On this week’s show, Karl discusses the tug of war between the slowing economy and the fact that the Fed isn’t raising interest rates anymore. Plus, the yield curve has inverted. Now what? And lastly, has the “Bernanke Put” become the “Trump Put”?
Hey everybody, good morning. This is the Eggerss Report. It’s your investing playbook. Thanks for joining me. I appreciate it as always. My name is Karl Eggerss. If this is your first time joining us, welcome board. You can visit us on our website at Eggersscapital.com, E-G-G-E-R-S-Scapital.com Our telephone number to 210-526-0057.
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All right, well, we had a wild week on Wall Street. Didn’t we? This amazing bounce that we’ve seen since Christmas Eve, is it coming to an end? We’ve had a few little sucker punches where it looked like maybe the market was rolling over, and then it continued up. And it certainly looked that way, again this week for most of the week, given the Federal Reserve has completely off the table now.
I mean, the Federal Reserve has basically done this huge 180 where they were raising interest rates in 2018, and now, they’re just done. And we see that the stock market and the investors really like that, but we need to examine the reason why they aren’t raising interest rates anymore. And the reason why is because, the economy is slowing down, which we’ve been telling you for a while now.
Now, again, there’s a difference between the economy slowing down, and an all-out recession. But we did get one big warning sign on Friday. All right? And if you didn’t see it, hear about it, you’re going to all weekend all next week. And it was the inverted yield curve. Now, don’t turn off the podcast when you hear these. These are big wall street terms, but basically, you know that when you blend or borrow money, short term interest rates are always lower than long term, right?
If you’re going a CD, for example, and you do a three month CD. It shouldn’t pay you as much as locking your money up for two years, or five years or 10 years. If you do a 10 year CD, because you’re locking it up, the rate should be higher for you. You should be compensated more for doing that.
Well, in the last few months and years really, the yield curve, they call it the yield curve, which is the short term rates and then you plot the next one, the three months or six months, and one year, two year, five year, 10 year, 30 year. If you plot all those, they should be going up. There should be a big difference between the short one and the long one. Well, it’s not as flat.
So in other words, you could buy a two year CD, or two year bond and get paid almost the same as a 10 year. And when that happens and you have that situation, it looks as if the stock market or excuse me, the economy is not doing so well. It’s sick. It’s like having a temperature. There’s something wrong. The body is telling us something, and there is the economy in Wall Street telling us something. Something is wrong when the yield curve is flat.
Now, when it goes inverted, that means, actually the short term rates are actually higher than the long term rates. And that always leads to a recession at some point. Well, Friday, the three-year bonds on Treasury started to pay more than the 10 year. So that part of the curve they call it inverted.
Well, that set off an algorithm basically that, on Wall Street, if the computers see that there’s a yield curve inversion, it’s triggered to sell. And it’s sold. The market was pretty weak all day, and then of course, sold off into the close pretty hard and finished down on Friday at 460 points. Almost two percent.
[inaudible 00:05:48] really seen a drop like that in quite a while. In fact, the Dow Jones falling that much, that was the worst drop we’ve seen since January 3rd, and when the Dow was down about three percent. So, we hadn’t really seen much of that this year. Same thing on, you name it, the Russell 2000. That was the worst drop for the Russell 2000 since December 4th of 2018. It’s almost five months ago.
The S&P, the worst dropped for that since January 3rd as well. The Nasdaq, the worst drop since January 3rd. But it’s interesting because, we were humming along pretty good this week. Right? And we know there’s basically a few big themes going on. It’s not real rocket science.
The theme is that, we had the Federal Reserve and this shows you the power of the Fed. And once they said, and they started to change their language and took some, essentially hikes off of the table and started softening their language, that’s when the market turned around, right? Around Christmas Eve.
And since then, they’ve only confirmed that they’re not going to raise rates, and the stock market has responded well. So, we have that. We’ve also seen progress on the China trade talks. Little nuggets, little pieces of, we’re getting closer, we’re getting closer, we’re getting closer. And then this week, we saw something that China maybe resending some of their verbal agreements. And then you heard Donald Trump say, “Hey, we may still keep these tariffs on for a lot longer.” So the verbal public negotiations continue.
So the stock market didn’t like that, and there was a little bit of a sell off. But then Thursday, again, a big, big rally because of the fact that the Fed confirmed that, we’re done raising rates, and we’re not going to shrink our balance sheet. So, the market zoomed back up. And then of course, Friday you had the yield curve.
