The Dividend Cafe - David Bahnsen on The Larry Kudlow Show

Episode Date: February 21, 2017

David Bahnsen on The Larry Kudlow Show by The Bahnsen Group

Welcome back, folks. Time to do some stock market work. Everybody tells me, and CNBC reports, and Bob Pisani, who's one of the best stock market reporters there is, asks cynically, why is every week people say the Trump rally's over? There may be more to it than the Trump rally, but the Trump rally has gone pretty far. I mean, it's had a nice move, 11 percent in just over three months. And in fact, you look at this week's performance, Dow's up 355 points, Nasdaq up 104, S&P 500 up 35. Per percentage change. The numbers are even more impressive. In fact, I'm just going to say since November 8th, that was the election. Dow's up 12.5%.

NAS 12.5%. S&P 10%. But get this. The smaller caps, which are really more growth sensitive, I think it's fair to say. Maybe growth and credit sensitive. Sensitive, I think it's fair to say. Maybe growth and credit sensitive. Anyway, the smaller cap S&P 600 up 18% since November 8th. The Russell 2000 up 17%.

And the big winners, yep, financials. You got it. Goldman Sachs. They're either running the government or running the stock market or both, up 22%. Bank's done very well. Financials up 22%. In fact, Goldman Sachs is up 38%. Now, I harbor no grudge.

This is good. I'm in favor of profits. I'm a free market capitalist, just saying. That's a very nice number. Bank of America up 44%. And, you know, you got your heavy industry cyclicals. What do we got here? Tech up 10, industrials up 12.5, consumer cyclicals 10, materials 11.

11. So it is a cyclical, I think, backed market, which is basing itself on a better economy, better profits. Some of that's probably coming from the anticipated Trump business tax cuts, which will lower tax rates and help elsewhere and produce more profits. At least that's my read. That may not be the only read. There's always a lot going on in the world. So let's bring in two of the best of the best. We've got Jeff Kleintop coming back. Jeff, Senior VP, Chief Global Investment Strategist at Charles Schwab. That's a humongous job. Jeff's, as I say, frequent contributor to CNBC.

And my pal Dave Bonson from California. He's founder, managing director, chief investment officer of the Bonson Group. He's a Forbes contributor, one of Barron's Financial Times and Wall Street advisors. He's also a pretty good op-ed piece. I want to read. This is from the pen of David Bonson. Jeff Kleintop, have a listen to this. I don't know if you've read this or seen this, but it's pretty interesting stuff.

I'm not sure whether it's pro or con, but here. The title for Mr. Bonson is some stock market advice for our billionaire president. OK, I believe that refers to Donald Trump. First of all, Mr. Bonson says Trump has less than 5% of his net worth invested in stocks. So Mr. Bonson goes on to say, when Trump said a while back, we are in a big, fat, ugly bubble, things are going to come crashing down. Well, they didn't come crashing down. Maybe he should have owned stocks, okay? And the animal spirits are better, tax reform, deregulation, repatriation of foreign profits, corporate profits. And then finally, this is the last one. This is the tough stuff. There's always a tough piece here with Mr. Bonson.

tough stuff. There's always a tough piece here with Mr. Bonson. When President Trump touts the performance of the market, he demonstrates a certain degree of incoherence, if not overt hypocrisy. The market was in, quote, a big, fat, ugly bubble at Dow 18,000. That was Mr. Trump's words. Well, what's that mean at Dow 20, hundred. Trump could argue elevated prices are justifiable before his promised policies. But I don't know. He may be doing it out of convenience. And David Bonson suggests that there are other better metrics for Mr. Trump to use besides the stock market. So my pal Dave Bonson, I'm going to get Jeff Klein top to react to this. Feel free to disagree as long as we are civil and respectable. David, you think as I read this, I read this the other day. Trump's focus on the stock market is probably not a good idea.

And if you live by the sword, you die by the sword. And by the way, he was wrong because he predicted the bubble would collapse and it hasn't. Am I getting this about right? You want to fill in some pieces here and link this to investment strategy? Yeah, I mean, I think you're getting it mostly right. The thing I am really trying to get to there, Larry, is that Trump is probably on dangerous ground to use the stock market in a short-term way as a kind of bellwether or benchmark for how he's doing. I think there's plenty of good reasons to be optimistic about certain aspects of the market. I think that there are plenty of reasons to be concerned and cautious of these valuations. But my bigger point is that what the country needs from President Trump,

what he will be graded by, by people like me and Jeff from a stock standpoint and people like you, pundits and analysts, are going to look to GDP growth. And ultimately, if we see the stock market at 25,000 and we're still stuck at 2% or less GDP growth, it is not goingaged something slightly south of 2% for the duration of President Obama's terms. Now, he came in with a bloody mess on his hands, no question. But even if you go back to the middle of 2009, it's about, we'll call it 2%. 2% allows a GDP number historically low. And Team Obama, actually, I don't really believe that Obama believes himself in the stock market. They're always ranking out rich people. But they did rely on the stock market as a justification.

