On this week’s show, Karl explains how the Chairman of the Federal Reserve, Jay Powell gave investors exactly what they wanted this week.
Hey, guys. Welcome to The Eggerss Report podcast. My name is Karl Eggerss. Thanks for joining me. Our number, 210-526-0057. Our website, eggersscapital.com, E-G-G-E-R-S-S capital dot com. Everything we do is on the website if you just go to eggersscapital.com/blog, or you can click the big button on there that says, “Investor Education.” Everything we do on there is put right on the website in terms of the podcasts. We do articles. We do have radio interviews. We have YouTube videos, and of course, you can go to our Twitter page. @KarlEggerss is the handle. You can go to our Facebook page. We have an Instagram page, and all those different things are different ways to articulate different stories, so some people really like graphs. Right? They like seeing some evidence of what’s going on. Some people like to read what we have to say, and so we transcribe this very podcast underneath the audio part on our website, so you can just read, read it, if you’re somewhere where you can’t listen to the weekly podcast, and then if you like to get some financial planning tips and so forth, that’s what’s on YouTube.
There’s lots of different formats and ways to get our information, and the podcast is available on Apple Podcasts in the iTunes Store, so make sure you check that out, and all of this information, you can like, and share, and give us your feedback. We appreciate that. As always, a lot of you have, over the last couple of weeks, have kind of sent me what you’ve been doing in your own portfolios or not doing, and we’ve been pretty clear throughout this that we have been going through a correction that has been really predicated on a few things. Number one, it was that the economy is decelerating. We don’t believe it’s a recession. In fact, if you go look on our website, on Friday we did put, excuse me, or on Twitter @KarlEggerss on Friday, we put a picture up there of Chicago Purchasing Managers’ Index.
Chicago PMI came out. It’s a regional survey of how, basically, how business is going, and very, very high levels. I put a picture showing previous recessions, what that looked like, and it’s nowhere near there, so I don’t think we’re going into recession. I don’t think we’re going into a bear market, but it’s been justified, I think, that the stock market has struggled here. If we take a look at the fact that we’d been going through a deceleration and continue to do so, so things are starting to slow a bit. When you pile on the tariff talk and already some of the ramifications of that, of corporate America potentially adjusting and not knowing what’s going on with that, and we will find a lot out, maybe, at this G20 summit, which will probably get some positive comments come out of there, but it’s not like they’re going to get some deal done. Then you have the Federal Reserve. How are they handling all this? Are they taking in consideration the tariffs and what that could do? Are they taking any consideration that the economy is starting to decelerate?
We saw this week, a big reason the markets were up this week is Jerome Powell, Jay Powell, the one that Trump wanted in there and then he wanted basically removed, capitulated, didn’t he? I mean, did he listen to what everybody’s been whining about with interest rates? Because at his speech this week, he stated that we’re almost at neutral. It’s a different message than what we were getting from him earlier, so he used the quote “just below” neutral. We’ll get into that in just a minute, but that was what’s been going on, but the fact that we are struggling, the stock market’s struggling, is not a surprise, but nobody knows exactly where it’s going and what it’s discounting, because remember, it’s a discounting mechanism. It’s making moves based on something that’s going to happen in the future. That’s just the way it works, and so the fact that it started to struggle in January and February maybe was a precursor to the fact that we started to get an economic slowdown in the last couple of months here.
Before we get into some of that, let’s talk about what things were moving this week. It was a good week for the markets overall. Markets were up anywhere from four to five percent. It was a big, big week this past week. Now, if you take a look at some of the things that were kind of the strongest areas for the week, technology, growth stocks, consumer discretionary, even healthcare, high beta, semiconductors, all the stuff that was kind of leading the rally the last few months, and even couple of years, really came back. Right?
On the other side of the spectrum, the things that were down this week, volatility, the gold miners were down a hair. None of this was down a lot, but they were down a little bit. Oil was down again. Silver was down. Steel stocks were down a bit. Gold itself was kind of flat a little bit, so those were some of the weaker areas. Bonds just didn’t do a lot, which is still interesting to watch, but it was a good week. What happened this week was, we came in Monday, markets were up pretty strong.
