On this week’s show, Karl discusses the differences from 2017 to 2018 in the stock market.
Hey everybody, welcome to The Eggerss Report. My name is Karl Eggerss and this is Your Investing Playbook. Welcome to the show. If this is your first time listening to the podcast, welcome aboard. Hopefully you listen every week going forward. For those of you that have been listening, welcome back. You can get this every week through various means. We are on iTunes, of course. We’re on Stitcher radio, we’re on Spotify, so lots of ways to get the podcast.
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Alright, well let’s jump right in because again, another week market. We’ll go through what was moving the markets, not only the why’sbut really the biggest things hit this week and let’s start with kind of the broad indices. Most of the damage was done and remember, we have up and downdays and so another down week, not a terribly strong week, but just big pointmoves, but really most of the damage was done in the small cap area. The small cap is the Russell 2000, down a little over 2% this week and the S&P 500, down a little over 1%. Dow Jones, 1%. NASDAQ about 1% as well.
We continue to see some things hold up relatively better.The emerging markets were actually flat this week and the volatility index was down5%, so we’ve talked about the fact that people go this is crazy volatility, this is just unbelievable and when I talk to people who don’t really follow the markets that closely, it does feel worse than it’s been and there have been alot of reversals. You have the up 1% or 2%, down 1% or 2% days, a lot of that,but point to point we’re still kind of moving sideways the last few days, andwhen you look at from top to bottom where we are, it’s still within the normal context of a correction that we seem to get every year.
The volatility index is telling us that because thevolatility index closed under 22. Now remember, back in January/February timeframe, the volatility got up over 50. Now there were some things in there that were a little abnormal. We’ve talked about some of the volatility funds, theETFs that were tied to volatility kind of blew up and those probably added tothe volatility, but 40 or 50 on the volatility is very high. We’re still in thelow 20s and the long term average since I think 1990 is around 19, so we’rejust slightly above average right now.
Again, we’re getting this tug of war and thisindecisiveness is really what it looks like but we are getting overall someweakness, so those were kind of the main indices that were down this week. As far as the things that got hit the hardest, natural gas, which of course was down 8% just on Friday alone, and had that huge run in November was down 16%this week. Oil and gas, I mean that has been an area … If you look at the oil and gas equipment and services companies, just really an ugly picture. Down 4%on Friday, down 8.5% for the week. The exploration and production companies down 8% as well just this week. Year to date, down about 22% for the oil and gas exploration companies.
You know what else is getting hit are the banks. The regional banks are down over 17% this year, 6% this week. Railroads down 6%. Alot of damage really this week in certain areas. The transports, which a lot of people look to as hey, if the economy is strong, transports will be doing well. Down 4% this week, so those were some kind of some of the outliers. On the positive side, we are getting again some specific emerging markets that are holding up very well. Semiconductors were up 1.3%. Remember, they kind of led theway down. They didn’t lead the way down necessarily overall, but they certainly went flat.
Remember, they were running up for a long time primarily,I would say, they really started to take off in 2016 and ’17, and then they kind of went flat for a lot of the late ’17 into early ’18. They started to slowly roll over and that was kind of a leading indicator if you will. They’vebeen really weak but they were up this week. We also saw things like utilities up, aerospace and defense was up, so it wasn’t all bad out there, it was justoverall again, another fairly weak week for the markets.
Now what we’re seeing is Monday we came in, market …Remember, last Friday, a week ago Friday, markets were down and we saw the really finish, kind of like we did this week, where we ended on a real sour note. I think it was down 500 points the week ago Friday, and then we come backin Monday and we were down over 500 at one point. I’ve talked about in the pastthat we had some cash and one of our strategies that’s meant to reduce volatility, we call it our gross strategy, and really what it is is it’s a strategy that’s meant to be in equities but it’s meant to kind of have the volatility of let’s call it a balanced fund with some stocks and some bonds, but we don’t use bonds for the low volatility part.