David Bonson, are we seeing this deja vu all over again or you just saying trump should get off this stock market thing it's it's more just that it's it's risky for him that it's an asymmetrical risk reward because ultimately he's not going to get a lot of credit for the fact that the market is higher in the real economy the people that are following it day by day heavily invest in stocks there's a lot of people in that camp that are pro-trump anyways, pro-conservative policy, pro-tax reform. But ultimately, the broader message that Trump won the presidency off of is far broader economically than just stock prices. Right. That's a good point. So Jeff Klein thought part of this, this is not the only part, but part of Mr. Bonson's controversial, albeit very well-written article, is that during the campaign, Donald Trump predicted a puncturing bubble meltdown.

After he won, we've had this tremendous rally. Broad averages up 10 to 12 points and smaller caps up 17 to 18 points. So was he wrong, Jeff? Do we blame him? Or do you take David Bonson's side and say, please, Mr. President, don't hang your hat on the stock market? I think David is 100 percent right on that. This is part of, I think, taking, you know, that that taking him seriously, but not literally type of angle. I look, the stock market's doing very well. I talk to a lot of investors across the country. And while they're a little nervous, there's some uncertainty out there. They're they're real happy with the way the economy is going and the way the market's going. And there's that sense of improvement that they haven't felt in a while. The volatility index in the stock market, we're talking about

levels of the Dow, but the volatility index, which is a good indicator of what markets are pricing in for future risk, if you will, is at 10-year lows. That means the stock market is saying there's nothing to worry about. And that worries me a little bit in this context, the expectation in the stock market for the president's agenda getting pretty high. Investors' top priorities for the president right now are taxes, taxes, and taxes. He's got to focus on getting that done. If I just spend another minute on it for a second, there's a high risk of disappointment here. Look, it's hard to do tax reform. And there are lots of competing priorities and distractions with battles in the media trying to respond to every criticism. And an inexperienced team. But I think the president's upcoming tax speech is going to be really important and likely to move the market.

Expectations are high for a big tax cut that was signaled by the president and how detailed and ready for action it will be. I don't know. I think that the enthusiasm over a cut in the short term should be curtailed, since it could be a long process, but that's balanced by a very positive impact on corporate earnings were to get done quickly. A drop to a 15% effective tax rate from the 30% it's at now would be absolutely huge for corporate profits for U.S. companies. A huge winner would be the financial sector. You mentioned Goldman Sachs, but year to date, many financials have lagged. That could turn around or unveil a really actionable program,

but I'm afraid it could go the other way if it seems more like a broad sketch without a lot of detail. Jeff Kleintop, Steve Moore and I and others are working lobbying in Washington. I want the business tax cuts early, not later, early this spring. Now, my question to you on that point, if the business tax cuts come late in the year, if the rate reductions and expensing and other details are lighter than expected in 2017 how much downside might there be in the stock market well some of that depends on how solid the the overall backdrop remains u.s economic momentum is clearly improving as its profit growth so that acts as a buffer but I think there will be some disappointment. I wouldn't at all be surprised to see a 5 or 10 percent pullback in the market if this gets drawn out, if it looks like it may not

happen, or it may be a very small and not the phenomenal tax cut or the numbers that the president has talked about. Already, we've started to see um uh all you know lower effective tax rate sector starting to outperform high effective tax rate sectors what i mean by that is the market's beginning to get maybe a little bit skeptical on the edges of this and i think you can see more of that if uh if this gets dragged down which is the lower which is the lower we gotta take a break but just be specific jeff which are the lower ones that are skeptical but you know some of the sectors that uh that have really been uh that are very low uh effective tax rate sectors are like technology it's the best performing sector

this year investors aren't betting that there's a turnaround there that they're going to see cuts already they're favoring low effective tax rate companies what would really benefit are those that pay high effective tax rates like the financial sector that's been lagging here today. Well, OK, they've been pretty strong. All right, gents, we're going to come right back and pursue all this. Really, I love the way you both handled this opening. Jeff Kleintop, senior VP, chief global investment strategist at the powerful Charles Schwab operation. Dave Bonson, founder, managing director, chief investment officer of the Bonson Group. Dave writes for Forbes and National Review and Barron's and all the rest of it. CNBC contributors, both of them old friends.

We've got to get much more to carve up. Among other things, I want to know, how much better is the economy getting? I'm Kudlow. Stay with us, please. You're listening to The Larry Kudlow Show. Welcome back, folks. I'm Larry Kudlow. Two of the best of the best. We're talking stock markets.

Jeff Kleintop is the Senior VP, Chief Global Investment Strategist at Charles Schwab. Jeff's a frequent CNBC guest. Dave Bonson, Director, chief investment officer of the Bonson Group, writes for Forbes, writes for National Review Online and elsewhere, also on CNBC. Dave Bonson, is the American economy getting better, materially better, in your judgment? I think up until this point, Larry, it's been getting modestly better, very slow, incremental, tepid growth. And I think that the policy levers Trump is holding will accelerate that growth. So I'm optimistic in that sense about the impact of tax reform when he gets it done. I'm optimistic about deregulation, optimistic about those various levers that we see. But right now, I still think it's been tepid economic growth,

and it's in need of an accelerant. Jeff Kleintop, lots of new optimism in the profits arena. When I say new, you know, I think it started last fall, and it's continued into the early winter. Both the top-down guys, Jeff, and the bottom up guys are really making substantial upward revisions to their profits estimates. Do you buy it? Profits are the mother's milk of stocks, so it's not inconsequential. Do you buy these upward revisions? I do. I think they're reasonable in almost all cases.

One of my favorite economic indicators is the Purchasing Managers Index. This is a survey of purchasing managers, mostly manufacturing firms, because it foreshadows profit growth. It gives you a glance ahead, usually six to nine months of where profits are headed. That's at 56, which is a very strong level here in the U.S., indicating good profit growth ahead. So that indicator that we've had for 60, 70, 80 years, always a good leading indicator of profits is pointing in the right direction. I agree. I think it's a very valid point. Retail sales stronger than expected in January.

I think that's fair. Some of it's gasoline, but it's fair. You are correct about the ISMs. Indexes of sentiment, consumer confidence index is really kind of off the charts, which is very interesting to me. And you're right. That's an interesting one, Larry. I've been doing a lot of traveling across the U.S., mainly in the Midwest lately. I've been in Kansas City and Cleveland and Milwaukee and so many places. And that change in the regulatory climate is just huge. I can't tell you how many folks I talked to who said, you know, all their additions to staff in recent years have been bureaucratic and administrative and all about red tape. And now they're thinking about, hey, I'm a florist. Maybe I can get that next new truck or, you know, maybe I can expand my business in this direction and look at a new area.

A lot of excitement around that. I've been hearing that again and again. And this is not something you're seeing at the S&P 500 level, but it's something yet. But I'm hearing it everywhere I go that people are really excited about a change in the regulatory regime. Before I come back to David, Jeff, translate that. Lower regulations, less red tape, less costly paperwork. Where do you go with that, sectors and so forth? Well, I mean, I think it's... Or is it across the board?

Yeah, why the small cap stocks have been outperforming, right? They've gotten a bit expensive. So you want to be careful where you're looking there because they have priced in some of this. But it does suggest that the fundamentals justify those higher valuations. Dave Bonson, there's been some talk about inflation. I mean, there's always talk about inflation. It's usually wrong. But there's been some talk.

Consumer prices, 0.6% in January, 2.5 percent last 12 months. Broader measures, consumer price deflator about 1.5 percent. I just ask you, are you worried about inflation? And regarding Ms. Yellen's testimonies on Tuesday and Wednesday, which I confess I don't know what she was trying to tell me. The door is open in March and it's open in June and maybe it's open in my hotel room, but I don't know if it's an unlocked key or not. Just help me on this inflation, Fed, interest rates. I've only been covering this piece about 35, 40 years.

I don't know what she's talking about. Well, and maybe that's by design. I mean, I think there's a sort of purposeful ambiguity that has become a tradition out of the Fed, certainly predating Janet Yellen. And I would say that the idea of a sort of secular inflation entering the fray now is probably very premature. A cyclical kick-up in inflation reflected in both consumer and producer prices seems very likely, and I would be probably more wary of that if we do see a big government spending infrastructure bill come down the pike. So some kick-up from where we were seems likely, but on a global level, the deflationary pressures from both Japan and Europe seem highly likely to win the day at just forcing that force. I'm in your camp. Not everybody is. I mean, they're going to

raise their target rates, I guess, I guess a couple of times this year. I hope they go very slowly, gentlemen. Now, if Trump gets his tax cuts through and the economy picks up the way it should and real interest rates go up, that gives the Fed much more running room to follow rates up. But Jeff Kleintop right now, the 10-year tips break even 2 percent. You know, the price of gold pretty much flat actually recently and for the whole last year. Oil looks pretty flat. I don't know. Jeff, I have a hard time with the inflation interest rate story being really a threat. Real quick. Real quick. I think you're right. I think the more interesting story is who is going to be running the Fed one year from now and what will they think about the growth picture?

That is key. You just nailed it. Jeff Kleintop, Charles Schwab, David Bonson of the Bonson Group. I'm Larry Kudlow. We're going to take a news break and we're going to talk about the Fed and hard money with distinguished economist Judy Shelton next up.