On this week’s show, Karl discusses how the Federal Reserve has made a major shift in their thinking and now the market is expecting a rate cut next month. The question is do we really want that?
Hey, everybody. Welcome to The Eggerss Report, your investing playbook. Thanks for joining me as usual as you typically do on this Saturday morning. Grab yourself a cup of Joe, and sit back, relax. We’ll talk about the markets. Really, as we’ve said before, we talk about all kinds of things on this podcast, whether it’s financial planning, things having to do with your taxes. Obviously, we’re not giving tax advice, but just some things to consider. Sometimes we have estate planners on and different guests, but there’s a lot going on with the market these days, and so we’re going to spend most of our time talking about that.
Now, as some of you know, probably most of you know, we had a PR release this past week. Eggerss Capital Management is now part of the Covenant family. In terms of what we’re doing and why and all those types of things, we’ve grown a lot the last few years, a lot of it because of you and the popularity of the podcast and Eggerss Capital Management. With those growing pains comes extra needs for infrastructure and so forth. Covenant is an excellent firm that has a excellent reputation and will give us those tools that we need for our clients for day-to-day purposes.
Here’s the thing, the podcast will stay. A lot of people ask me that. We’re going to continue to do the podcast. It may have a name change over time, little hint there, but it will still Karl Eggerss doing the podcast. I’m looking forward to bringing on more people. We have a tax team now available, so I’ll be able to bring on people from the tax team to give you information very, very quickly as soon as it’s happening. We’ll also bring on people that manage bonds, manage funds, manage all types of things, and a lot of planners as well, I mean, the financial planning aspect, so I’m really, really exciting about what we’ll be doing the next few months.
You will have to be a little patient with us over the next few weeks as this was just announced, and obviously, we’re working through lot of different changes. More on that in the next few weeks and episodes. Very exciting. If you want to look up the press release, just, you can probably Google “Eggerss Capital Management” and “Covenant,” and you’ll see that national press release. Again, we’ll continue to do not only the podcast, but my radio interviews that I do and all the things that we typically do and serving our clients as well, we’ll continue in that. It just hopefully will be more effective in bringing you more information that you can benefit from. That’s ultimately the goal. Karl Eggerss is not going away, and I will continue to do this. I’m too young, although I just celebrated a birthday. I’m getting up there a little bit, but few more gray hairs.
With that being said, let’s jump right in to this week’s podcast and information. Interesting themes going on here right now. Obviously, we had this weird weekend last weekend where Google was out for several hours. That affected Snapchat, Google Cloud. It affected Uber. It affected… A lot of companies rely on Google’s Cloud Services. It was kind of a crazy reminder that we rely on these cloud services, and when they go down, it’s a domino effect, whether it’s Amazon through their AWS or what have you, there’s a lot of companies relying on a few companies, and when they go down or have issues, it affects all of us, whether it’s payments or storage or accessing our different files in the cloud. That’s a little scary, isn’t it?
But Google had that. Then they had some antitrust news come up. Bottom line was you come in Monday, and technology stocks just got absolutely crushed. It was probably the most interesting day of the year. You’ve heard of the most interesting man. This was the most interesting day of the year because there was a ton of stocks up that day, but when you looked at major indices, it was a pretty nasty day. It was primarily because, we’ve talked about this, the cap-weighted indices, Dow Jones. Well, actually, the Dow Jones is pointed-weighted, but the S&P and some of the other ones are cap-weighted, so the bigger the company, the bigger influence they have on how much that index moves each day from a point aspect.
When those tech companies got crushed, it took those indices down, but if you looked underneath the hook, plenty of companies that day were in the green. It was interesting because you had a lot of things working this week that didn’t appear to be working those first couple of days because it just looked like the headline Here We Go Again and the stock market’s going down, but it really wasn’t. A lot of foreign stocks were up and gold and gold miners and all those types of things did very well that day.
Now, again, we’re looking at what’s happening with the yield curve. All that simply is, again, for those of you that are new is short-term interest rates and long-term interest rates and comparing those. When short-term interest rates are higher than long-term interest rates, you have an inverted yield curve. Usually signals a recession’s on the horizon, the economy’s slowing down. The market is focusing on that once again. Our investors are focusing on that once again.
But if you look at… That was about a three-month treasury compared to a 10-year. Now if you look at the two-year and 10-year, it’s actually been getting better, so mixed signals there, but no doubt the economy has started to decelerate or has begun decelerating, which was several months ago, and slowed down. What’s changed is, remember, we went from a Federal Reserve that was hiking all of last year and seemed that they were not looking at anything as far as the tea leaves. They just said, “We’re going to keep hiking.”
Then the fourth-quarter sell-off came, and all of a sudden, they changed their tune and said, “Well, we’re going to put things on pause.” Oversold stock market, Federal Reserve that is now out of the way, boom, we get a huge rally from Christmas Eve all the way up until, really, early May.