What we use are some various types of funds and then we do some trading ourselves. That has had about 15% cash for some time. Well that Monday, last Monday, we went ahead and bought 5% when we saw the DOW open down another 500 points and we saw a huge reversal that day. The market actually finished pretty flat on Monday so we saw a huge reversal that day and then we came in on Tuesday, market opened up 350, so were up almost 900 points from the low on Monday to the high on Tuesday, and then it faded and it finished flat again, which was the theme this week.
Of course, we had Trump and Schumer and Pelosi and theyreally showed us the best reality television we could see, right? It was supposed to be this kumbaya presser and it turned into this argument, which wasreally awkward on TV, but entertaining nevertheless, but it’s just one more thing, right? I don’t think the market has faded because of that but we did seethis market gap up and fade. Wednesday? Same thing, market is up 450 at onepoint, finished up 150, so again a fade of about 300 points.
What I think is happening is traders are really shortening their timeframes and trading this, because remember, you’re getting 2-3% swingsover just several hours and it feels like traders are just saying you knowwhat, let’s just shrink the timeframe instead of looking at things in weekly ordaily timeframes, let’s look at it in hourly or minute timeframes and they’remaking money on that. We also saw this week, besides this gap in fade, we alsodid see China saying they may ditch the 2025 initiative and they seem to begiving on some things. They talked about that, they actually did buy soybeansand they’re definitely … And the tariffs by the way, removing some of the tariffs on autos, so they’re doing some things but it’s not getting the markets moving, right?
We are seeing some action this week as opposed to just talk, but it’s not what’s driving the markets and maybe it’s because it’s not all about trade. Maybe it’s about the Fed is more important here. Thursday, market was weak and it was kind of a mixed day, it didn’t look that bad, butthat was a day where 25% of the Russell 2000 stocks were down more than 3% thatday. Indices don’t always tell the story of overall strength or weakness, but here’s the deal, Thursday night after the bell while you were sleeping, China comes out with weaker economic data.
Their industrial output, the retail sales, weaker thanforecast for November. Friday morning, we come in, features are down 250, you know? You wake up and we’re already in the hole. We got some of our economic data and it wasn’t that bad. It beat expectations but again, it fadedthroughout the day and we finished down yesterday 500 points, and so we’re getting this back and forth and back and forth.
Where do we stand right now? I’ll tell you kind of wherewe stand and then I want to tell you essentially what I think is going on orwhat’s causing it. Again, we’ve talked about what’s causing it so it’s nosecret but I think there could be some resolution. I’ve been saying for a while now, you know we’ve been hanging out in this range on the spiders … Let me put it in S&P or even the Dow Jones terminology because if you think aboutit in Dow, a lot of you know that because it gets quoted on the news, but we’vebeen kind of hanging around, let’s call it from around 24,200 to 26,000. That’s been the range, kind of a 2,000 point range, 7% or 8% range, and we’ve beengoing to the low of it then the high of it, then the low of it then the high ofit.
We’re still making low or highs and we were making a little bit lower lows but we were holding in there for a while but I kept feeling as though we needed a little more panic and a little more of a VIX spike, a volatility spike. We did break to closing lows yesterday on Friday, we broke to closing lows. Earlier in the week, we saw the reversal. You know the market went to new lows but reversed, so yesterday was a closing low but we still have not seen the volatility spike and I hate that we have to go through that but we aren’t at the point yet where it feels like people are giving up completely on the market. They’re discouraged with it, they’re not happy with it, they’re frustrated with it, but I don’t see people panicking yet and that’s usually when you get a real, real bottom.
There are some positives. If you look at things like oh I don’t know, the relative strength indicators, they’re higher now than they were back a few weeks ago, so even though the markets are lower, they are higher. That’s a positive divergence going on so we’re starting to get some of those types of things. We’re also getting just some of the points gained and the volume, there are some positive things developing but at the end of the day, I still think this is about … This is bigger than just trade. What we have going on is an economy decelerating. It’s not going to be able to keep up with the profit growth that we’ve seen,
I mean, the last few quarters have been just unbelievable, we’re not going to continue that. The dollar strength is a big deal and that’s going to hurt corporate earnings for a while, and you have a Fed who is backing off a bit, but it’s probably going to raise interest rates next week. So, it’s what they do. Will they raise and then say, “Okay, now we’re going to pause.” And, they may not say it that way, but they could say it in a very dovish tone like, “We’re very data dependent now and what we see is that it warrants us being more caution about raising rates, or putting it on hold, or something to that effect.” If they say that, the markets will will say, “Yes, we got some confirmation that they are actually going to stop raising rates.”
