On this week’s show, Karl explains how Jay Powell and the Federal Reserve appeared to capitulate this week and give investors exactly what they wanted.
Hey, everybody. Welcome to The Eggerss Report. It’s your investing playbook. It’s our first show of 2019. That’s crazy. I think I started podcasting in 2007 or ’08. I think I started Twitter in 2008 or ’09, maybe ’10, I don’t know. But it’s amazing how the time flies and how many years have gone by. As I say often, a lot of you have been listening to this podcast for that whole time, during all those years. We’ve seen through those years, many, many corrections. We’ve seen bear markets. We’ve seen bull markets. Seen just about everything in the last 10 years.
For those that have been along for the ride, thank you for continuing to be there for us and us for you. For those of you that are new, which we have a lot of you that are new, welcome aboard, fresh start 2019. This is The Eggerss Report. My name is Karl Eggerss. We do this podcast every week for information. We try to give you information and really help you think about the markets. I don’t want to say in a different way, because it’s not necessarily in a different way. It’s really to, sometimes in a different way from maybe you have some preconceived notions about things. So we try to help you through that. But sometimes it’s just to reiterate things you already know, and you have a second voice.
Again, we have a staff of people that are looking at the markets, and our job is to really tell you what we think is going on. That’s not always easy. We make mistakes. We make good calls, bad calls, all those types of things just like you do. The idea is to help you along over the long-term, and that’s what we try to do here. We talk about the markets. We talk about financial planning. We bring guests on from time to time. We will continue to do that in this new year.
We’ve already started a wacky new year in the markets. If, by the way, you want to get a hold of us, it’s 210-526-0057. Our website is eggersscapital.com, bunch of stuff on there. If you’re on our blog, then you are getting a lot of this information sent to you. We do radio interviews. We do television interviews. We do video podcasts. We do the audio podcast here. We write articles, and we put it right there on the website, very transparent. We let you know what we’re thinking. We don’t have sailboats on our website. We don’t have two bathtubs with a couple holding hands for those types of commercials. We have information. That’s what you want.
If you need help from us, there’s a button there that says, “Get a free advisor consultation.” You click on that and we will help you. All right, let’s jump right in. It was a crazy start to the year already. It’s amazing the moves that we’re seeing already. I think I saw that we had the worst second day of the year ever, trading day of the year. We also had the best third day of the year, of any year, for the market. So we kind of saw a reversal of fortunes on Thursday and Friday, but let’s go ahead and recap what we saw this week. Of course, Monday finished out the 2018 with about a 1% gain or 265 points.
We ended 2018 with a little bit of an uptick. We had that crazy Christmas Eve, just massacre on Wall Street. And then we started to see a big move up. I think we had the 5% thousand-point day, 1100-point day on the Dow Jones. But we finished the day. Of course, the markets were closed for New Yearâ€™s Day. And then Wednesday, we started the new year. It was interesting. It was a really encouraging day. The market opened down, the Dow Jones about 400 points. And then it was up almost 100, finished slightly positive, but a big reversal. That was a real solid reversal.
We had news that President Trump was speaking, and he called some of the recent volatility and the drop in the market, a glitch. The glitch is what the traders on Wall Street were talking about this week. It wasn’t a glitch. It’s just volatility. But if you watch the president’s comments, whether you agree with him on anything or not, very entertaining, right? Those are entertaining comments. But market did not have a glitch, but he claimed it was.
But a nice comeback on Wednesday. But Wednesday evening, we had the Apple warning. When was the last time Apple came out and warned. You hear companies all the time warn, “Our revenue’s going to be lower. Our earnings are going to be lower, the guide lower.” Well, Apple did it. There was plenty of signs of this. I don’t even remember when. We had Apple long ago in our dividend plus strategy. We sold it sometime in 2018. I don’t have it in front of me. It continued to run up after we sold it. But what we started noticing was … and we actually put this out on my Twitter page @karleggerss. We put a chart up of Apple stock, and then we put all of their suppliers’ stocks on top of it.