Now, here we are this week. What happened? Well, we had some heads of the Federal Reserve come out and say that not only are we neutral, maybe a rate cut would be warranted. Bullard said that on Monday, and then on Tuesday, Chairman Powell from the Federal Reserve, head of the Fed, basically said the same thing. The Dow Jones went up over 500 points that day because he said rate cuts are a possibility. Then what added to the good news, if you will, was the fact that China said they’d like to resolve the trade war through dialogue, so risk gone, market goes up big time on Tuesday.
Fast forward to Wednesday, and we start to see some more negative economic news. The International Monetary Fund lowered its 2019 growth forecast for China from 6.3% to 6.2%. They also said the trade talks have significant impact on China, have had significant impacts on China. That meant that China needs to negotiate here. They’re in a worse predicament than the US. That’s what this is leading to.
We also had the ADP report, which is a, of course, the private company that reports employment, and that was much weaker than expected. In fact, it was supposed to be 185,000, and the employment only grew, according to their numbers, 27,000 last month. Not good.
In fact, this was the biggest miss, so the miss, if you take the difference of what it was supposed to be versus what it is or what it actually was. It was about 158,000. That was the biggest miss since December, wait for it, 2008. You don’t like to hear anything that is the first since 2008, but that was in the depths of the Great Recession. Worst ADP downside miss since 2008.
Now, but we did get, what’s interesting is we got the market rallied a couple hundred points because of the Beige Book, which is basically this report on how the overall economy is doing, but it was really, one thing we saw about Wednesday and Thursday specifically, very low-quality rally. What does that mean?
Again, it’s kind of a opposite of what we saw Monday, so while the indices were up, a bunch of stocks were down on the day. What does that tell you? That tells you those stocks that got hammered on Monday that really control the index, indices, it was the complete opposite. They were doing well, so the FAANG stocks, F-A-A-N-G, which is Facebook, Amazon, Apple, Netflix, Google, all went back up for the most part.
That took those stocks up, but the overall market didn’t look great. Then after the bells reported that Mexico and the US did not come to a deal on immigration and the tariffs would kick in, and so we saw the futures in the evening sell off a little bit Wednesday evening, but, really, the story of the week was oil. Oil prices plunged on Wednesday, and stockpiles jumped the most in almost 30 years. Technically, again, people using the bear market word, which is a 20% drop from where it recently was until now, oil entered a bear market, and it was down almost as much as 5.5% on Wednesday. Brent fell below $60 a barrel for the first time since January.
Yes, that’s good for you drivers out there, which is all of us, but it’s bad for anything in the energy field in terms of potentially job growth and what that might look like and folks getting royalty checks. All that affects the economy. Again, Thursday, we come in kind of a low-quality rally again, but it was the second day in a row the market was up, but it was just a low-quality rally.
Then Friday, we got the employment figures, the official. Remember, we got the ADP, the private payrolls, but this was employment from the US Government, their official numbers. In May, we saw only growth of 75,000, and the job growth was supposed to be 175,000, so 100,000 miss.
Now, some are saying, “Well, it wasn’t as bad as it appeared,” and maybe, maybe so, or should I say maybe, maybe not? Then Barron’s said the good news is that the job market is not yet deteriorating. The bad news is that it seems to have stopped improving, so every month, we were seeing improvement, and we could just be plateauing here, but here’s the thing.
Market jumped again 260 points for the Dow Jones on Friday, and so we had a pretty good week. Remember, it was sell in May and go away actually worked this year. Hadn’t the previous several years, but for the week, we saw a big jump in the markets. Dow Jones was up over 4.5%, Standard & Poor’s almost 4.5%, most of the major indices, but what was interesting was even gold was up, emerging markets were up. Not as much as they had been, but they were up this week.
It’s just a good all-around week in terms of risk gone again and let people know that, a little sigh of relief because we did see some pretty intense selling, really, for most of May, and that seems to have eased so far. We’re still not quite where we were at the early part of May, but a nice rally, just not the highest quality rally.
Let’s watch how that plays out, but some of the biggest movers, the material stocks this week up 9%-ish. A lot of these are approximate numbers by the way. Home construction up 6.5%. Airlines as a basket up over 6% this week. Semiconductors, which have been hit pretty hard, up about 6% this week. Gold miners, which, full disclosure, we own the junior miners in our aggressive strategy, up almost 6% this week. Telecom, aerospace and defense, all up over 5.5%. Good quality week. Even Staples. You would think they wouldn’t have performed. They were up 5.4%, and they’re actually at an all-time high. Interesting to watch that.
On the downside, what lost money this week? Natural gas was down. The dollar was down. Again, commodities down slightly this week, but volatility, people betting on volatility actually lost quite a bit of money this week.
But here’s the thing I want to talk about today is why is the market rallying? Is it just because, “Well things are that bad, and it shouldn’t have gone down in May, and so it’s bouncing back?” It’s not that. It’s we’re in a period of bad news is good news. This isn’t anything new. I’ve been doing this since the ’90s, and it was always that Fed days and what the Fed says and what they’re doing or… it’s always important to people watching the markets and investing in the markets. Investors like when the Federal Reserve is not raising rates, and they’re not raising rates, but do you really want the Federal Reserve to be cutting interest rates right now?