There’s even people talking about them cutting rates next year, which is I think ludicrous because again, they’ve raised rates. The market is throwing a hissy fit, but naturally the economy’s decelerating a bit and if they pause, fine, but they shouldn’t be cutting, but should they be raising? I’ve been saying I think the economy can withstand it, but now that we are seeing evidence of a deceleration, could they pause? Should they pause? Why not try? Right? Because again, their fears that we have too much inflation. If we don’t get rapid inflation, they don’t need to raise right away. There’s no rush to do so. So, that’s to me the bigger issue, the trade thing going on is obviously, it’s causing … It’s not just the hurting China, hurting US, it’s about uncertainty. And, when companies can’t plan for what they’re going to do, what they’re going to charge, their supply chains, all of that, it makes it difficult. And, it makes investors go, “If you can’t plan, we don’t know what your profits are going to be and if we don’t know what your profits are going to be, how can we buy your stock?”
So, that really is what’s going on. So, you have that on the trade side and then you have the economy slowing down on the global growth side, and you put all that together, and you’ve got a market that is, has sold off accordingly. And again, it’s not something we like, but it is again back where it was back in February. It’s a, I think probably if I had to as betting man, we would break the lows of February and April, since we’re close to that right now. But if we do that, I think that’s when some stops get triggered and then you see a flush down and a reversal at that point. Like I said, we went in and bought on Tuesday on that big reversal, about 5% of our 15% cash. So, we didn’t commit a lot, but when we saw that panic over two, three days in a row, we bought a bit of that, and that’s how you have to treat this market.
You have to chip away at it and stay flexible if you are trading. And that’s a big if, because again, for most people you probably shouldn’t be trading, it should be more about the bigger picture allocation. And again, I’ve said this before, this is where portfolio construction comes into play. Now, this has been a tough year in the sense that it’s been very difficult to diversify in anything because nothing’s really worked. So, even though you’re diversifying, it hasn’t worked. Normally when you diversify it’s because something is going up and this year has been notorious for nothing going up. Sure, there’s some stocks that are up and there’s some very specific things, but in terms of the broad category, stocks, bonds, commodities, domestic equities, international equities, nothing’s really helped. Nothing … Diversifying, hasn’t helped, hasn’t worked.
And so, that’s been challenging. But, what has been working is anything income based that isn’t tied to the market, it’s still plain income, and some of these things that aren’t tied to the market have been doing fine. I mean, some of our commercial real estate holdings are doing fine. They’re not doing as well as they did the last couple of years, but there’s still green, and they’re still paying income every month. So, to me, you still have to start with asset allocation in the big picture and determine how much income, not that you need, but income to the portfolio and using that income as a shock absorber, so that you can stick with the equity side. You see, the only reason people should really own bonds over the longterm is, because it helps them sleep at night to hold stocks.
So, because you’re not getting a lot of income on him, it’s all about … I mean, if stocks make 10% over the longterm and bonds make 4, let’s call it, why would you own the thing that pays 4? Well, the only reason you do that is because when the stock’s lose 10, the bonds are going to lose 4, and so that’s why you do that, and that’s why people have an allocation to bonds. But in this environment where bonds are not the most attractive thing in the world, you can still have something that acts like a bond, that has the volatility of a bond, but is more of another, let’s just call it income as opposed to bonds. So for us, we have an income strategy, we don’t have a bond strategy.
Most people say how much stocks versus bonds should I have? I think that’s the totally wrong way of looking at it. I think it’s more about how much capital gains oriented investment should have, versus how much income oriented investments or low volatility investments should I have. And, that low volatility can be mixed of a lot of things that don’t have to do with the market. And again, I talk about lending and all the time there’s lots of ways to lend your money and that’s what keeps the youth sleeping at night, so that you can allow your equities to move a bit, because they are going to be volatile, but over time you’ll get rewarded for hanging onto them. That’s historically how it has been.
