On this week’s show, Karl discusses how investors are pricing in a Federal Reserve rate cut and why that may not be good.
Hey everybody, welcome to the Eggerss report. It’s your investing playbook. Thanks for joining me. We appreciate it as always. And on this episode, we’re going to not only talk about what’s going on in the markets but also try to help you become a better investor, which is really what we do every show. And one of those things is to talk about mistakes I see just observing. I meet a lot of people, as you know, and some of them need our help. Some of them I meet in other ways, just during conversation they will tell me kind of what they’re doing with their portfolio or their investments. And I see these things they do, and sometimes I’m baffled and sometimes I applaud them, it just depends. But I really want to bring some of those to you, those examples, because honestly, that is what’s going to help all of us become a better investor is by observing what others are doing, seeing what’s working, what’s not working, and try to go from there. So we’ll do that here in a little bit.
But first let me give you a little information. As you guys know, I am one of the partners at Covenant and I will continue to be doing this podcast. I’m a senior wealth advisor and partner and through that, I’m going to continue to be able to help clients and bring that information to you as well, listening to the podcast, and try to educate you and really just, again, help you become not only a better investor but better with your money and just tell you what’s going on in the markets as well. Just doing a lot of market commentary.
So over the next few weeks you’ll see some changes in terms of how we do things with the podcast and how it’s published and things of that nature. But if you’re getting it right now on our blog, you will continue to get that, but some of the names will change as far as moving from Eggerss Capital to Covenant. If you go to the Covenant Website, which is covenantmfo.com, we’re not on there yet. But you can still look at that site and as we move forward you will get more information on there on all the different services Covenant offers. And we’re really excited about this merger between Eggerss Capital and Covenant, as we said last week.
So let’s jump right in here. We’re continuing to see this market really grind higher and I must say, looking at this, of course we had the big V bottom back after the December sell-off and then the Fed changed their tune pretty quickly. They basically said, “Okay, we’re not raising rates anymore,” and up the market went. And then in about April or May, we started to hear tariffs popping up again and we heard the China deal didn’t look like it was going to happen and it wasn’t imminent. And then we saw a tariff being put potentially on Mexico for immigration, not because of trade stuff. And once that was fixed, if you will, the market bounced back up.
But I feel like we’re in this range, and you can kind of see it, whether you look at the Dow Jones, around 24,500 to around 26,500, about a 2000 point swing there. Which sounds like a lot, but percentage wise, not even 10%. We’re seeing the markets bounce around in there and I kind of feel like that’s where we’re going to continue for a while. Now again, we’re close to breaking out to all-time highs, but you have to remember that we haven’t made new highs in a long time. We barely made new highs in October of ’18 if we’re looking at the Dow Jones, but you can go all the way back to January, February of 2018. So we’re talking a year and a half of really no movement as the market’s been moving sideways.
So let’s see if it breaks out. I still believe that the underlying strength and the internals of the market will take us to new highs. But I do think something in the short run’s potentially happening. Look, the Federal Reserve has gone from raising interest rates to all of the sudden saying, “Well, we’re going to be neutral and we’re not going to raise rates,” to now there’s three rate cuts factored in. So here’s the problem. The rate cuts are being factored in, so the market is rising based on the hopes of the Fed dropping interest rates. And to me that that kind of puts, I don’t want to say the Fed in a corner, but maybe that’s the right terminology, but it certainly is investors are hoping for that. And so if the Fed doesn’t lower interest rates come July, does the market fall?
And I think there is a good chance of that because, look, we got a retail sales number on Friday that was better than expected. Now the initial number was worse than expected, but when you look at the revisions from the prior month, they were revised up quite a bit. So it was a good number overall. So we’re getting some good data mixed in with some bad data, but it’s enough good data that we are not looking at a recession, in our opinion.
So again, this good but not great economy is still humming along, still moving forward, but taking a few little body blows here and there, but not enough to have a recession yet. But if that data is good enough, the market’s still pricing in fed cuts. So what if the Fed says, “You know what, those retail sales back on June 14th were pretty good, so we’re not going to cut rates.” Does the market sell off 5%, 10%? Because we’re in this situation now where good news is bad news. And sometimes it’s always like that. When the news is too good, that’s the fear. It’s that the Fed is going to start hiking again or they’re not going to cut.
And this is really important. I mean, if you’re thinking, “What’s the big deal about a quarter point here, a quarter point there, cutting, hiking, what is the big deal?” The old adage, “Don’t fight the Fed,” it’s alive and well. And the Fed has been essentially, since 2009, there as aid. Anytime the markets fall, anytime the economy looks as if it’s slowing down, the Fed is right there to inject money, to cut rates, and in late ’15, they started raising rates. Very slowly, very gradually. And they remained loose, meaning they could have raised them to where they should have been, but they didn’t.
But here we were in 2018, and they went a little overboard according to the markets and a lot of pundits out there. And so the market threw a temper tantrum, stock sold off 20%, they say uncle, and the market goes right back up to where it was. Over the last few months, that’s a dangerous place to be. Is the market just going up and down based on the Fed? I mean, it doesn’t always do that. As we’ve said, markets do correlate with profits. And that’s really, when you buy stocks, that is what you’re buying, are profits of companies. Regardless of if the Federal Reserve, if their rates are at 1.5, 2.0, 2.25. But there’s no question, when the Fed is hiking rates, investors don’t like that.
Now, we did say a while back that what’s interesting about this is that when the Fed is raising rates, the markets don’t go down right away. Remember we called it the Paul Tudor Jones effect, and basically what it was, was looking at what happens when the Fed raises rates to the financial markets. Now, back in November, we wrote an article on the website called The Paul Tudor Jones Indicator. Now, Paul Tudor Jones as of 2017, worth about $5 billion according to Forbes, and is considered one of the best hedge fund managers of our time. And something he looks at could be the key as to where and when the next bear market is starting. We called it the Paul Tudor Jones indicator. He’s best known for making a bunch of money during downturns. In the 1987 crash, dot com bubble crash, 2008 financial crisis. And he doesn’t do a bunch of media. He’s a big philanthropist, and of course, he is promoting the Robin Hood Foundation and so sometimes he does media to promote that.
But his answer about Fed hiking and cutting, it’s interesting, he reminded the viewers last time he was on, and this was in November, I’m going off an article we wrote in November. So we’re talking seven months ago. But he said eventually rising rates will cause bear markets, but before they do, the Fed typically stops raising rates, the stock market makes a new high, and eventually rolls over into a bear market. And so he thought in November the current selloff was because of rising rates but didn’t think the market had peaked. And he used 1999 to 2000, he used 2004 to 2007 as examples. In 2006 that’s what happened. So the Fed stopped raising rates in mid-2006 and the market had these 7% to 10% sell-offs. Then it went up to new highs and in September of ’07, that’s when the Fed started cutting rates, August or September of ’07, can’t recall, but it was too late. All those hikes were factored in. So there’s this delay.
And it’s interesting that that’s kind of what’s going on right now with the markets is that we went through these hissy fits, right? The markets were going down because the Fed was hiking, but ultimately they stop, and here we go, and the market is moving higher and close to new highs. And so, did all those hikes from December 15th, December of 2015, excuse me, all the way until last year, are those going to continue to weigh on the economy? The bears think yes, the bulls say no, still too low, but regardless, we need to look at the underpinnings.
And what’s interesting is sentiment is pretty bad out there, meaning people still don’t believe this market should be going higher. And that’s precisely why sometimes it does go higher. We don’t want everybody agreeing that the market’s going higher. That means nobody’s left to buy and all of a sudden, a little bit of selling takes us down. So sentiment is in a good place from bull’s perspective, the underpinnings of the stock market, when we look at supply and demand based on various indicators, are still very good, and the economy is still okay. So that’s why I think we probably are in this range, but again, it’s not the prettiest technical picture, for those that look at charts. But look, at the end of the day, again, what are these companies going to say? Some people would argue that the tariffs haven’t affected really any companies. Now, I shouldn’t say any. Some companies have been affected, but the majority have not. So we’ll see how that plays out over the next few months, but this, “Don’t fight the Fed,” is very powerful.
So the fact that the Fed is talking about, not only were they neutral, remember last week we talked about the fact that two Fed governors, Pal included, the head of the Fed, comes out and says that cuts may be warranted. So they’re already setting us up that, “Hey, we may cut,” and the market is going up based on that. So again, if they don’t, that’s kind of what I’m worried about in the short term. Now, we do see, again, some leading indicators starting to get weaker. We just have to watch this, but don’t assume everything here. Don’t assume it’s going down. Don’t assume it’s going up. But I would be positioned as far as higher quality. You know, getting rid of things that you really don’t want to own that maybe have bounced back. And just, again, look at your portfolio. This is a really good time.
This kind of transitions into what I want to talk about today which is, look at your portfolio, not only for what’s going on in the market but really based on what you’re trying to accomplish. When you do a financial plan and you know what you have to earn to live the life that you want, then your portfolio should reflect that. And then you tweak it over time and you make moves based on that financial plan. So what are you really trying to accomplish with your portfolio? Figuring that out should drive your allocation.
And in this business, I see all kinds of situations, as I said, and most people I can help. At least give them some words of advice. Some are just very short, brief meetings, some are long term relationships. Some people I can’t help. There’s some people that just think they know everything. And I’ve realized over the years that I don’t know everything and I know you probably don’t know everything. And so we’re trying to help each other get better at this. I just have a lot of experience because I’ve been doing it a long time and I see all kinds of scenarios. You gain experience talking to people every single day. I mean, I get the joy of sitting there and trying to help people with their finances. And it’s not that they’re ignorant people. These are people that are extremely smart, have saved money. But knowing about how to optimize it is something that some people don’t know how to do. And so that’s what I try to bring.
But talking to some people, it’s really interesting that there’s people out there that take too much risk. And again, I have to frame and look at it and say, “What are you trying to accomplish?” Maybe you have enough saved for retirement based on all kinds of projections. What’s that extra bit that you’re saving for? And I don’t mean that everybody should, “I’ve saved enough for retirement, therefore I’m going to take my foot off the gas and sit in the money market.” I’m not talking about that, but in terms of taking excess risk… When you take some risk in the equity markets, for example, that’s usually how you get rewarded over time. Usually. Over the long term. But some people take this excess risk and you have to ask yourself, what’s the downside here? Look at the upside and the downside. Is the extra bit of money that I’m going to make from this, if it works out, worth it? Because if I’m wrong and it goes the other way, it could alter my life.
And I see people do this and they’ve actually been through the dot com bubble and bust and they’ve been through the financial crisis and yet they still continue to do this. And so again, I don’t know if it’s a game, if it’s a contest, if there’s friends saying you need to do this and do that. Is it an addiction? Is it a gambling mentality? Those are things that can really alter your retirement. And so again, I would look at that and say, “What is my downside?”
And that’s why we talk about stress tests so often here because stress tests are really important, aren’t they? They let you look at a portfolio and say, “If this scenario were to happen, whatever it is, how would my portfolio be affected?” And it’s not an exact science, it’s an art, but it does at least put you in the ballpark and say, “Can I absorb that?”
And it could be looking back at what happened in October, November, December. I met with some people a couple of weeks ago and we talked through October, November, December. Stock market was down about 20% and their portfolio was down somewhere around 5% to 6% during that. So, were they comfortable with that? I mean, nobody likes to be down, but were they comfortable? Yes. And we put the 20%, said, “Imagine if you were all equities and you were down somewhere around 20% during that. That would have equated to x dollars. Could you have stood, standed, however you say that, looking at your portfolio and seen it down that much during that short amount of time?”
And so you have to work with that and you have to look at that and be honest with yourself because the risk/reward is a real deal. You don’t get the extra returns, generally, by not taking extra risk. There is no free lunch. You can’t invest and want the volatility of CDs, which is nil, and expect stock market-like returns. We all want that. That would be great. And we all try to find that balancing between risk and reward, but it’s not free. It’s very, very correlated, right? More risk, more return over the long term is generally how it goes. And so we want that.
So you have to, you have to live with something, you have to pick out where you’re going to be and live in that area. And oftentimes people don’t want that. Now what you can do is if you are a little more conservative, obviously when the markets fall, you’ve been conservative to protect against that. And when it falls, it does help you to go in there and say, “Okay, now I’m going to up my risk a little bit because some of the risk I’ve been worried about has been taken out of the market, because it’s already fallen.” That I think is how you do this over the long term and actually take advantage of sell-offs. But be very careful about wanting the excess returns with a very low risk. It’s just very difficult to do and rarely can happen.
So I always start with the plan, what are you trying to accomplish? And go from there and then stick with your allocation. And I don’t mean a pie graph that’s stagnant and concrete, I just mean within the range. I mean we take the range of 100% stocks versus 100% cash, money market, CDs. Where in between there do you need to be, and then make tweaks along the way. Now, how you invest that can be very different of course, but in the big picture of the allocation, look at that. Because again, I meet people all the time that it just doesn’t make sense what they’re doing. It just, I don’t understand.
And again, I’d like to go back and figure out where did this start from? if you have enough for retirement, you’re on a good pace, do you really want to jeopardize that? And then what would you do? Again, it’s a very good question. What would you do with that extra money, versus the flip side, potentially having to go back to work. And so that’s something to really watch out for.
So just a little word of advice there on dealing with, again, really figuring out what are you trying to accomplish? It sounds a little cliche. What are your goals? Where are you trying to accomplish? But when you really ask yourself that, are you, are you wanting to leave a legacy? Are you wanting to leave money to a charity or the next generation? Or do you really not care about that and you’re okay spending most of your money? Or are you wanting to take a couple of really nice trips every year that are outside of your normal budget? If so, you may need to take a little extra risk, and you’re willing to do that given the downside. That’s okay. Build a portfolio for that.
But some of you are saying, “You know what, I don’t really need all of that. I need to protect what I have, beat inflation, but I’m not trying to hit home runs. Singles and doubles and I’m good.” Well, then you can’t say, “Boy, I want to own that high flying tech stock,” because, I mean, then you’re taking extra risk potentially.
All right. That’s enough. I’ll get off the soapbox. Have a wonderful week, and don’t forget we will be changing some things up over the next few weeks, but if you’re currently getting the blogs and all the commentary, that will continue. If you’re subscribed to get the podcasts and so forth, that will continue as well. And if you need our help, always call us. That’s the easiest way. 210-526-0057, I’ll be glad to help you out. Have a wonderful weekend, everybody. Take care.
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.