On this week’s podcast, Karl discusses the recent volatility we’re seeing in the market. You don’t see these moves everyday, but it’s not unprecedented.
Hey everybody, welcome to the Eggers Report, your investing playbook. My name is Karl Eggerss. Happy New Year to you coming up here pretty quickly as we draw 2018 to a close. And for a while it looked like everything was really great in 2018 and then it didn’t. And then maybe it did. So we’ve had some volatility which we’re obviously going to talk about that today.
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Well, we thought last week was wacky and it was a nasty week two weeks ago. This past week was really strange, right? We were supposed to have a quiet Christmas Eve. It fell on a Monday, probably most people weren’t working. And lo and behold, the market was down a little bit and then it really accelerated. Remember, the market was only open until noon, Central Standard Time on Christmas Eve which was Monday. And then of course, Tuesday was the holiday.
Well, Monday, the market fell 650 points and it seemed almost justified to a certain extent. Why do I say that? Well, look what happened that day. We had Treasury Secretary Steve Mnuchin, right? Who’s been in the news a lot lately, he calls six of the biggest financial institutions, the big CEOs of these big banks in the country, he calls these individuals and puts a press release out basically saying, “I’ve called them to check to make sure liquidity was okay. And they can assure me everything’s fine.”
Now, that’s … why are you calling them on a Sunday night unless you’re worried about something, right? Now, he did say at the end, they’ve said growth is still good. He didn’t start the press release that way. He started it with discussing liquidity. This was very reminiscent of 2008, wasn’t it? And in 2008, we heard this a lot, everything’s fine, everything’s fine and then Lehman Brothers is gone.
Everything’s fine, everything’s fine and then some other institution is forced to merge with somebody else. You remember all that? It was always on the weekend, too. And so to get that type of news that he’s calling up these people on Sunday and checking on liquidity, that’s pretty scary. And I’m not sure why. Now, he said, look, “I talk to these people all the time. That’s part of my normal job.” I believe that. I do think he regularly talks to them.
What happened though, I believe, is that he was trying to calm markets by saying, “Hey, routinely I call these people, I went ahead, just for good measure, I called them on Sunday night and they said everything’s fine. So you guys calm down, let’s let the market rise and instead it came across as, what’s he seeing that we’re not seeing? And the stock market fell and it fell hard. 650 points. Now remember, as we fall, 650 points is a bigger percentage than 650 points at the beginning of October, right? Because the Dow is not at 27,000 anymore.
So, it went down almost 3% that day. And you know, the usual suspects were up. Gold was up, utilities were up, actually, I take that back, that was the day gold was up, but what was interesting about this day was consumer staples and utilities and REITs, the got the brunt of it. So it was almost as if, you started to feel there was some capitulation because even the stuff that had been holding up okay fell. That was Monday.
And so while we were supposed to be having a nice, calm day, we weren’t, we were in there buying. And we bought a lot because, you remember, I’ve been telling you, in one of our strategies, our growth strategy, we had raised some cash in early to mid-November, about 15% and in the last couple of weeks, we were averaging that back into the market. We did some on Friday, 21st and we did the last remaining bit on Christmas Eve.
So, the snap back, which we’ll talk about in a minute, worked out very well, but you were seeing panic at that point. And it’s interesting, for some of you that monitor the volatility index, that, for some reason, when it gets to about 30, it seems to trigger … that coincides with our human emotions of fear. Because I started to get more emails and phone calls about, man, this is starting to get scary. And 20% will do that, right? The S&P’s down 20% or was, from its high. Just like 2011 and we had the same type of reactions then.
So, but during that time, we went and used that cash. Now, again, we come in Christmas, market’s closed. And everybody’s going, oh, good. You know? So, markets were closed. And look, we know right now, I’ll give you a few of the reasons, and I said it last week and I’ll say it again, some of this sell off is justified, right? If you look at the reasons for the market sell off, you’ve got a strong dollar. What does that have to do with you? Well, most of you, and your 401K and your investments, you own American, large companies through mutual funds, through ETFs, individual stocks, those companies sell most of their products overseas.
When the dollar’s strong, they got to take that money that they made overseas, bring it back into the US and it hurts their profits. So I think we’re going to see profits get hurt a little bit. So the dollar strong was a negative. A slowing economy, we’ve talked about it, deceleration, okay? Not recession, but deceleration. Things are slowing down a little bit. The Federal Reserve, right? We know about President Trump, we know about Jay Powell, you know, basically Trump saying, hey, there was rumors he wants to fire him. Jay Powell raised rates, some people thought he shouldn’t have.