What you notice was a huge divergence. Basically, Apple was going up but the suppliers were going down. That told us, there’s something not right here. We weren’t terribly concerned about it, but we did notice. It was a big difference. So we posted that out. We’ve heard some warnings along the way, various things. Well, Apple warned and it was a big warning. This was rare. So immediately after hours, the Dow’s down 300, 350 points. My question was, are we going to see the divergence here? Are we going to see technology go down, but maybe healthcare or some other sector, commodities, go up? You know, completely ignore it?
Well, we’re in a market right now where it doesn’t ignore anything. It took the whole market down on Thursday. So we opened lower after the Apple news. Apple was down about 10%. Tech got slammed. We did have an ADP employment change that came in much higher than expected, but it was ignored. But then, we got the ISM manufacturing report that was 54.1. The estimate was for 57.5. Now, you’re probably listening to those numbers and going, “I don’t know what that means.” Of course, because you don’t watch it all the time. I don’t expect you to, but anything over 50 is basically expansion. And anything under 50 is contraction in an economy.
Well, there was a manufacturing report that came out also the night before and it was China manufacturing report that was under 50, slightly but under 50. So we already saw the markets under pressure from that, and then we get a report that our manufacturing goes down to 54.1. Now, 54.1 is still very good. It was 60 the past few months, so it’s coming down. The market took that news and just sold. We finished the day with the Dow Jones on Thursday down 660 points. But it was interesting. There was still a lot of … I don’t want to say a lot of green, but there was some green on my screen. We’re seeing some positive divergences building as far as new highs, new lows, all those things we look at to see, is there something better going on under the surface?
We kind of saw that. Still was a down day, but there was a lot of good things going on, I thought, at least that were different than what we might have seen three or four weeks ago. Well, then we come in on Friday and we’re getting the big jobs report yesterday. The markets were anticipating 184,000 jobs created in the month of December, non-farm payrolls they call it. Well, we didn’t know what to expect, right? Because if the number comes in strong, you would think that’s great. But at the same time, we don’t want the Federal Reserve continuing to raise rates. Do you want a weak number? Well, we don’t want too weak of a number because it may show that we may be headed towards a recession.
What did the market really want? We didn’t know. Well, instead of 184,000 jobs created as the estimate was, it was 312,000. Now, of course, people will digest the numbers and say, “Well, it was because of this, because of that.” But at the end of the day, all these numbers were kind of smoothed-out, but 312,000 is a pretty significant beat. It was interesting to watch how did the market react to that. The bond market sold off. The bond market was saying, “That’s a good number. We think the economy’s a little better.” Interest rates went up. The stock market though did not go down.
The stock market held in there. It was up about 250 points, 280 points on the futures in the morning, and it stuck. Well, the market was still pretty strong, up about 300 points at open. And then fed share Powell spoke. This is what we’ve all been waiting for. Was he going to start backtracking. He did. He capitulated. He basically gave this speech on Friday and went on to say essentially that the fed isn’t on a preset path to raise rates. They can change course when they want. They’re going to be data-dependent. Exactly what the market wanted to hear. That’s what investors have been wanting to hear.
Now remember, we’ve had a couple of weeks ago, we had one of the members of the fed, Williams, come out and say the same thing. The market liked it initially, but it sold out. I don’t know if it didn’t believe it, but we started to say on this podcast that the fed was definitely sending the signals out there, “Hey, hey, hey. Hold on, guys. We’re data-dependent. Don’t worry. We’re not going to just raise rates haphazardly. We’re going to pay attention to the data that comes out.” But nobody believed it until Jay Powell said it. He said it and basically said, “We don’t have to unwind our balance sheet as fast as we’ve been doing it.”
He said exactly what the market wanted to hear and up we went. The Dow Jones finished the day on Friday up 750 points. The NASDAQ recovered 275 points. So you had the major industries up anywhere from 3% to 4%, very, very strong day. Now, for the week, what we saw was, not this year, but for the week, remember we had one day this week that was in 2018. But this week, we saw big, big moves out of things like oil and gas and equipment services, exploration production up 8% to 9%, I mean big moves out of the energy space, biotech up 8%. Some countries specifically, Brazil was up 10%. We saw oil itself up almost 7%. The gold miners, gold and silver are starting to get some traction.
