The Fed is walking a tightrope right now between an economy that they don’t want to grow too fast and one where they don’t want it to slow down so much that a recession is possible. On this week’s podcast, Karl discusses why the stock market was in a slump this week.
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Hey, we’ve got a market that is a pausing shall we say, just a little bit here, and we all wondered when this would happen, right? You know, markets don’t go straight up forever, and we did a video newsletter for our clients earlier in the week, and we said from a technical perspective, this was a logical place for the markets to pull back.
Now, it’s had a couple of times over the last several weeks that it could have paused, and reversed, and pulled back a little bit, and it didn’t. It’s been a very persistent market since Christmas Eve, right? We’ve seen that, and markets don’t just go one way all the time, but they have for the most part.
All of December was straight down, and pretty much all of January, and February was straight up, but for the most part, markets don’t do that. They digest, they move sideways, and we’re getting a little bit of a pause, and we saw that earlier in the week, and a lot of different things going on.
But really, what’s driving this is the Fed, and growth, and that balance, and the markets, and investors, we’re all walking a tightrope it feels like, and what’s that tightrope? Well, we want moderate growth. We want goldilocks. You ever heard about the goldilocks economy? Not too hot, not too cold. That’s what we want, and so it came out Monday, China lowered their growth from six, and a half percent, to six percent.
Now, many people don’t believe it’s even that high. Some people believe all their numbers are fake, they’re not real. China’s growing faster than the US, but what’s happened is their growth is slowing down. So, six percent, far cry from where it was prior to the great recession, but still six percent, really good if that’s an accurate number.
But they did lower it from six, and a half percent, to six percent, and so we saw the stock market down about 400 points, kind of cut those losses in half, and by the way, I talked about it on my radio interview earlier in the week, and if you want to catch that, I do a live radio interview on the Trey Ware show every Monday morning at 7:20 AM Central standard time.
We usually post it on the website most of the time, and I basically answer whatever questions that he has for me, but I mentioned that we could say, buy the rumor, sell the news, right? We heard over the weekend that we’re getting closer, and closer to a trade deal, but we could still see the market sell off. Well, I thought that was good news, isn’t that what everybody wants?
Yes, but that’s why the market’s been running up in late December, January, February, and the early part of March, that’s why it was going up was, because of that. The market’s a forward looking mechanism, and so it had factored some of that in. So, that was a warning that I gave that we could see some of that, and indeed, we may be seeing that right now.
Now, on Tuesday we did see new home sales beat a multi month high. We saw ISM services with a big, big beat. So, Tuesday was a really good day from an economic standpoint, because look, these economic releases that come out every day, you hear about them, right? CPI, PPI, all these acronyms, you probably don’t even know what half of them mean, and some of them are surveys, some of them are real hard data. They’re not surveys, they’re not asking people, they’re hard data.
But some of them are also looking in the rear view mirror. They’re looking back a few months, and we don’t really care what happened a few months ago. We want to know what’s going on now, or in the future, but we’ve been seeing some weaker data coming out, and that’s why we’ve been saying that we see a deceleration happening in our economy, so it’s not going to grow as fast as it was, but that still doesn’t mean that it goes into a massive recession, or something, and the bears are believing that it will.
But whenever you get some bad economic news, then we get some good economic news, and that’s what we saw on Tuesday with the new home sales beat, and the ISM services, real big beat from the estimate. So, we’re getting some bad things coming out, some good things. That is kind of goldilocks to a certain extent. Wednesday, another weak market, and you know, we’ve been seeing a lot of chatter lately by several Fed members about QE.
Remember QE? Quantitative easing. It was basically, we’re going to inject all this money into the financial system. We’re going to buy bonds, the government’s going to come in, the Fed’s going to come in, and basically orchestrate extremely low rates, very accommodative, very extreme things, and we didn’t hear a lot about that the last couple of years, because we didn’t really need it, and now all of the sudden you’re hearing a lot of Fed governors coming out in interviews talking about negative interest rates, and quantitative easing, and why it was good, and why we could do it again, and is it really good for the long term?
Interesting to hear them say that, because are they starting to see something that would cause them to implement that again? Remember, it was only a few months ago, late, late last year that the Fed seemed to be saying, ‘No, no, we need to keep raising rates’, and then they paused, and now could they go back the other direction, are things that dire?