But the Fed’s raising rates as if they’re oblivious to the slowdown. I think they’re getting the message, I think they will pause. We’re now starting to see, by the way, rate cuts factored in to the odds. Rate cuts. So there are people betting their money that the Fed sometime in 2019 will start cutting interest rates, believe it or not. So the Fed has been another issue.
Tariffs, we know about that. And when did the market peak? Tariff man, when he called himself tariff man, that was it. Markets don’t like tariffs, but the administration likes them. Or at least, do they or are they just it as a negotiating tactic. I don’t know. But I think it’s having an affect right now even though the tariffs haven’t been huge, the talk of them is having an affect. The whole trade war with China, right? We may get some progress, but the trade war with China is obviously something that’s got the market on edge.
Government shutdown, not a huge deal in the big picture, because it’ll be resolved, but it’s one more thing. Mnuchin calling the banks, that’s another one. And then Mattis leaving, right? The reason why it’s a big deal, it’s not really a big deal to the stock market, but what it does show is that somebody that has a history of a good reputation, seems to know what they’re doing and they disagree with the president, who, I don’t think he’s got a lot of experience in the military side of things, more than Mattis, we’ll say. And he disagrees, which they can disagree, that’s fine, it’s the president’s right.
But it’s perceived as, if you disagree with the president, you’re out. So you combine all these different things and of course, the market’s going to go down. But it got to a point where it was panicky and if you have cash, that’s the time to take advantage of it.
Now here’s the deal, I say, if you have cash and if you were going to get it invested. See here’s the thing, some of you have written me for the past two years saying, “I’ve got cash. This market’s going down.” Well, it went up a lot after you said that. But now that it’s gone down, are you still waiting for something else? See here’s the way you have to approach this, I think. If you think the market’s going to crash or it’s going to go down, what are you really afraid of? You need to monetize this and think of it in terms of dollars. Are you thinking the market’s going to fall 40%? Well, guess what? It just fell half of that and many stocks already fell 30, 40%. So a lot of the reason you were sitting there with cash, that risk has been
Take off the table some of it. Some of you thought a 20 percent drop would come. Guess what, it just happened. So if you’re not using your cash when are you going to use it? You’re going to use it when you’re comfortable, which means generally that the market’s going to be higher.
So, again, for the money that we knew was supposed to be invested we did it. For clients that were over allocated into their income strategy, we sold some of that and bought more stocks. That was the time to rebalance. You had the chance a few days ago to rebalance. I’m not saying you won’t have another chance, I don’t know, but you have so many things this week that were … They don’t happen that often let’s put it that way, and when you do you generally get a stronger market a month, three months, six months a year later, and we’ll talk about that in a minute.
So, Tuesday market was closed. Wednesday market opens higher by almost 300, and then it faded, and then it kicked in. Up 1,100 points, one of the best days we’ve seen in a long day. Best point day ever, but that’s irrelevant, right? Points, eh, it’s percentage. Still a really good day. Up five percent, six percent for some industries. Really strong day. Got some people’s attention big time, but the numbers started to come out, or some of the data. These types of rallies typically occur in bear markets. That is the case, but there have been plenty of times they have occurred at the end of bear markets as well, not the beginning.
So, and some of the quotes. This is the kind of action bulls want to see apparently because there’s a bunch of five percent up days in 08 and way back in the 1930s. So you started to get these kind of condescending from the bears saying, “Oh yeah. Just another shorting opportunity,” but here’s the deal, 1970, 1987, 1997, 1998, and 09 all had five percent up days that started … That ended the sell off and started a new uptrend.
By the way, some of this comes from Jason Goepert by the way. Some of these stats. It was a 28 to one up volume day on Wednesday. 28 to one up volume. That hasn’t happened … That type of volume happened at the low in 1982 in March of 09. Historical bottoms, and also in August of 11, right.
Now we ended up going down a little bit more until November of 11, but it was pretty much near the low. We come in Thursday we’re expecting … I was expecting a couple hundred point drop, and we started to have that, and then it started to go down, and it went down, and it was down 600, and boy the bears came out again. Aha, we’ve already wiped out two thirds of the gains. Told you so.
And then we had an 850 point rally from that point to the close. So we were down over 600 at one point, and within about an hour we finished the day up to 50. I mean a big, big reversal. This was the biggest buying stampede based on the uptick from the New York Stock Exchange since 1990.
So, here’s the thing. We are seeing some unprecedented things, and we’re seeing some precedent ed things. When people say this market is unbelievable. We’ve never seen this type of thing before the answer is yes we have. Plenty of times. This is not unusual volatility at all. I want to be clear about that. 15 percent, 20 percent pull backs happen periodically. They’ve happened lots of times. The average drop is something in the tens every year. We’ve talked about that.
Once you get over 20 a little more rare, but they happen. The volatility, though, is not unusual. The volatility is … Again, we’ve been seeing some higher volatility in the last few days, but this is not unusual. Is it higher than average at this point? Yes, but is it unusual, no.
Here’s what is unusual, though. Some of these statistics are crazy. So for example since World War II, and this comes from Bespoke we’ve only had about, let’s call it 10 times, or the S and P was down 10 percent in one month, okay. If you fast forward on all those times the median gain a year forward is 16 percent.
So if you buy that dip you’ve made money every time but one by the way. How about a down quarter of over 10 percent? I mean, this has been a nasty quarter. This all started October 1st or 3rd. Again, up 23 percent is the median a year forward, post-World War II, and a down 10 percent quarter’s happened, I don’t know, I’m not going to count them, but about 15 times.
Another unusual stat, we had the S and P 500 down one and a half percent four days in a row, very rare. We saw that in The Great Depression believe it or not. We saw it in 01 and 02, and we saw it in 1962, and then we just saw it. Again, fast forward six months later the market’s up 11 percent on average is the median, and it’s up about 71 percent of the time.
So, my point in telling you that is the volatility, the bouncing around wasn’t the unusual part. The oversold condition, the condition that the market is so oversold and so stretched to the downside you knew a rally would come.
Now, where we are today, is the coast clear? I don’t know, and you don’t know. The media doesn’t know. The bears don’t know. The bulls don’t know. Generally what happens, and I can tell you a typical pattern is that we probably did make a low. We might rally some more, which we did obviously over the last couple of days, but you might go back and retest the lows over the next month or so. You might even breach the lows, but when you get that type of selling exhaustion, number one it’s a great trading opportunity. Number two, it’s a great opportunity to rebalance, and number three it’s a great opportunity if you had some cash on the sidelines to invest.
Is it the bottom? I don’t know. I don’t know because nobody knows, but I do know that those conditions are rare in what we saw, and I do think the market will be higher a year from now, and as we’ve said many times your allocation should be based on when you’re going to need this money, and I had to explain this to a soon to be retiree this week because I was talking to him about adding some more money because he had a lot of cash in the sidelines, and the conversation went something like this.
I don’t like this fluctuation. I’m about to retire. I don’t like seeing an account go down, but here’s the thing. I said you have a lot of cash in the sidelines, in the money market. If you retired tomorrow you could live off that cash for five to seven years, and he said yeah. Okay, that leaves your stocks in tact.
Then you could also live off your income portion of your portfolio. In other words, the money that’s not in the stock market for another easily five to seven to 10 years. So the stock money we’re talking about. The money that I would add to, that money isn’t going to be touched for at least 20 years. Even though you’re about to retire it wouldn’t be touched for at least 20 years, and more than likely, it’s not going to be touched by you. It’s going to go to your daughter, and he said I get it.
So it’s layering your money. Bucketizing it. Whatever you want to call it. That stock money is the last dollars. That’s the stuff that you can afford to add to. You can afford to be volatile. All those different things, right. What we can’t do is be investing money that you’re going to need in the next six months, a year, even two years. That needs to stay in interest bearing positions that you can take, and not have to be a forced seller.
See, a lot of what we saw the last few days, and this isn’t … it’s not unusual. This is very typical, is that when things start to snowball down you have to remember why is this happening, and why does it accelerate. A lot of the worst days are at the end of a sell off, not the beginning, number one.
Number two, what happens is you have mutual fund managers that own stocks. Let’s say they’re a stock mutual fund. That’s their job to own stocks. They’re not sitting around holding 30 or 40 percent cash. So what happens is when the stock market starts to fall people start hitting the sell button those funds and their 401Ks for example. The fund manager gets the note. Hey you got to raise a million dollars to send out by tonight. So what he does have to do? He has to sell stocks. So the selling begets selling, and then on top of that you have people that buy stocks on margins.
They get margin calls. You have hedge funds that are leveraged, right? They’re buying a lot more than the cash they have on hand, and that’s how they enhance their growth. Then they are forced sellers, and then you just have people panicking that are the forced sellers, and then you have the algorithms that say, you know what, it’s a computer that says if it goes below 24,000 on the DOW sell X number of shares automatically.
They may be out on the golf course, and poof, it sells. All of that is what sometimes dries these things much further down. So again, are you a forced seller? If you’re not, then you take some of this bumpiness, and again, there’s a differentiation here. I do want to differentiate between a bear market and a correction or just a tough market. I don’t really care the label of it.
The media calls a bear market over 20 percent. We almost went into bear market, but just when it was about to hit a bear market we got saved. That’s so silly it’s not even funny. Again, the difference between 19.99 percent and 20.01 percent is meaningless for you, your portfolio, and your retirement. All we know is that it went down, and we don’t like it, right. That’s what we know.
But to me it’s the swiftness. I would still argue 1987 was not a bear market. It was a crash. It was a nasty correction. 2011 was over 20 percent. That wasn’t a bear market. It was just a really nasty summer selloff just like we’re having right now.
What we do need to figure out, though, is are we in a bear market, and I don’t mean bear market again using those definitions, but I’m talking about something that’s going to be long lasting that we really need to change our whole allocation. Think about things differently, and I would say the answer’s no.
We know over the long term what the stock market makes because we have that data. We have that evidence. The only reason we don’t all have our money in there, all of it, is because of the
… the fact that we may need that money over time or you want to have some money sitting there to buy. So if you had 60% stocks, 40% bonds, which I don’t like doing it that way, but let’s just say you had that allocation, for simplicity purposes. Why do you have the 40% bonds? Do you think the bonds are going to make more money in the stocks over the rest of your life? I don’t think you do. You do it because you’re scared of volatility or you may need some of that money. Well, if you need some of that money right now, you don’t go sell your stocks. You take it from the bond side of the portfolio, right?
But isn’t this a time to consider reallocation? Maybe you should go to 70/30 or should’ve the other day, right? This is all the stuff that we deal with every day and making sure the allocation matches the person and what they’re trying to accomplish. And so again, everything we’re seeing, we do not see a bear market. It doesn’t have the traditional setup for a bear market. And I think we wrote this article a few weeks ago about the fact that the market is going to, and the economy, frankly, is going to force the Fed’s hand and they’re going to stop raising rates. I don’t know for how long, but they’re going to stop raising rates. The market will like that. Maybe we get some positive news on China and then up we go and then what we need to see is what all those rate hikes they had been doing since 2015. Are they really going to continue to slow the economy down?
Right now it’s decelerating but is it going to go into a recessionary area? So what we need to see, and I mentioned it last week, we need to see some of that deceleration stop, right? We know we’ve gone from 80 miles an hour down to 40 miles an hour, 30 miles an hour. Are we just going to keep cruising at 30 or are we going to keep slowing down? And we don’t know that yet but the market is pricing that in. And a lot of times the evidence shows that the Fed’s no good at predicting recessions and neither is the stock market. But it does always shoot first and ask questions later and right now, in the past month, it has been selling, investors have been selling based on the fact that they’re worried about a slowdown and the Fed raising rates and all these other things we mentioned.
Those are really what we see going on. So we did add to that allocation right now. Again, don’t go overboard here by going, “You know what? I’ve got 40% of my money in safer income producing things. This isn’t a time to abandon that and go 100% stocks. But I do think if there had been money on the sidelines that you’ve been wanting to get invested, this is what you’ve been waiting for. This is what it’s all about. You don’t get this type of sell-off every day. You get it every so often, but they are pretty rare. The intensity of health oversold it is.
And I would also use this time to upgrade your portfolio. If you have a stock you don’t really care for and you’ve been wanting to buy another stock that you’ve been waiting for it to come down, this is the time to maybe do that swap. Also, I do want to caution you by the way on … Oh, by the way, I wanted to give you one more, I’m going to caution you about something, but I’m going to mention one more little stat in here and we’re going to talk about stats.
So this is one of the quickest 17% drops ever from a 52 week high. From 1950 till now there’s only been six of these. This is the sixth one. Fast forward a year later, the market’s been up 27% So again when you get a swift sell-off it tends to lead to swift gains. And look, as I said last week, I’ve always thought that the prolonged bear market like we saw in ’08 was not our biggest risk because the next crisis will be different than the past one.
My biggest thing was I thought that we would see the odds of a crash, a flash crash again, we’re still high. You could argue that maybe we saw that. Remember the ’87 crash was 22%. Well, we just fell 20%. It just took a little longer, but maybe it was a multi-date type of crash. Who knows? Again, it doesn’t matter the why, but these swift selloffs are typically good buying opportunities.
Now, as I say that, okay? As I give you all these stats today, because there was a ton of them, I also want to caution you. The reason I want to caution you is we have a lot of technology at our fingertips right now, and because of that, it’s very easy for people to data mine. What I mean by that, you could go find all types of data to support your story, right? For example, if somebody is bullish, they could say, “Boy, every time we’ve had these big rallies, here’s The times it’s gone up.” And the bears would say, “Every time this happens, here’s all the different times we’ve been in a bear market when the markets rallied.”
We saw a lot of that this week, both sides of the aisle saying, “This is a bear market rally.” And the other ones saying, “No, no, no, no. Look, it’s a bull market rally.” And people want to talk their position and validate their position and you can do it with a lot of data. You can say, “Every time I was wearing blue jeans on a Tuesday and it was less than 40 degrees outside, the market tends to go up.” Well, that didn’t cause that. It’s coincidental. But with all the data we have available, you see a lot of that floating around. And so be careful about some of that.
And again, I’m doing it. I’m giving you some of that same data, but I’m also going to give you the negative side. And when we see sell-offs like this, it is true that we have had sell-offs and sharp rally’s. Some of the sharpest rallies we’ve seen came in ’08 during a bear market. They’re fake rallies. Okay. But when I look at stuff like every … Only one S&P 500 stock was down the other day and when I look at the volume of 28 to one and operation and all this stuff that so unusual and you go back and look at … That was meaningful to me. But again, at the end of the day, even if you bought at the peak of ’07 before their weight drop and stuck with it, here’s where you are. So this is about long-term still, right?
And you’re getting an opportunity to buy stocks cheaper. A little more expensive than they were the other day. And there’re some great quotes, but they’re not in front of me. But essentially how scary the market looks when it’s going down. And then after the fact, after it runs back up, the regret of what a great opportunity that was that I missed. I had been saying along this that we never really saw that fear and I saw the fear the last few days and until we got a couple of back-to-back days, and when you start having people regret their decision of not buying at the low’s, that’s when you tend to get a bottom, right. And I don’t know if we’re there yet.
I haven’t surveyed a bunch of people to say, “Are you regretting not buying the other day when it was panicky?” But if you go back in time, especially if you’ve got time on your side, you go back and look at all the times. Wouldn’t you have loved to go back to ’08 and bought in March of ’09? Wouldn’t you have loved that? If you were around during the great depression wouldn’t you have loved to have bought those lows or the lows in the summer of 2011 when our debt was downgraded or the flash crash of 2015? You look back now and go, “Man, had just bought that I’d be so much wealthier.” We just had a 20% sell-off. So again, a lot of the risks that you are worried about, if you were, two or three months ago has happened now, but it’s all about snapshots.
If you look at your account right now, it looks worse than it did a month ago. If you look at it compared to 10 years ago, it looks a lot better. Right? And that’s how you have to approach this. But asset allocation is always key. And working with an advisor to figure out the right mix and not just stocks and bonds. Again, that is just one little piece of it. There’re a lot of other types of investments and then all the little tricks that go along with optimizing. Have you been tax loss harvesting this year? Have you been doing any Roth conversions this year? If you need money out of your account, are you taking it from your Roth, your IRA, your joint account, your trust? Are you gifting? And if you’re gifting or using appreciated shares or using cash or using your Roth or using your IRA? What are you doing in those things?
Those are where those are the types of questions we answer every day. So if you need our help 210-526-0057 and it’s been a great year, guys. I mean our podcast group grew a lot. We got a lot of new listeners, lot more interaction this year. We, of course, I think it was earlier in the year, we revamped the website a bit. We started to do more video, which we’re going to continue to do and looking forward to a great 2019. I appreciate you guys listening because if you weren’t listening I wouldn’t be doing this and so we appreciate you kind of spreading the knowledge here and forwarding our stuff on or telling people about our podcast or if you know somebody that you know says, “I don’t know what to during this market. I don’t know how to navigate this.” Give them our name and number. We’d love to help them out.
So we appreciate you listening, especially those of you that have been listening for well over, believe it or not, well over 10 years now. Amazing. It’s interesting to see people saying, “Oh, I like podcasts. That’s neat. What is that?” I’m like, “Oh my gosh, we’ve been doing podcasts for over 10 years now. People are coming around to it,” so anyways.
Well, have a great New Years. Stay safe, and we will see you back here in 2019. Stay sane in this market. Right? Because our emotions again can allow us to make some dumb, dumb decisions sometimes, and I’m guilty too. At least what I want to do. I want to run away from stocks when they’re falling. It doesn’t feel good, but we know the right thing to do is to add to it. And when everybody says, “Hey, this is the greatest thing ever, like sliced bread.” That’s when you need to start selling to them. Right? We saw some feared the other day for the first time. We saw some real, real fear. So if you have any questions for me, give me a holler. All right, guys, have a great weekend. Take care.
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This show is for entertainment only and information provided by the host-guest, 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.