Now, in the middle is where we talk about trading. Soagain, you’ve got your income, you’ve got your stocks, but in the middle theremay be something that you trade. And when trade, we talk about trade, we don’t necessarily mean buying something and trying to sell it a week later. We’retalking about making adjustments, right? Reducing a bit of exposure, adding some exposure, maybe having some funds that do it for you or you know, thingsthat are not correlated with the stock market. So, that’s kind of in the middlepart there and that’s the part that we have had some cash for some time in thatparticular strategy. For our aggressive strategy, we don’t hold a lot of cash,right? And, for our all equity strategy or dividend strategy we don’t have alot of cash, because that’s not the point of those strategies. They’re there toown good quality things for the long-term.
But we do have a lot of people we work with that arewanting exposure to the markets but one it in a lower volatility fashion, and that’s where that growth strategy comes in. And, that’s the part that we’ve hadsome cash for some time, and we want to buy when people are panicking and there’s flush down, that’s when we want to buy. And, on the flip side, when everybody’s confident and things are great, and they can’t get enough of it, wewant to scale back a bit. That’s the part we still have 10% cash, we still havesome funds that are very low volatility funds, and so that keeps us asleep inthe night. But it’s not a fun market, because of the fact that there aren’t alot of places to hide. I mean, again, if you look at what’s worked this yearand what hasn’t worked this year, if you’ve owned the dollar that’s work thisyear, the dollar, but not many people owned the dollar in terms of investment.
If you’ve owned a things that are, let’s call themrecession type things, right? Utilities, healthcare, that’s worked this year alittle bit, but not much else has worked. And on the downside, you got theextreme things like Bitcoin down 80 something percent this year in 2018, but I mean, oil and gas equipment and service companies is down 40%. Home construction down 30%, you know, 25% to 30% metals and mining down 25%. Oil andgas exploration down 20%, copper down 20%. Banks down 18, steel stocks down 17.Emerging market’s down 15, materials down 15, silver down 14. I can go on andon, I mean, even small caps down 8% this year. Biotech down 10%, oil down 10%. Airlines down 10%, retail down 7. Telecom, nice, safe Telecom down 6.5%. So again,when you put all this together, if you own a diversified global basket ofstocks and bonds, it’s been a tough year.
And by the way, bonds, good old fashion, just broad basketof the bond index down 3.5% this year. So, it’s been a frustrating year for everybody,but not every year is going to be great and easy. In 17, we’re seeing kind ofopposite bookends here, were 17 was low volatility, calm, every asset classrising, and we come into 2018, a little more volatility, not unusual but twice as much as we had last year, and now these 1% days are just commonplace, andit’s frustrating because nothing has been working as opposed to 2017. But, ifyou really stand back and look at it objectively, and a lot of us don’t look atour own stuff objectively, because we’re going to defend things we own, and we’re going to say bad things about stuff we don’t own because you know, that’sjust the way our minds work.
But if we really look at it objectively, does it makesense to you that the stock market should be down a bit right now and over the last few months? It does, to me. Now, it’s easy to say that in hindsight, andit’s not like anybody saw a 10% quick sell off in October coming, in the way ithappened was unusual, but does it really surprise you? It doesn’t surprise meif we look back, because of the fact that we know that look, every time the Fedis raising rates, the stock market’s going to throw a hissy fit and strugglewith that. At the same time when you have quantitative tightening around the world, as opposed to quantitative easing and there’s not everybody’s doing it,but you know, when the Federal Reserve was injecting money into the system andnow they’re pulling it from the system, that’s a tough thing, and we haven’t seen … Really it’s an experiment, because we haven’t ever seen this muchbefore.
So, when you have that happening, that’s tough. Then whenyou have a trade war between these two huge economies, and all these globalcompanies don’t know what to do, and everybody’s frozen like, what’s going on?And, there’s comments being leaked that a deal’s about to happen, drafted, no,it’s not. Threats are made, the back and forth, and you and I and ourportfolios are caught in the middle of it, of course, they’re going tostruggle. Of course the stock market’s going to struggle, but there’s a difference between struggling temporarily in a bear market, and so again, Idon’t believe we’re in a bear market. I think if you are, have an equity portfolio position where you are saying, “Is this a time I should be 100%in or not?” No, you should have somethings that aren’t moving with thestock market right now. We’ve clarified that the last several weeks.
On the flip side, is this a time to get ultra defensive, short the market? I don’t believe so. And, remember the market is a forward looking animal. And so, the fact that it was falling in January, February and it’s fallen in October, November, it’s basically trying to tell you that, things are, it’s priced in there. This stuff is happening right now. So, I think we need to see some clarification, and it’s not saying this stuff, we need to see some action. China made some action, did some action this week. The US, we’ll do some action at some point.
I think, again, this is going to take time, but if we seesome continual improvement and companies will start saying, “Okay, now weknow what to do, we know how to plan budgets.” That will help. Then wealso need the Fed to say, “Yes, we are done for a while.” Or,”We’re going to be more data dependent,” or however they want tophrase it, that will certainly help. We’ve seen both those things start tohappen a little bit, but the key is we still need to see good economic data. If the economic data continues to get weaker and weaker and weaker, then you continue to hear about recession talk. And all of this yield inversion you hear about is … Again, it’s not the end- all be-all, saying the economy’s horrible and this and that. It says: “Look. Be a little more cautious.” But generally you don’t see a recession right away from that. You don’t see a stockmarket sell-off right away from that. But the media’s blown it huge. Is itsomething we should pay attention to? Absolutely. Absolutely we should. Butit’s one piece of a big, massive puzzle, and we just don’t see a recession right now.
But we do acknowledge, and we’ve said for weeks that we are seeing the economy decelerate and slow down a bit. But it’s very easy for our minds to go back to ’08, and when we see a deceleration we go, “Uh-oh. This thing could get really nasty, really quickly.”
Are there big problems in places? Sure. Look at Deutsche Bank. Does that look great to you? Deutsche Bank is obviously a big European bank that is … I mean, in 2010 until now it’s down 90%. That’s no bueno,right? It’s no good. Down 50% or 60% just this year. That’s a problem. I mean,any time a bank’s having those kinds of problems that’s something we need to watch out for. Europe has been slowing.
But I do think it’s interesting. Again, some of these things are factored in; some are not. I shouldn’t say they’re not. Obviously Deutsche Bank’s stock is down because people know about their issues, but it’sreally interesting to watch some of these things, how they’re reacting to thestock market.
For example … and I’ve mentioned this lately … since mid-September the basket of commodities has outperformed the US stock market. Emerging markets since early October has outperformed the US stock market. And again, they aren’t dramatic out-performance, but the fact that they’re not underperforming any more is something to watch. Certainly they haven’t hit a home run—they’re still falling—but this week was just a microcosm of what I’ve been discussing, the fact that we have seen that this week, while some of these things were down, other things were kind of flat on the week.
So continue to watch that. But again, the key to all of this is a balanced, diversified portfolio with modifications along the way.
I do get emails from time to time of people saying,”I’m 80% cash because,” this is happening or that’s happening, andagain, more than likely if they’re 80% cash they’ve been 80% cash the lastthree or four years, and so it really hasn’t helped them to be 80% cash because they’ve missed a lot of equity improvement.
On the flip side, for those that say, “I’m 100% stocks,” and they’re ignoring things that go around them, they’re justgoing to put up with more volatility and … Hopefully, they are long-terminvestors.
Remember … I do like to ask the question to peoplesometimes when the say, “Well, what if the market falls 30% or 40%? “The question is, “When do you need the money?” because the market has fallen 50% twice since 2000, and yet those people that have been invested sincethat time and didn’t do anything about it made it through fine because theydidn’t need the money right away. So that’s why I start with asset allocation. It sounds really basic but it’s, “When do you need the money?”
A lot of us I do think get so honed in on trying to miss every little 3% or 4% or 5% correction that we end up making a lot of big mistakes. So again, I think it’s about having a portfolio, a strategy over the long-term, and then making tweaks in those strategies. And “tweaks” mean modifications. They don’t mean huge, massive overhauls.
And let the market kind of speak to us, right? In other words, when I say it doesn’t look like a bear market to us, could I be wrong? Absolutely I could be wrong. I can just tell you from looking at this stuff for years and years and years and studying it, it doesn’t have the characteristicof a bear market. Now if thing continues to get more negative and we get deterioration and all of these types of things, yes, but to me it’s justified why the market has fallen the way it has.
And again, we’re talking about something that … Again, if you look at it from top to bottom … roughly … let’s just say it peaked in mid-September to where we are now. I mean the spiders are down about 11.5%. We’ve talked about for decades the average drop of any year is around 13% or 14%. So this is a normal correction. Could it turn into something worse? Absolutely it could. But we’ve had worse. Again, we’ve had 20% draw downs since the financial crisis. 2011 we saw a 20% drop in the S&P 500. We’re just over half way there. Things can feel like a bear market.
I mean, if you go look at charts … For you techniciansout there … and I know a lot of you are listening that like to look at charts… go take a look at the picture of 2015 and ’16 and look at it daily, weekly, however you want to look at it. It’ll look like the market was rolling over in2015 and ’16. I mean, it looked like we were heading straight down. Same thingin 2011. It looked like we were heading straight down. And yet, we resumed the uptrend. And the same thing could happen now.
But we’re not going to continue to get earnings growing asfast as they were. We’re not going to have the Fed keeping rates at zero. Thosedays are behind us. But that doesn’t mean that equities don’t keep going up. Imean, it’s all about: Do these companies produce more profits, more cashflow,bigger assets on the books? Do they continue to do that over time? And the answer is yes, they get rewarded and their stock prices go up.
And I think on the bond side … We’ve talked about manytimes that I think it’s going to be more like a death by a thousand cuts for the bond market. I don’t think you have a down 10% year in the bond market. Ithink you just end up having a lot of years like we’re having this year, where you lose 2% or 3% if you earn a diversified basket of bonds. So it’s important that wherever you’re getting your income from, or your “non-stock marketstuff” we’ll call it, that it isn’t just bonds.
All right. That’s a lot of stuff. We’ve got a lot of things going on. It’s, again, another interesting week where we saw wild swings, and not crazy wild but if you … Again, in a point in a vacuum of points, it felt really big. But we’re getting 1% and 2% swings.
And it’s interesting. I mean, when’s the last time … I don’t have it in front of me … when’s the last time we had a 20- or 30-point day? If we had a 40- or 50-point day on the Dow Jones … It was 500 at one point during the day, right? That’s the type of days that we’ve had. So let’s focus on, again, the big, big picture here.
But I do think one thing you need to watch for … Watchthis dollar because the dollar is something that a lot of people don’t care about, don’t watch, but it really does hold the key to a lot of … It’s the starting domino. Once it starts moving, a lot of other stuff starts happening.
We had said … I shouldn’t say “years ago” …well, it was years ago … we said at the time that … When the Fed started raising rates everybody thought the dollar was going to go up, and we saw a bigdrop in the dollar in 2017. I mean, the dollar went way down in 2017. 2018’sbeen the complete opposite. Dollar’s been very strong, and that puts head winds on commodities and international stocks. That puts headwinds at some point on earnings for big US global, diversified American companies. So if that reversesthe other way it’s actually going to be a good thing for a lot of the stuffprobably in your portfolio if you have a diversified, global portfolio.
Hey, if you have any questions on any of this, you canalways contact us: 210 526 0057, or go to eggersscapital.com and get a hold of us. If you have any questions on your portfolio, want us to analyze something,want to talk about financial planning … because, again, we talk about investments a lot on here, but financial planning we talk about at times too because, again, investments is kind of the long-term thing, and the financialplanning is as well, but it’s really … I mean, some of these cash flow things and decisions on when to do Roth conversions and when to take Social Security are equally as important as your portfolio and how it’s diversified over the long term. So if you need any help in that area give us a call, email us, and we’ll be glad to help you out.
We appreciate you listening as always, and have a great restof your week, and take care, everybody.
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This show is for entertainment, only and informationprovided by the host, guest, and this station should be 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.