Trump had more comments after the bell about tariffs and was kind of talking some of that before the G20. I think he was trying to talk tough before the G20. Right? Getting a couple more shots in there, negotiating power. We saw oil bounce a little bit on Monday. Tuesday, markets were mixed. The dollar, which we’re going to talk about in a minute, remained very strong on Tuesday, and Trump once again, on Tuesday, reiterates, and this is interesting, he reiterates the day before Chairman Powell’s set to speak, Trump says he’s not happy with his pick of Jay Powell. Really interesting stuff to hear a president say that.
Wednesday, though, turned everything around. Wednesday, Jay Powell’s giving the speech, and he uses the phrase, “We’re just below neutral,” quote, “just below” neutral. Now, that’s opposed to a long way from neutral, so remember, if we go back a few weeks, he’s talking about that we have a ways to go, but for neutral, and everybody kept asking, “Well, what’s neutral? What does neutral mean? Where is that?” Because if we don’t know what that number is, then we’re all speculating. The fact that he said, “We’re a ways from neutral,” made it sound like they were going to continue to raise rates regardless of what happened in the economy.
Now, I’ve been mentioning the last few weeks, if you go back and listen to a few podcasts, we’d been talking about that there’s been little hints lately from different Fed governors talking about “data-dependent” again. Remember that phrase? Data-dependent, meaning, “We’re going to let the data speak for itself, and then we’ll adjust rates accordingly.” That’s good. That’s what the bulls want to hear. There were some other comments made that just made it sound like maybe the Fed’s backtracking a little bit. Well, Jay Powell kind of put the exclamation point on that when he came out and said, “We’re just below neutral.” He also talked about some concerns he has as far as economic growth, so that combination, boom, got the market going. The Dow jumped 620 points, but what I thought was interesting was, notice the Volatility Index. It didn’t really, it didn’t plummet that day, so I thought that was interesting.
People were still holding on to their protection, if you will. Thursday, we saw the oil drop below 50 in the early morning, and then it reversed and it finished higher, so people were saying, “Hey, was that the bottom or not?” Lo and behold, Friday the oil started falling again and went below 50 once again, so it’s flirting around this $50 level, which there’s a lot of areas around the country where that’s kind of the break-even on some of these places, so it’ll be interesting to see if that’s a critical level.
Once again, the VIX market was strong on Thursday, faded a little bit, but the VIX, the Volatility Index, was in the green. I mean, as strong a day, or excuse me, a week as we had, and the VIX was down 13, 14%, not very much, so let’s keep an eye on that. It could be a contrarian sign. It could be that something, more volatility’s coming, so let’s watch that.
Of course, Friday, President Trump signed that new … I don’t even know the name of it, but the new deal with Canada and Mexico, and none of them looked like they really wanted to be there, because behind the scenes, they’re still fighting about stuff, but they signed the deal, dog and pony show, thank you, good night. They all walk out. Then President Trump heads off to the G20, and he cancels, of course, his meeting with Putin, so let’s see what comes out of this G20 meeting.
But the big news of the week was, Jay Powell blinked, and market clearly liked that. Now, here’s what’s sad about this, and you guys know this, that there’s those people out there that say the Fed needs to raise rates so that when the next crisis comes, they can just drop them. We’ve seen evidence that they always raise them too much, and they have to come right back out and start cutting them again, so many people believe they’re already setting up to have to cut next year, when we go into recession.
We’ll see about that. I don’t think so, but here’s the deal. I mean, we’re at a point now where the Fed may pause, and it’s unusual for them just to hike and then pause, and then hike some more, go back and look. They tend to go in these big cycles where they raise too much, they drop them, they raise again. They don’t typically pause, but if they raise again in December, which they will raise in December, and then if, after that, they say, “Now, we’re going to wait and see the effects of what we’ve done trickle into the economy,” the market will like that. Now, it does beg the question, if they’re having to pause, is it because the economy is so weak? I don’t think that’s the case. Just remember there’s a big delay between the time they hike and what it does to the economy, and they’ve hiked pretty consistently for a while now. Right?
Now they need to let it marinate. What’s sad about it is, I’ve mentioned this before, is that technically our markets should be higher in terms of the interest rates. The interest rates should be higher. The problem is, is when you’re at zero for 10 years, it’s very difficult to start raising rates, and so the market and investors are much more sensitive and don’t want them to go higher. I think they could go higher, and they probably waited too long to raise rates. They could have raised them earlier a few years ago, but they didn’t, and so now they’re trying to play catch-up a little bit, and the market’s throwing a hissy fit because they don’t want higher rates. Again, if the economy can’t withstand rates higher than two and a half percent, maybe we have some bigger issues systematically, wouldn’t you say? Shouldn’t we be able to handle higher rates than two and a half percent?
That’s a separate conversation for a separate day, but Jay Powell did blink, and it doesn’t guarantee what they’re going to do. It doesn’t … He may have, his words may have been purposeful for various reasons, but it was interesting that he did, basically seemed to capitulate with what the president and the market’s begging for, which is for them to say, “At least we’re open to pausing.”
Now, I mentioned the dollar. I think, and then we’ve talked about it before, but it’s really interesting, because the profits of companies in this country have gone up tremendously since the last couple of years, especially since the election, and there’s no way they’re going to continue to go at that pace, so the market is starting to price in that things are going to slow down a bit not just economically, but from a profits going up, so profits are still going to go up, but they can’t go up that fast.
What’s going to happen, I think, is, number one, the economy’s slowing a bit. Number two, you got tariff concern, and number three, you’ve got the bugaboo, which is this big U.S. dollar, the dollar going up. All our officials say, “We want a strong dollar,” and the problem is, is it’s gone up a lot. It’s gone up a lot this year. In fact, if you look at it just from the beginning of the year, it’s probably up 12%. That’s a big move for the dollar. That’s a headwind for these large corporations, so if you’re an American company selling your stuff overseas to get it back in the United States, that profit, you got to convert it back into expensive dollars, so it’s going to hurt these international conglomerates. Let’s see if the dollar starts to peak here, because there’s all kinds of ramifications for too strong of a dollar.
We’ve seen in the past President Trump talking about the dollar, and politicians have a big influence on the direction of it, but it’s gone up pretty much in a straight line since the beginning of the year. Now, remember, last year, 2017, it was the opposite. This isn’t a commentary on where the stock market goes relative to the dollar, because 2017, the dollar was weaker, market went up. 2018, dollar very strong, market kind of flatish. Right? But it is a headwind, and it’s going to continue to, the longer it stays at these levels, the more it’s going to hurt corporate profits, so I think part of what we’re seeing is, everybody’s saying, “Boy, look at the P/E ratio has really come down,” but they may be looking at earnings that may not be there.
They may be price, using the E in the P/E, may not be what they assume, so I think the market is pricing some of that in, and then again, we are having a cyclical slowdown. It is happening right now, but I would caution many of you are that are expecting a recession that we’ve had cyclical slowdowns. We’ve had a few of them since 2008, and those were buying opportunities, so there’s a difference between a slowdown and a recession, and there’s also a difference between a recession and a financial crisis. I don’t even think we’re at the recession part, but we are going through a correction.
I’ve said that I don’t think the bull market is ending, but I also have said in the last three weeks or so we have taken some money off the table in one of our strategies, and it’s our strategy that is meant to reduce volatility. That’s the nature of that strategy, so when things are kind of a coin toss, it’s on, the money’s on the sidelines. It’s not a big percentage, but it’s about 15% of that strategy, so it’s nothing to sneeze at, but it’s not like taking 90% off or anything like that. When the market peaked basically in November 8th or 9th, the 9th, that Friday was the day we took some of that off. Sure enough, we went down to the old lows after that, and we’re still not back to where we were a few Fridays ago, so we now have this W pattern. Right?
It looks like a successful test of a low, but we’ve never really had the capitulation. We’ve never had the massive VIX spike fear-based selloff. We’ve had some intense selling, some fear. Certainly, people are talking about it, but it almost felt like we needed a break to new lows, have the VIX really spike up, and then we’d get a nice reversal. We never got that, so this pattern has almost been too clean and easy, but it has held so far. Technically, it looks pretty good, but I will tell you this.
As of right now, the close of the week, we have seen that we’re still, if you look at the Dow or the S&P, we’re still making lower highs, so until this rally goes above the peak, which was, let’s call it November 7th, till we go above that level, we’re still have to question where we are, and some of the things that I watch are still in a state of a little bit of elevated fear. Having said that, there’s still a yellow light here. The market needs to prove itself to us that this correction we’ve been going through for the last couple months is over, and I don’t know if it is or not.
That’s why we have some of that cash on the sidelines in that particular strategy, but it is interesting that if you look at some of the things that have been happening underneath the surface, and I mentioned this a few weeks ago, from early October, emerging markets have outperformed the U.S. Some of the developed markets have at least held pace with the U.S. If you look at things like commodities have outpaced the U.S. since mid-September, so there could see a little mini-rotation happening, but we did see a bounce back this week of some of that stronger, that stuff that had been leading the way, as I mentioned, when you talk about some of the semiconductors, and the triple-Qs, and the momentum type of ETFs and whatnot, so again, let’s watch that.
There is something else, too. I think if you look at the stocks that have been, some of the internals of the market, when the market got to its test of that low, kind of have that double bottom, they call it, the internals were better the second go around they were the first time, so we’ve had some positive divergences that could mean that that was a successful test, and we have, we do have the calendar on our side, and we probably have a nice Santa Claus rally in us for the rest of the year.
In addition, don’t forget the mutual funds have to do their selling by October 15th or so, so when they do that, they, if they sold something for a loss, they can’t buy that back until November 15th, because it would be a wash sale, so if they want to sell something and get back into the same position, and they took a loss on it, they wait until November 15th, so now, some of them may be doing some of that buying that we hear about, kind of the … They used to call it the January effect.
Could be the Santa Claus rally, all of that, so let’s watch, and it could be some of the beaten-up stocks do really well in December, so that’s something to watch as we move forward, but again, this market right now would not overtrade it, and it’s very easy to do that, but we’d been very methodical and patient with this market, because if you kind of look at where it is right now, it’s essentially, at least the Dow Jones is back where it was on October 10th, so we’re coming up on two months, point to point, where it’s sideways. A lot of volatility, a lot of jostling around, but they didn’t really go anywhere. It’s like you’re dancing, but it’s not like you’re running anywhere. You’re just kind of staying in place, and that’s what’s happened. We keep seeing these kind of fades into the day. We saw that Thursday, market finished a little lower.
We saw that Friday, market was up almost 200 at one point, kind of faded into the close, so there’s still a lot of uneasiness and, of course, with this G20, but don’t bet everything on this G20. This issue with China is a long-term deal, unfortunately. It’s a little longer than just saying, “We have a deal.” That Bloomberg article that came out saying that the president had told staffers to draft a deal, I don’t think it’s that easy, because it’s not just about trade. This is about, there’s intellectual property. It’s not just about businesses and some of this money flowing back. There’s some other stuff going on that’s a big, big deal, and this, we have to get this part right, and it’s going to take some time, but I do think the pressure is on China. I think we have the upper hand as America, and we will see that, but some positive news could be enough catalyst to get the market going through the end of the year, and also having the Fed say more dovish things and be on hold would certainly add to that.
All right. Have a wonderful weekend. Don’t forget, eggersscapital.com, and our telephone number, 210-526-0057. Don’t forget to subscribe to our YouTube channel. Let me know what you think about that, and if you have any questions or thoughts or anything, please always feel free to send us a line. Have a great weekend, everybody. Take care.
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