We owned Gold Junior Miners in our aggressive strategy. That was up about 6% this week. So we started to get some moves on those. The banks obviously liked … Most of these gains came on Friday, but we did see the banks liked some of this. Overall energy up about 5%. Home builders up 4%. Those are some of your biggest movers for the week. The S&P was up about 2%. The Dow Jones up about one and a half. Those were the outliers on the upside. On the downside, the things that lost, natural gas down eight and a half percent. We saw copper down about 1%. Semiconductors still finished negative on the week. And Volatility, Volatility fell 25% this week.
Now, if you’re wondering what bonds did, bonds were kind of all over the place for most of the week. Interest rates got down pretty low, around 2.6% on a 10-year treasury. But bonds finished down a little bit. Treasuries did. The overall bond index was down slightly this week after a big run. Here’s where we are. Here’s where I think we are and what’s going on. We’ve been saying for a while. We weren’t the first to call this and there’s certainly been others. But we are going through a cyclical slowdown. There’s no question that the economy is starting to decelerate. The earnings that are going to come in, are they going to grow at 20 and 25% like they did over the last few quarters? No.
Are they going to grow at all? Probably. But they’re not going to grow very much, I don’t think. It’s because we’ve had a strong dollar in a slowing economy. The slowing economy has been self-induced potentially because we’re trying to talk ourselves into it with the trade war going on and the uncertainty. When you hear the word, recession, and you hear the word, bear market, people start hunkering down and don’t spend as much. So we could be talking ourselves into something here as well. But we are going through a slowdown. It is happening. The question is, is it a slowdown that literally makes us contract to where we have a recession? I don’t think that’s going to happen.
But the market is anticipating lower earnings growth accurately, and it’s also been fearful of a fed that seems to act as if the economy’s still growing gangbusters. So we got acknowledgment from the fed finally that no, that’s not the case. They don’t need to panic and start cutting rates, but they may pause for a little bit here. Of course, again, we also still have the trade stuff going on. We have a meeting on Monday. We’ve gotten some boxes checked that we were looking for. We talked about this last week. We needed to hear the fed say, “We hear you. We see everything that’s going on. We’re not just going to raise rates haphazardly.” We got that, check.
We have some, what appears to be maybe some progress on trade, but it’s all talk. But we’ll find out more next week. But that seems to be going in the right direction. Look, this stock market, in our economy, primarily the stock market going down, it could be the best thing that happened because of the fact that, I think, it’s putting pressure on the president to get something done sooner. If we were still sitting at new highs, he would be holding all the cards. But China’s looking at us going, “Look, your stock market’s suffering too.” Both countries need to get this done. I’ve said for a long time, China needs us more than we need them. That is totally true still. We still have the upper hand. But our economy is slowing and getting a deal done with China will help. But this is going to be a long process.
I think we get bits and pieces. But to say, “Oh yeah. We’ve got some deal done and it’s done and we’re done talking. It’s all fixed.” That’s not going to happen. We could go years. Of course, we still have the government shutdown going on. That’s negotiating for the wall, et cetera. We’ll see how all that turns out. But the main thing, again, when the economy is starting to slow, investors don’t pay premiums for stocks. We’ve seen that. They don’t pay premiums. So we need to see if we’re going to level off here and start to get some positive news. But we still have a good economy. Stocks are reasonably priced at this point. Again, what were you doing and what are you doing? I mean we still have depressed levels in stocks.
Are you making adjustments in your allocation? Because I do think this is one of those times where if you were 60/40 or 70/30, whatever your allocation to stocks and bonds, you could make some adjustments and at the very least, rebalance some things and take advantage of some stocks and upgrade your stocks. If there’s a stock you don’t really care for and you want to sell it and go buy a better company because that stock’s beating up as well, you’ve had your chance the last several sessions and probably still do. We’ve been active tax-loss harvesting the last few weeks, upgrading some things, adding to some positions. People that had the ability to add cash to their accounts, adding it so we could go buy some things.
But I want to be clear about something. In our growth strategy, which has a tactical element to it, that growth strategy is still out as far as one of our indicators. It’s still saying we need to keep a slug of cash. So that indicator’s still negative. We took that out in November and as I mentioned the last few weeks, as this sell-off got just stupid and we started to see some really unusual things happening that we haven’t seen in years, we put that cash to work. It’s about 15% of that strategy. We put it in three different pieces. We averaged into the market and basically that piece is in.
