explain it here, that it’s essentially insurance against a market downturn … that it protects investors from declines in asset prices. So you used the concept metaphorically to refer to a “Trump put”—suggesting there’s a threshold of market pain that would prompt the president to shift back to policies that are more market-friendly. How close do you think we are to discovering what that is?

BAHNSEN: Well, my point is that I don’t think you want to wait till you get to that place that the administration is going to be very wise to reverse course before you get there. You don’t know what their level is until you arrive there.

There is absolutely a level at which it’ll be too late that you could reverse policy and therefore maybe help market prices, but the economic damage will be baked in and very likely recessionary.

It’s highly unlikely that we get to a bear market in the stock market and avoid a recession. So, you could argue that just to use that 20% threshold of a drop in the stock market, which is what we traditionally call a bear market, but that is generally the level at which a presidency can be pretty cooked.

It simply doesn’t happen much other than a wartime FDR-type situation in the midst of the Great Depression that you have a bear market and a presidency gets resolved. Richard Nixon in the 1970s, and obviously we know about Bush Junior in the 2000s. You have certain situations where you could argue a bear market was not a given president’s fault, but that’s a tough case to make, and by the way, the same is true for a recession.

I don’t know of a case where a politician has said, “well, we had to go—” what was the word Secretary Bessent used last week? “Detox?” Jimmy Carter referred to “malaise.” We still talk about it now—50 years later.

Maybe sometimes there’s merit in it, but it doesn’t matter. The American people just simply don’t like short term pain and they’re never going to. The economy is way too big, way too complex.

It is so easy to say, if I wanted more economic malaise and detox and pain, we could have just stuck with the other president who was giving it to us. At least the stock market was up.

I’m not saying that’s fair. I’m not saying it’s the way people should think. I am most definitely saying people will think that way.

You see right now a significant reversal in the approval ratings of President Trump—specific to the economy. You do not see a reversal in approval ratings, about immigration, about the border. Most people rightly believe he’s doing good things there and the things he promised he would do.

But I don’t believe you’re going to make the case that, “well, yes, we’re having some tough times in the stock market, but it’s because we’re bringing a bunch of jobs back to America.” Jobs are going to go down, not up, with a trade war. The economy is going to go down, not up, with a trade war. That’s just a fact.

This is a difficult time politically, but really my major point is not political. If I were the president, I would not care for political advice from me. He’s gotten himself elected twice and I certainly haven’t.

So the political side here is not my concern, Nick. It’s the economic side.

I am positive that at both a small business and big business level, we are currently enduring significant uncertainty that is going to create problems.

EICHER: David Bahnsen, founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at dividendcafe.com and regularly for WORLD Opinions. David, thanks! Have a great week!

BAHNSEN: Thanks so much, Nick.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.