So basically, that the things that are battling against each other are a good economy, or a bad economy. I mean, that’s really it because, yes, we celebrate the Fed not raising rates because if you borrow money, you want to borrow cheaply. And people care more about low rates than they do high rates. They like low rates. Wall Street loves low interest rates.
But again, the reason they’re not raising rates is because they are fearful, and they see the economy is slowing down. I mean, and look, it’s not just here. If you look around and in Germany, they printed some really bad economic numbers this week.
Now, you may be going, what does Germany economic numbers have to do with my portfolio and my 401(k)? It’s a puzzle piece. That’s all it is. Germany is not more important than any of the other international countries, or the US. But it’s a puzzle piece showing that things are a little weaker and they’re slowing down.
But because we have gone through the worst recession of our lifetimes, and may ever go through that, the financial crisis in 2007 and eight, when we hear recession, when we see that the economy is slowing, our minds and Wall street’s minds immediately go to the financial crisis, and, oh, oh, hang on.
And we need to understand that we’ve had recessions, and the stock market has done fabulous. In fact, if you look back, we’ve had yield curve inversions in 2006, 1998, 1989, 1978, 1973, 1966,
… 66 and the market has been higher of each of those times a month later, three months later, six months later, and a year later. So, if you see the yield curve inversion, and you hear a lot about it this weekend, don’t panic. Does it increase the odds of a recession? Yes, it’s one warning sign. It’s a symptom. But again, we had a recession several times before huge bull markets. So again as we’ve been reiterating, the economy is slowing down a little bit, but we are still in a bull market.
Now, can we have a correction? Yes. And, are we overdo for a correction? Probably so. Remember the average drawdown, the average drop in the stock market in any year is around 13 to 14 percent. So, you can have a 10, 12 percent drop and still be at a bull market, whether the economy’s in a recession or not. And again, we don’t think it’s going in a recession. We don’t see any indicators other than the yield curve. Now, there are things slowing down. There’s no doubt about it, but decelerating is not a financial crisis. But, that is the big news, and does that supersede from the stock market’s perspective does that supersede the dovishness, meaning the Federal Reserve isn’t going to raise rates? Who’s going to win that tug of war? Weak economy or the Federal Reserve not raising rates?
But what got hit really hard this week, and I’ll explain why, are the banks. Bank stocks were down 9 to 10 percent on average this week. Now, why would the banks be down so much? Because of the fact that the banks borrow money based on short-term rates, and they lend based on long-term rates. So, think what happens. When you have a yield curve inversion, what happens? You have a Federal Reserve that has to pay yields … I’ll just use round numbers. The Federal Reserve or a bank I should say, the bank pays you 2% on a CD, and you can borrow money at 1.9%. Or, the bank pays you 2 and a half percent, and you can borrow money at 2.4%. Does that sound like the bank is going to be profitable? No, the bank is losing money in that situation. So, banks make their money by what’s called, net interest margin. It’s the difference between what they borrow and what they lend. That’s how they make money, and so that’s why you see the banks getting crushed. They were down 9 to 10 percent, and the regional banks were down even more. They were down 10%, the index. The regular bank index was down 9. It’s because regional banks are much more traditional banking.
I do think you need to look around in the banking area. Look around for bargains. This is an area that may be getting overdone. I think there are some financial stocks getting tossed in as a bank, when they do other things and they may not be as affected as much by the yield curve inversion. So, but those were the areas hit the hardest this week, were the banks down 9 to 10 percent.
Now, we did see other areas like some specific foreign countries. We saw biotech stocks get hit this week, primarily because of Biogen down 32%, 30% one day. Financials overall down about 5%. Insurance stocks down about 3. Russell 2000 down about 3. Airlines down about 3. On the green side, what made money? Well as you can guess, the Volatility Index was up 21% just on Friday alone. And if you’re wondering how big of a jump that was, we haven’t seen a jump of 21% really going all the way back to December 4th of 2018 when it was up 26%. So, it was a big move on Friday, the Volatility Index jumping.
We did see Bitcoin up. By the way, are you watching the issues on Bitcoin? Remember they came out with Futures near the top, and then they’re announcing they’re getting rid of some of the Futures. Maybe that marks the bottom for Bitcoin. Just a little side-note. It’s interesting how some of that stuff happens. But, that was up this week. Of course, treasury bonds up 2 and a half percent, gold miners 2%. Some of the specific commodities, oil and gas exploration was up this week. Consumer discretionary was up this week. A bad day on Friday, but up for the week. So basically, your traditional safe havens, your utilities, your consumer staples, your bonds, your gold, all green on the week. The things that are getting hit the hardest would be things hurt by an economic slowdown, like transports and of course the banks. So, those were some of your big movers for the week.
Now as we move forward, it’s going to be interesting because when earnings come out, that’s the key right? We know over the long-term that the profits of companies is what drives stock prices. Over the short-term, we know it can be anything. Headlines. It can be tweets. It can be whatever. But long-term, it’s all about the profits. It doesn’t matter what the yield curve is doing. It doesn’t matter what any of that is. If the companies are making more money, the stock market will eventually reflect that. That’s what you are buying when you buy the stock market. So as we enter earning season down the road, we will get some more information about how the companies are dealing with this economy. Is the economy really slowing down enough to hurt their profits, or has that been overdone and the companies doing just fine?
Now remember, we had something called the Bernanke Put. Do you remember that? It was basically … A put is a floor. You can buy insurance to protect yourself. And when Ben Bernanke was head of the Fed, they called it the Bernanke Put, which was basically meant every time the market would get in trouble or the economy, Ben Bernanke and the Federal Reserve would do a round of quantitative easing. They’d cut interest rates. They’d stimulate, and the market would just keep going up.
Well, we have the Federal Reserve now that obviously is not raising interest rates, but maybe … and I was just thinking this earlier in the week. Maybe the Bernanke Put is now the Trump Put. Now, does President Trump have as much power as the Fed when it comes to the stock market direction? Probably not, but we know based on his tweets, based on his comments, he watches the stock market like a hawk. He, I think grades himself sometimes on how the stock market’s performing. And with the re-election coming up campaign, he certainly does not want a weak economy and a weak stock market during that period, so he’s going to do everything he can, I believe, to keep the stock market going in the right direction. That meant putting pressure on the Federal Reserve to stop raising rates, which he was very verbal about and actually so far has been successful in that endeavor. The next thing would be trade, right? Maybe he concedes on some things and just wants a deal done. Remember, he’s been pretty tough so far on trade, but maybe that changes if the economy continues to slow down and the stock market continues to slow down as well.
So, I don’t know what other tools he has. Maybe he pushes for another round of tax cuts. I don’t know, but maybe we start to see that. Maybe we start to see all types of things as much as he can, to continue to keep the economy and the stock market going. Just a thought. Just a thought. Maybe it’s the Trump Put. And again, I say that loosely because he doesn’t have near the power that the Federal Reserve has. We’ve seen that type of power, which was pretty amazing, that the Fed was so hellbent on raising interest rates in 2018 as we started to see signs the economy was slowing, and low and behold the stock market was going, “You guys are wrong. You’re not seeing this.” And, they were selling stocks really hard. Big, big nasty correction in 2018. But as soon as they softened their tone, we saw the v-bottom, and they softened it even more, and now here they are. As they did that, the stock market has continued higher.
But, watch for some of these things over the next few weeks. But again, I think one of the main things is the earnings coming out. One of the things that’s been, I guess troubling if you will, is why are the consumer staples so strong? Why are utility stocks at an all-time high? I mean, if the economy was that strong, shouldn’t they be selling off, and money moving more into the really economic-sensitive areas? And yes, we have seen a rally in economics, economically-sensitive areas, but
It hasn’t been at the expense of traditional recessionary type of investments, right? If we’re going through a recession, consumer staples do well because people continue to buy soap and medical stuff. Those are things that aren’t cyclical and they buy utility stocks because those aren’t cyclical, so shouldn’t money be coming out of those? They’re not. That’s been a little concern of mine as we watch this market that was humming along until Friday.
This has been … By the way, this has been one of the quickest V bottoms that we have seen since the early ’80s. Just a massive, massive V bottom. It was because it got so oversold, and again, we’ve talked about that. This is … The last couple of weeks we’ve been discussing this is the point at which if you owned too much of something in December, if you were not allocated properly, you got a little … I shouldn’t say December, I should say October … Coming in … When the market was at highs in October and you were buying things maybe you shouldn’t have been buying, maybe you’re allocation of stocks versus other assets was too high, if you were doing that then and then you got caught in November and December, you’ve had a second chance. You’ve had a massive bounce.
This is the time to say, “You know what? If I owned 5% of a position and I should have owned 2, this is a good time to trim it.”If you owned 70% stocks and you’re supposed to be 50%, this is a good time to trim it. This is a good time to reallocate, and I’m not saying … For those of you who do have stocks and are supposed to have a certain percentage or what have you, I’m not saying to change your allocation and I’m worried about anything right now. All I’m saying is given this run, you’re getting a second chance to pause and take some of that excess that you shouldn’t have had and sell that.
This is a great time for that because again, we’re going to have some correction at some point and the yield curve inversion is obviously something that the algorithms and the computers and Wall Street was waiting to happen officially. When it happened, the sell button got hit, and then, of course, it just escalated into Friday night’s close, whether it’s the weekend or who’s know what, but it was one of the biggest selloffs we had seen. Does it start a trend or not? You’re getting an opportunity here to reassess where you are, whether it’s on individual positions or whether it is your overall allocation because, look, I mean, technically the stock market looks like it should pull back here, right?
The Dow Jones has been … If you look at … Just look at moving averages, if you want to look at something like that. It looks like it’s rolling over here, and again, we’re talking about rolling over potentially for a correction, not a bear market, but again, you don’t want that same feeling. I can assure you, you don’t want that same feeling you felt in mid-to-late December again, right. That one of, “What was a I thinking? How did I get in this position?” Stick with your discipline, stick with your allocation, be smart, and look for opportunities because, again, there’s still opportunities.
I had people asking me about Boeing the last couple of weeks, and I don’t think Boeing is an opportunity just yet. Boeing is down in the last just few sessions … It’s down somewhere around almost 20%, but here’s the deal with Boeing. It was overvalued coming into that news and it’s just now getting to fair value. Well, fair value doesn’t really excite me. I want to see it at a discount. I want to see it a good value, and it’s not quite there yet. Due to the nature of what they do, it’s going to take a little time I think. It’s a very slow-moving process, right? That’s an example of something that if it fell further could present itself as a value, but I’m not looking for stuff that was overvalued and now it’s fair valued. That’s not … That doesn’t get me excited.
What gets me excited is something that is artificially too low and, again, we don’t want to be in that position where you own something that is overvalued and it becomes a deep discount. This is a good time to reassess and to have a strategy. If you still don’t have a strategy, we can help you with that if you want, eggerscapital.com. 210-526-0057. We’re more than happy to help you implement a strategy. Look, over the long term, that strategy’s going to have stocks. That strategy’s going to have some … Some, and again, it’s different for everybody, but some volatility management, and it’s going to have a portion of money in income-producing securities. Things that continue to pay you income, whether the Dow is down 460 points or up 460 points. Income is a really key component to a portfolio. How much you need depends on when you need the money that you’re investing.
Coming up with that strategy isn’t easy all the time because it requires us to know your situation inside and out, and then on top of that, what tools you use to achieve that, and then, where do those investments go? Do they go in an IRA? Do they go in a Roth? Do they go in a 401(k)? Do they go in a joint account? A trust? Those are decisions we make every day, so while we’re talking about the movements of the market in this particular show, bigger picture and your specific situation is much more important than what the Dow Jones did this past week, right? It’s about your specific situation and your goals, and how do you get there, and helping you stick with that. I mean, that’s mainly what we do is help people, talk them through these markets. I mean, not panicking out in late December.
Instead, having really our experience of looking at these markets and saying, “You know what, in late December, this is not a … This is not typical and this is an opportunity to take advantage of a market in buying”, which is what we did. We know a lot of people that sold out in December and are still sitting there and every day hearing that we’re very close to new highs going, “What was I thinking?” Well, it’s because you didn’t have a strategy and you didn’t have somebody helping you along with that process, but this is a time I think that you’re getting a second chance to reassess and get your allocation where it should be because, again, we are just a few percentage points away from an all-time high.
Let’s continue to watch the market here and see what’s going to happen, but again, the next few days or weeks or even months, that doesn’t have anything to do with what your allocation should be like in the long term. What we’re talking about in the short term here is more of a tactical nature or getting where it should be. Long term, again, the next few days shouldn’t impact you.
All right, don’t forget, 210-526-0057, and our website is eggersscapital.com. E-G-G-E-R-S-Scapital.com. If you have any suggestions for the show, if you have any feedback or thoughts or things you’d like to hear, a different format, whatever it is, let me know. I’d love to hear it. I want to continue to try to make the show better and give you information that you want, and we get a lot of positive feedback every week, so we appreciate that. We know we’re part of a … Some of you a normal routine, whether it’s working out on a Saturday morning and listening to the podcast. We appreciate you along on this ride with us and we want to be a tool for you, a resource.
Have a great weekend, and we will see you back here next week on The Eggerss Report. Take care, everybody.
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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.