But still, we’re viewing it as a trade right now because if we get continued up movement and we don’t see any oomph behind it, we don’t see any quality behind it, we don’t see a change in anything, then at some point we will take that position back off unless, obviously, our long-term indicator switches back into the market. We’re still in a trading environment right now. Now if you’re long-term, again, you can add to stocks because this is … Look, if you haven’t had the money in the stock market because you’ve been waiting for something, this is it. You’re taking advantage. I’m not saying this is it meaning the bottom is definitely in. I’m saying you have a 20% discount on stocks, maybe 30 or 40 in some positions.
Speaking of discounts, let’s talk about Apple for a minute. Again, it’s something that we don’t own in our strategies for our clients. We owned it in our dividend-plus strategy. We felt like it was getting, it was just a little too expensive and it actually ran up after we sold it. But here’s the thing. Apple fell 38% in about three months. This is what can happen with companies that get a little overpriced and especially if they say some bad news. I mean you look at something like a Facebook. Facebook’s still down 35, 40% from its high. We’ve seen big drops. We saw Amazon. Amazon down to its lows, it was down about 30% as well. Netflix, the same thing.
The thing that’s happening though, I mean Netflix fell 45%. The thing that’s happening is it’s not just taking down those companies. It’s taking down a lot of companies, and this is where you have to say, “This company shouldn’t be going down. I’m going to buy some of it.” Apple having some issues does reverberate around the globe and especially in the technology sector. So when you look at semiconductors, when you look at component companies, if Apple’s having troubles, there’s probably a lot of people that are having trouble. It was a big warning, it really was. But that doesn’t mean that a healthcare stock shouldn’t be going up. In fact, we saw an acquisition this week.
We saw Bristol-Myers purchase Celgene. Companies are still finding value out there especially in things that are not technology. But technology companies are coming back in here. There’s been things that have been holding up relatively better than tech, but tech was one of those areas that was overpriced. When it’s overpriced and things start to slow, it gets hammered. That’s what happens, and we’re seeing that. What your job is is to say, what’s been unjustly hammered and what’s been justly hammered? If it’s unjustly hammered, then you go and acquire it. There’s some tactical things to do here, for sure, but I do think where we are right now is we may be in the process of, from a technical perspective, backing and filling.
There’s an important level on the S&P around 2600 or so. That was kind of the level it broke down. As we try to rally back up, which I think is another 3%, 4% above, if we get up to there, look for that place where people will start taking some profits again. If we go through that, we may have some real strength. But when you look back over time, these types of sell-offs, you tend to get a bounce and then it either comes and retests it or it goes down a little. I mean it’s not a perfect V that goes straight up to new highs. But I do think, and I’ve mentioned this several weeks on the show, when we called it the Paul Tudor Jones indicator, it’s working out that way so far, which is to say the fed raises rates. Investors don’t like it because they like low interest rates.
They throw a hissy fit. They sell stocks. Stocks go through a correction, 15, 20%. They finally force the fed’s hand. The fed says, “Okay, okay. We won’t raise rates any more.” The market works it way back up, ultimately makes new highs. And then all those hikes that they’ve been putting into place since 2015, actually do start to slow the economy, and then we go through something even worse. We may be in that phase right now where the market’s going to rally because of the fact that it’s forced the fed’s hand to stop raising rates. Again, as we’ve said, it’s not necessarily the level. It’s the fact that we were at zero for so long. So as they keep raising, it feels larger than it is. I mean they’re at two and a half percent.
Our economy can’t handle the fed funds at two and a half percent? That’s silly. But it’s not about that. It’s about the fact that it was zero for so long, and everybody got used to it. They could borrow money whenever they wanted. They could go do a real estate project. They could buy stocks. They could do whatever. Now the cost of capital is going up, and the earnings growth on companies is going down. So the fed needs to say, “We see it. We’re going to pause, and that’s that.” That’s kind of where we are right now.
Again, in the very long-term here, this is a correction. I still don’t believe we’re in a bear market. