Innocent Until Proven Guilty

On this week’s podcast, Karl discusses why the market keeps going up despite the many pessimists.  Until proven otherwise, the bull market is intact.

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Hey everybody, welcome to the Eggerss Report. Thanks for joining me. My name is Karl Eggerss. If you’d like to get ahold of us, 210-526-0057. Just a reminder, over the next several weeks some of our communication will change in terms of how we are sending you the podcast. If you’re subscribed to it, you will remain subscribed. If you’re getting it via the various podcasting networks, such as Apple Podcasts or Overcast or Stitcher or Spotify, that will continue to remain the same. If you get it through your email, that will remain the same as well, except the from email will change over time as well. So look for that coming in the next few weeks, some changes, and this all stems back to the merger that Eggerss Capital Management did with Covenant, which was official on May 1st.

So we’re looking forward to some new things, especially for the podcast, to bring some more resources to you, to bring some more guests on, in all areas of finance, from planning to helping you think about tax minimization, and maybe muni bond investing if some of you are doing that or need to do that or want to know the pros and cons of doing that, estate planning, just all types of areas to help you ultimately live your dreams. Sounds kind of cliche, but that really is the goal here is to really grow your net worth and allow you to accomplish your goals of whatever that may look like.

That will continue to happen over the next several weeks and as we have some new changes, but in terms of the podcast itself and how we’re doing it, that will remain the same. You can look forward to many more episodes like what you are hearing right now. If you’d like to share it, please do that with your friends and family and coworkers.

Well, hope you had a great 4th of July. It was kind of a long weekend. The markets were closed a half day on Wednesday and of course closed Thursday for the holiday. Friday they were opened a full day, but of course many of Wall Street didn’t come back to work for one day, so it was kind of a quiet day. But we did get a big jobs report on Friday with the 224 000 jobs added in the month of June. That was better than the estimated 160 000 jobs. What does that mean? Well we’ll tell you in just a minute.

All right, well let’s run through some of the things that moved this week. Again, basically three and a half trading days this week. Let’s run through what was the big winners and losers on the week. For the week we saw natural gas, which had a real big Friday, up about five and a half percent, it was up 4% for the week. We also saw [inaudible 00:03:32] up 3%. Insurance companies. We saw technology stocks. Overall for the market, when you look at the major indices, a pretty strong week. The S&P was up a little over 1.6%. The Dow Jones was up 1.2%. You saw some of the international markets kind of mix this week, and interest rates actually were up on the week. They finished at 2.05%, rounded up, that was a 10-year Treasury, and a lot of that came after the jobs report was released on Friday.

All right, some of your losers. Volatility Index down 12 and a half percent. Remember we had been talking about it was kind of strange because there was a couple of weeks where everything was up. We saw stocks up, we saw bonds up, we saw cryptocurrencies up, we saw gold up. All commodities, you know, most of the commodities were up, and we even saw Volatility up, which is unusual. And so finally that changed this week as Volatility did drop as stocks did advance.

The big news of the week was really the jobs report and the fact that it was hotter than expected, and so initially the stock market sold off because of the fact that, you know, if the jobs report is good, then there’s a smaller chance that the Fed is going to lower interest rates. This is exactly what we’ve been talking about the last several weeks is we’re kind of backed in a corner here, or the Federal Reserve is, where are they in a position where they’re going to have to cut interest rates? Because they’ve been kind of communicating that message to everybody the last several weeks. This jobs report comes out and it’s a little better showing that, hey, maybe the economy’s not completely falling apart.

So we’re in this strange scenario, and look, this isn’t anything that’s new. I’ve been doing this since 1995 and it’s always about this balancing act between a good economy, but not so good that the Feds are going to have to aggressively raise rates, but also we don’t have an economy that is going to slip into a recession and the Fed’s going to cut rates. We want the … I say we, Wall Street tends to want the Fed not raising rates. Cutting rates is great, but we want an economy that’s still moving forward and not having a recession, and we’re in that period right now. I mean we are still seeing a slow down and I would say this week was a fairly low quality rally.

I mean, really what you have right now is demand overall. When you look underneath the hood of the car, demand has really slowed down a little bit, and I say underneath the hood of the car, of course that’s an analogy for looking underneath the hood of the stock market and looking at the internals, and demand slowed a bit. It’s as if everybody has all the stocks they want and they’re just holding pat, not buying aggressively, but at the same time, and more importantly, nobody’s willing to sell. I use these terms generally of course, “nobody,” of course somebody is selling, but generally speaking there’s not this antsiness on the part of investors to start selling stocks. They’re reluctant to buy more, and that stalemate of no sellers and no buyers, the market’s just still floating higher, and because there is some demand, it’s just slowed a little bit.

What we saw on Friday was when this jobs report came out, the stock market, it was a great excuse for people to sell stocks because, look, there was talk that the Fed was going to cut rates in July by 50 basis points, a half a percent. I didn’t ever think that was going to be the case. Now those talks are probably off the table, and so the market [inaudible 00:07:23] off a bit, initially. The Dow was down about 200 at one point and then kind of rallied back as the day went on. But we did see interest rates [inaudible 00:07:32]. Remember, something is amiss here when the 10-year Treasury rate is below 2%, okay? We’re in a position right now where, again, the economy is growing and you have the President who has been clamoring for lower interest rates but yet says the economy is doing great and it’s the best economy in the world. You can’t have both.

Now, you can want both. There’s nothing wrong with him wanting both, right? He’s a real estate developer. He likes low interest rates, he likes to leverage and borrow money at cheap rates. By the way, if you haven’t refinanced some of your debt, go do it, because this is again one of those opportunities that we don’t see that often in our lifetimes. Now, some of you that are maybe in your low 30s, it’s been most of your lifetime that you’ve had low interest rates, but interest rates will go up at some point in the future. Some data suggests that, look, it’s going to slow right now. The Fed’s going to lower rates, and then down the road you’ll see inflation, but that’s another animal. So go do that. If you’re looking to take advantage of something right now it’s low interest rates.

We know that President Trump wants low interest rates and there’s nothing wrong with him saying he wants that. But again, you don’t get extremely low interest rates in this fantastic economy. The reason interest rates are going down in the bond market, across the spectrum, is because the economy is slowing. Now, again, there’s a difference between an economy slowing and one that’s grinding to a halt, and even contracting or going into a recession. I don’t think we’re there, but we are slowing, and we even know, and this was reported by Bloomberg on Friday, that President Trump actually spoke with Federal Reserve Chairman Jerome Powell in May, just a few days after he basically was commenting on how bad of a job that he was doing, that Powell was doing. They only spoke for about five minutes. There’s a record there, Bloomberg saying that it was from 4:42 PM to 4:47 PM on May 20th, according to Powell’s May calendar. I keep a nice little calendar and many of you do. I don’t have phone calls down to the minute on mine, but I guess he does. Maybe he has to for compliance reasons.

So we know that the President, we don’t know what he said, we don’t know if he was apologizing, we don’t know if he was saying you better cut otherwise I’m going to look for all types of legal ways to replace you. We don’t know what he was saying in there, in that conversation, or what Powell was saying, but we do know it’s clear that he wants lower interest rates, but at the same time says this is the best economy ever. It’s been a good economy. Look at the employment situation. It’s been very good, but it is slowing, and no president on a re-election campaign, on their watch, wants a slowing economy, and so he knows that, hey, if the Fed’s cutting rates coming into my re-election bid, that’s a good thing. And we are, we’re setting up for that.

Now, this news on Friday probably didn’t change things. It changed the half-a-percent camp. I don’t think anybody’s going to be saying a half a percent is coming up for a Fed cut in July, but it really didn’t change the narrative for the interest rates as far as cutting them a quarter of a percent. I think that’s going to happen. Now, if we do cut interest rates in this country, if the Federal Reserve does do that, what’s interesting is we know that our interest rates are high relative to the rest of the world. We did our video newsletter, and if you’d like to get on that, give me a email, give me a shout out and I’ll make sure to get that to you. We send it out once a month.

Basically what that showed was we had a chart in there that there’s many countries that have interest rates that are negative for most all of their maturities across the board. Their government bonds are negative, from short-term bonds all the way up to 30 years some of them. Some of them have negative interest rates for 30 years. So you lend your money to that government, you come back 30 years from now, and you had to pay them interest. Something is amiss, right? So you know, we have that going on, and so it’s very conceivable the Fed’s going to cut interest rates.

Of course we have a trade truce, that was big news last weekend. So the next thing up is corporate profits. If corporate profits come in, if the companies say, “Look, things are actually pretty good, yeah we’re seeing a little bit of slowdown, but you know what, it’s not that bad. We can continue to go higher.” And we’ve been talking about that. I’ve been very consistent on this podcast of saying that we are still in a bull market, and I still believe we’re in a bull market. Bull markets don’t end based on tweets. They don’t end on even trade discussions. There’s a lot of things they don’t end on, and they don’t end because we’re in a very long economic cycle. Bull markets don’t end just because they’re old and economic cycles don’t end because they’re old either.

How it works is you start to get some deterioration. It’s as if your tires are starting to bald. The hubcap falls off. Does anybody have hubcaps anymore? Don’t we have wheels? But if you had hubcaps, they fall off, right? You start getting some flakes in the paint. Things are starting to deteriorate. Or, just like old age, same thing, and we’re not really seeing those signs yet, so that’s a good thing.

Now, it has felt like, especially earlier in the week, it felt like we are in this blow-off top phase. I mean, remember, we have not had any type of correction this year at all. We’ve had a little bit of a pullback, but nothing that you would normally see, so we’re certainly due for that, and who knows what it is. It could be when the Fed actually cuts interest rates. It’s a buy the rumor, sell the news, as we’ve discussed before, that could easily happen. That still doesn’t mean you should get distracted or change your overall game plan because of that. So we’re not seeing the deterioration that typically occurs from a bull market to a bear market.

But, again, are we at the beginning of this? No, we’re not at the beginning of this, and I don’t know exactly what it will look like, the next bear market, but the more I do research and the more I look back at history, it’s very clear to me that all these things are very different, how they occur. But it’s clear to me that we can’t just look at the last bear market and assume it’s going to be the exact same. I think that’s what so many people are doing. They’re looking back at 2008 and they’re saying, “Boy, if it goes down, I need to get out of everything and change my life, because I’m not losing that much money again.” That is a typical investor response because of the fact that it’s recency bias. That’s what we remember. We remember 2008, we remember a 50% decline in a lot of different things. But that’s not normal.

What’s normal, again, is what happened during the dot-com bubble. Go back and look. The dot-com bubble was very, very different, where a lot of stocks did fall, a lot of sectors fell, but there’s a lot of places that actually went up during that 2000, 2001, 2002 timeframe. That to me is a normal bear market. I think this is going to look similar to that if and when it happens at some point in the future. You can almost see it from some of the sentiment indicators we watched, that there’s still … and again, go ask your neighbor, I think I mentioned this last week, actually mentioned on our video newsletter as well, go ask your neighbor how they feel about the stock market. Very different today in 2019 than in 1999.

I remember 1999. I remember, literally, little old ladies calling me wanting to get in on IPOs, wanting to find out how to borrow money on their accounts to buy more stocks. Those are not made up stories. I’m not getting that right now. What I’m getting is, “I don’t really trust this market. I don’t know how much higher this thing can go. I keep reading that we’re going to go into recession.” That is not exuberance. That is not how bear markets start. Those comments usually mean that we’ve got much, much higher to go because those folks that have that type of hesitancy probably aren’t as aggressive and don’t have as many stocks as they normally would, because of their concerns. So that’s a good thing from a contrarian standpoint, that sentiment is not as great as it has been in the past.

Now, we don’t want the irrational exuberance, right? That we saw in the late 90s. That was not healthy. 2008 was different because we didn’t have that, but what we did have was a very horrible financial crisis, and we don’t have those types of signs right now. Now, you could argue some of the things that were there in 2008 are still there today. Again, the amount of debt we have, the negative interest rates across the spectrum, those are all very big concerns. Who’s elected and how they deal with those things, that’s a big deal. What other countries … how they elect people and how they deal with it. Those are all legitimate concerns, but all we can do is look at sentiment, we can look at corporate profits, we can look at the economy, and most importantly we can look at the actual market.

That’s the most important thing. Everybody can say it should be doing this, it should be doing that, and the last couple of times it’s done this. I get a lot of that type of research. “The last two times it’s done this was in 2000 and 2007, right before it fell.” That’s all speculation. What we can look at is what’s going on with pure supply and demand, and people are still buying stocks. A little less than maybe they were, but they’re surely not selling them, and that supply and demand has to deteriorate for some time before you start to see something that would be a major concern. It does feel like, right now though, that we are going through some type of what could be potentially what they call a blow-off top. It feels like how much better can things get in terms of the Fed is about to cut interest rates, more than likely. Corporate profits have been doing fine. Unemployment’s very low. We have a trade truce right now. What else is there? That’s why we could see a summer sell off just because, but that doesn’t mean you get distracted with your overall financial plan.

Now, going back to the 2000 market, the similarities I see now in 2019 to the 2000 market is that you do have a select few stocks that are ridiculously overpriced. You have some sectors that are ridiculously overpriced. People searching for yield, people wanting to buy technology stocks, and you are also seeing, on the other side of the ledger though, a lot of companies that are still reasonably priced, and that’s what’s different. We’d have a bifurcated market that’s getting more bifurcated in my opinion. So there’s still value out there. There’s still things to do and we don’t have an everything bubble. A lot of people say we do. I don’t think we do. I think you can still find some very good gems and areas to invest in that are a good deal and aren’t overpriced, but there are some overpriced things. We can look at the number of companies that are coming public and don’t have any profits, right? I mean, some of these IPOs are ridiculous. Again, the difference now versus 99 is I don’t have a lot of people calling me saying, “How do I get in on that action?” That’s a good thing.

Now, we also have been seeing gold doing pretty well, right? That’s something different. We had the best June for the S&P 500 since 1955, I believe. That was followed of course from May, which was a really bad month. So we had another V bottom. So what’s interesting to me is what are things going to look like? This is why I’m still in the camp of having a nice diversified portfolio, and diversify doesn’t just mean small-cap stocks, large-cap stocks, international stocks and US bonds. You know, that’s nice, that’s a core, but you still have to have some things that move differently than the market at times, because I think we may … what if we get a market that, as we move forward, goes down maybe, let’s say it goes down 10% and then moves sideways for three years? We haven’t seen that. We’ve seen a lot of V-shaped recoveries, and so every time the market goes down, people are trained to just go buy the dip, and that is true. If you get a 19 or 20% sell off, it’s a good thing to go buy that, especially if you have a long-term timeframe. But at some point that may not work for the next couple of years.

And so again, it’s important to look at the portfolio. How much income do you have in there? How many things do you have that are not correlated to the stock market? Everybody’s situation is different. I’ve always said you start with the plan and then you build the portfolio based on that. And yes, you take into consideration where we are in the cycle. Things should look different in your portfolio today, probably, then they should’ve looked in March of 09, right? Because even a conservative person in March of 09 could have gone and bought some stocks, because they’re conservative because they didn’t want a stock market that sold off during their retirement. Well once it happened, if you were conservative and played your cards right, then you could take advantage of that stock market sell off.

All right, so that’s going to wrap it up. Just remember, we’re in a position right now where the Federal Reserve is probably still going to cut rates next month, and the market knows that, and so the market’s sitting near all-time highs. What happens when we get to that point? Do investors begin to say, “You know what, this is probably as good as it gets”? I don’t know. That’s something we’ll have to see when we get there, but for right now, market still this week celebrated the fact that we have a Fed that’s accommodative and we have a trade truce with China for the time being. Of course, we’ve seen many discussions go awry, at times, with China. So let’s see if this one has some legs. Of course, as we’ve been saying all along, both countries need each other and both want a trade deal. Let’s see how that plays out over the next few weeks. But once again, happy 4th of July to everybody, and have a great weekend. We’ll see you back here next week on the Eggerss report. Take care everybody.

This show is for entertainment only and information provided by the host, guests, and this station should not be deemed as advice. Your investment decisions 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.

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