So, it’s interesting to hear them talk about that. Why are they mentioning all that? Well, we’re continuing to get more clues. We did see China lower their growth on Monday from six, and a half to six percent as I mentioned, and then Thursday we saw the European Central Bank, the ECB, another acronym for ya, they lowered their growth forecast.
So, we’re seeing governments, we’re seeing countries lower their growth forecast going forward, and now what you have is as I mentioned, this balancing act of walking this tight rope, which is the tight rope of growth, but not too fast, but we don’t want it to slow. So, what does that mean?
Is there a perfect number? It depends on the situation you’re in, okay? The situation you’re in, it depends on that, and what I mean by that is you have to look at several factors.
It’s not that easy to say, ‘Well, two percent economic growth is always the best economic growth’, that’s not what I’m saying, but we know that if the economy’s growing at five percent, the Fed’s going to fear inflation, and if they fear inflation, they’re going to raise interest rates, which is going to try to slow things down, and the stock market doesn’t like that.
We know that. We saw that in 2018, that’s what it was all about. The economy was going up, it started to slow just a little bit, but the Fed was raising, raising, raising, but on the flip side, if it slows too much, guess what happens? Yeah, a recession.
Earnings go down, and then the Fed has to cut rates to try to stimulate it, and that’s hard, because see, and I’m not defending him, but this was Ben Bernanke who was the former Fed governor during all the financial crisis.
His big thing was, ‘Look, inflation will fix itself, okay?. So, interest rates go up automatically just by the markets, because people will just stop buying stuff when it costs too much.’
It’s deflation that he was concerned about. When things are going down, deflating, real estate prices, stocks, assets in general, that’s something that doesn’t just stop going down, and so therefore, the powers at be, the Federal Reserve has to come in, and inject money to stimulate it.
In other words, he’s more fearful of a slowdown, than he is of inflation. There’s probably some truth to that, but do they always need to be tapping on the brakes, and hitting the accelerator? Like, are they the puppeteer here? They seem to think so, and of course many believe that, what if it was just a formula?
Do we even need The Federal Reserve? That’s a whole nother animal, but if you want to know what’s going on right now, and why the markets maybe have set up, and paused a little bit here, number one, we’ve had a huge run, I mean a huge run, and again, for those folks that were panicking out late last year, they’ve missed a massive, massive move.
But if you want to know why it’s pausing right here is one, we have some technicals, and we’ve had a move, a big move, but number two, it’s because is the pendulum swinging now from, ‘Okay, the Fed has stopped raising rates, we know that, but now as the economy is starting to slip, what’s going to be the next catalyst? Are we going to actually have what’s called an earnings recession?’ You know, over the long term, and I tell you this all the time, profits of companies is what really drives the stock market.
I mean, if we don’t have profits going up, stock market generally doesn’t go up over the long term. So, we saw earnings go up really fast last year, and now they’re flattening out. Are they going to start going down? And if they go down two quarters in a row, that’s an earnings recession. It may not lead to an economic recession, but it could be an earnings recession.
So, that is the mindset right now. That is what Wall Street is talking about. Now, what do you do about it? I don’t think you do anything about it at this juncture, because you need to give this to this market some time to breathe, number one, okay?
I mean, after a move like what we’ve had, you could theoretically give back half of the gains. Think about that. Half of the gains you could give back, and that would still be perfectly normal. That would mean a Dow somewhere around 24,000.
I don’t know if that’s going to happen. You don’t know if that’s going to happen, but if we do pull back to 24,000 from a technical perspective, that would be quite normal. Quite normal, and again we went up to 26 thousand-ish, think we’re at 26, a little over 26,000 the last few days, and we’ve pulled back a little bit, so that would be normal, but again, let’s look at the big picture here.
Let’s take off our hat of what’s the market going to do over the next week? What was Wall Street focusing on this week, versus next week, and last week? Let’s take that hat off, and put back on our financial planning hat, and it’s about your specific situation.
I mean again, if you are supposed to have, let’s just say 30 % of your money in the stock market over the long term, because you think that 30 % can put up with volatility, and it’s going to earn you the most over the long term, because we know the math.
Historically, stocks have been the best performing asset class. If that’s the case, then do you need to worry about this week, or last week, or next week? The answer is no. You don’t need to worry about that. How about if you have 100 % stocks? Should you worry about it then?
Probably not then either, because if you have 100 % stocks, it’s because you have more than 15, 20 years before you’re going to touch that money, and I mean, let’s go back to 08, let’s use an extreme. If you would have bought the market at the peak in 08 before it went down, or the peak of 07 we should say, 2007, and rode it all the way down, and you were sitting there today, you would still have substantially more money even going through a 50 % drop.
So, now does that mean we don’t do anything? No. That’s why you’re listening, is because you want to really I think, correct me if I’m wrong, send me some feedback, but I think you’re listening, because you want to know number one, about some mistakes you can avoid, and some tips, and things, you know, ‘Should I do this, should I do that’, and various situations, and again, I don’t know your particular situations, but I use these case studies I call them, all the time, because if you are in a situation that I’ve mentioned, and it’s similar, you can assess your situation, and obviously tailor it to what’s going on in your life, okay?
So, but you’re wanting to know that, and you’re also wanting to know, do you need to reduce a little bit your equity holdings, or do you need to increase them, or what are some areas that you need that you can take advantage of? And those are very plausible reasons. I mean, tweaking your portfolio, making modifications makes all the sense in the world.
I’ve mentioned to you the last several weeks that we did lighten up, and we had some cash going into December, and we were actually buying on the way down, and that was a tactical move, and we have some funds that are meant to be tactical. They are meant to have a lot of flexibility in how much stocks, or cash, or bonds they have.
That’s how they’re designed. So again, this is about portfolio allocation, but many of you, I shouldn’t say many, but some of you, your whole portfolio, or your whole life is tactical, and you’re setting yourself up for some big, I think extra stress, and extra mistakes by doing that.
So, what we do is try to tweak, but we also do try to tell you some areas that we think are interesting. I think it’s interesting to look at what’s been happening with certain areas as the markets pull back.
I mean for example, if you take a look at the transports, they’ve had a really, really rough time since the market peaked. So, there’s areas that are moving worse than others. I think that the home builders are very interesting, I think the gold miners are very interesting.
And by the way, full disclosure, we own gold miners, and home builders in our aggressive strategy. So, that’s been interesting to watch, but look, I think it’s also an interesting time if you want to delve into individual stocks, this is an interesting time to do so, because we’re at a market that isn’t a spring chicken.
This is a stock market that’s been going up for 10 years, right? We just had the 10 year anniversary of the bottom of the financial crisis, and so as the markets mature, and as they’re sitting at these levels, overall there’s a lot of things that are expensive.
There’s a lot of pockets of the stock market that are expensive, and it’s very hard if you’re putting money into the market, which some of you are, it’s hard to go, ‘Man, I hate to put this money in when I feel like I’m buying something at a premium.’
So, that’s where individual stocks can come into play, because you can cherry pick the good deals, and there are a tremendous amount of good deals out there, and I will just say, most of the good deals are in the value part of the universe, whether they’re large cap, or small cap, but primarily large cap.
I mean, just go think of the most boring names of companies that haven’t done anything in the last several years, and those are probably where you’re going to find most of your gems, most of your ones that you’re buying something that’s really cheap at a garage sale, right? And you can turn around, and sell it on Ebay for maybe 50 % more at some point in the future. That’s kind of the market we’re in. Now, that doesn’t mean you have to buy individual stocks.
Many of you do not do that, and I don’t think you should, because there’s the whole emotional side of owning individual stocks, and seeing something that can move 20 %, or 10 % at a day, and it’s just not worth it for you, and frankly, you don’t need it.
There’s just a lot of people that don’t need that extra risk, ’cause it is an extra risk, right? The only way it’s not an extra risk is if you own 50, or 100 different stocks, and if you do that, what’s the point? You might as well own an index, or an ETF, or a mutual fund.
So, not everybody needs individual stocks, but even if you don’t, there are ETFs, there are mutual funds that you can still hone in, and capture some cheap parts of the market, and again as we’ve talked about, some of you do like to trade, and we speak to that all the time.
And I said that on the Trey Ware show that, ‘Look, it could be a buy the rumor, sell the news market for the short term’, and I said, ‘This is an interesting area.’ In fact, I think I told you last week that if you had positions on that you’ve had on for a while here, especially since the Christmas Eve timeframe, or if you were in positions that you really didn’t want to be in, and you were on Christmas Eve going, ‘What was I thinking?’
Or in January, ‘What was I thinking? I can’t believe I did this’, it’s an interesting time to sell, and lighten up on that. You’re getting a second chance to do that, and so you’re seeing a lot of people do that, and that’s why these markets move the way they do where you know, you have three, four, five days in a row where markets go down, because everybody has the same psychological makeup, right?
We all want to lock in gains. We all to want to buy bargains, and so you see the market’s kind of move in a pattern for a while, and they go one direction for a while, and then they turn around, and go another direction for a while. So, this isn’t a time where we should expect a pause, but I don’t think we panic, you know?
Well, you should never panic, and in fact, if you do feel like panicking, which we’re going to talk about on next week’s podcast, if you do feel like panicking, you probably shouldn’t be buying rather than selling, because usually when you’re panicking, I’m panicking, right?
That’s just our human emotion, and the difference is, I’ve done it enough, and hopefully you’ve done it enough to know that our emotions get us into trouble all the time. So, we need to focus on what we should be doing. So right now, yes, is it an interesting time to take some off the table if you’re short term?
Sure, and then also as the markets pull back here a little bit, what’s presenting itself? What’s pulling back faster than it should? You know, we saw an interesting drop in the biotech this past week. Why? Because one of the heads, or the head of the FDA is stepping down, Scott Gottlieb, and everybody apparently really likes this guy, and people worry about what this is going to look like for their drugs getting approval.
So, the whole biotech industry fell like three percent the day he announced that. I think that was on Monday, or Tuesday. That’s an area where you may go, ‘You know what, that’s a short term concern.’ I mean, should all biotech fall, because a gentleman resigns?
Probably not. Is it a knee-jerk reaction? Yeah. So, you start to look, and go, ‘Do the prospects look better than they were, and am I getting an artificial sell off that I can take advantage of?’ And so that’s interesting, and that’s what you start to do in this market, or the other thing you do too is look for things that are holding up maybe that shouldn’t be, and if you own those, you take profits, and then you’re buying other things that you can take advantage of that have fallen.
So, there are some things you can do when the markets do this. You can again, this modification, this tweaks, and so forth, but we don’t see a change right now in the overall direction of the markets, just like we didn’t last year. That was a nasty, nasty correction, violent, sharp, and it makes you question the things that you’re doing, and saying if you have a podcast.
But it did prove to be a correction, and again, if we are going into a bear market, an actual bear market, a multi year, you’re not going to make any money for years, and years, so just give it up type of market, that’s when you start to change your allocation in a more meaningful manner perhaps, but you see that happen over months, right? And we do need to watch, and we need to watch these levels from last year.
I mean look, late September, early October was the high. A lot of people, they’re going to say this is just a bear market bounce until they see evidence that we’ve broken up to new highs. So, we’ll see on that, but we don’t see evidence based on the internals of the market that we were in a bear market, or are in a bear market.
We’re in a bull market that’s a little weaker, and we had a nasty sell off, and we’ve had a violent rally back, and now we’ve paused a little bit, bottom line. So anyways, okay, Eggersscapital.com, (210) 526-0057 is our telephone number, and if you need help with anything, let us know.
Again, we are on Twitter, we’re on Youtube, and again, keep the communication between us coming, very helpful for me to get your feedback. A lot of you have sent me information on how you’re positioned, why your positioned that way.
Tell me what you like about the show, what you don’t like about the show, and again, if you’re listening on Apple Podcasts, or Stitcher, or Spotify or iHeartRadio, we’re on all of those, give us a rating, comment, whatever. We would appreciate it.
And if you need any help from us, you can just pick up the phone, (210) 526-0057. Again, kind of funny, we don’t really pick up the phone anymore, right? We don’t pick it up. Well, I guess we can physically pick it up, but when you think about picking up the phone, it’s usually, you know, I’m thinking of taking the hook off the wall, and punching the numbers.
We don’t do that anymore, but I’m on speed dial, or whatever. You can call us, (210) 526-0057. We’ll be glad to help, even if you have a friend in a certain situation that needs some help, give them our name, we’ll be glad to help them out. (210) 526-0057 . Have a wonderful weekend. 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.