In other words, if they are, it’s because they see issues in the economy, and issues meaning it’s getting weaker. That’s something that we don’t want. I mean, we really want them gradually raising interest rates because the economy is justifying and it’s getting better. That’s where they were a year ago, but now, things have slowed, and many people believe the economy has slowed. That Fed hike they did, that last one in December was one too many.
Now, if you look at the Fed funds futures, you’re seeing three to four rate cuts over the next several months, and the odds of a July rate cut have gone way up. What is that doing? That’s setting us up that if they don’t do it, will the market fall?
We’re in this interesting area again where we’re pricing in that the Fed’s definitely going to cut rates. It’s like the Fed is leading us around on this leash, and the investors, Wall Street, is the puppy dog, and the Feds got this dog treat, and we’re just chasing them around. This is not what it should be about, but unfortunately, it is, and again, I don’t think it’s that different than the ’90s, but there’s no question that since 2008, people are much more, they focus more on the government and the Fed and how much the government and the Fed are pumping money into the system.
We don’t really want them cutting rates, number one, because it hurts the savers in this country from the standpoint of short-term money markets and CDs and savings accounts. Those rates would start falling once again. Yes, it helps you to borrow money to buy a house or what have you, but we really want the economy growing moderately, not wild inflation. We want interest rates to be the reasonable level, that if we don’t want to take any risk, we have an option. We can let our money sit there and earn a reasonable rate, and we went over a decade primarily, mainly about a decade where interest rates were literally nothing, so you either had to take risk, or if you didn’t take risk, you didn’t make anything.
Now in the last couple of years, at least we have some interest bearing things that are actually paying you something. Now, it’s all relative to inflation, but inflation expectations have come down recently. Again, are we seeing a recession? I personally don’t see a recession on the horizon, but there are some things that the economy is slowing down. I mean, we see that happening, and the Fed’s acknowledging it, so everybody knows that. The question is how far does it go and what does the Fed do about it?
One problem I have is why does everybody look to the Fed for the answer, or the government? I heard somebody, a commentator on television the other day saying, “What will the government’s response be to a slowing economy,” as if it’s their responsibility to somehow salvage this. Well, they did tax cuts. Now what are they going to do? How about doing nothing? Sometimes that’s the problem in and of itself.
What I would like to see is that we see businesses invest in people, invest in themselves, invest in buildings, and consumers buy things, and that economy grows, but we’re in this game where, well, if the economy grows too fast, the Fed’s going to raise rates, and so the stock market drops. What does the Fed do? The Fed responds by saying, “Well, maybe we’ll cut interest rates.” They cut interest rates, and the market goes back up.
All of that, we may have a price to pay down the road at some point in the future. Be careful what you wish for as far as interest rate cuts, but we are seeing the market price in a Fed cut. It’s in there. You can see it. That’s concerning because what if they disappoint? If they disappoint and don’t do what we all believe they will do, we have an issue.
Now, some don’t believe they should lower rates. Some think they should just do nothing for the time being, but the market’s telling you otherwise. I mean, again, why would you see a jobs report that, on the surface, wasn’t that great, and yet, the market just takes off and goes up almost 300 points on Friday? It’s because investors want the Feds cutting rates.
Let’s say we get next week, we’re going to obviously, we have threats of tariffs on Mexico outside of anything having to do with trade. This is primarily about immigration, so now we have tariffs being used for all kinds of things. Let’s see if that gets resolved. Again, let’s see if the China dialogue continuous, but this isn’t just about trade right now. This is about the economy slowing as well. We need to continue to watch that. Obviously, earnings coming up in the next few weeks is going to be very, very important not only in what is being reported but what the companies say as well.
Shifting gears real quick before we get out of here. I do want to mention that be very careful about where you’re getting financial advice from. I say that because I hear about people saying their CPA, who, if the CPA’s qualified in taxes and as an actual financial advisor, fine, but many CPAs are not, and they’re telling people, giving them all kinds of advice regarding the financial markets. That’s very, very dangerous, and they really need to stay in their lane.
Just like myself, I need to stay in my lane when it comes to taxes. I don’t do tax returns. I’m not a CPA. That’s not what I studied. Yes, I took some accounting classes as part of my finance degree, but that’s not what I do on a daily basis. I defer to a qualified CPA to help with that, which we now have on staff, which is exciting.
I would say the same thing for CPA. Very similar to somebody that’s an insurance salesman and is posing as a financial advisor. Be very careful about taking general financial advice from somebody who literally is just a salesman or a liaison. Just a word a little word of caution. Again, I try to bring you things that I see during the week that will hopefully be helpful to you.
All right, hey, if you need our help, don’t forget, 210-526-0057. Keep in mind that eggersscapital.com website and the communication we send is still up and running for the time being, but we will be changing things over in the next few weeks, so just be patient with us, but these podcasts and all our communication will continue to come to you. If you have any questions, feel free to reach out, 210-526-0057. Thanks a lot, everybody. Take care.
This show is for entertainment only, and information provided by the host, guest, and this station should not be deemed as advice. Your investment decision should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.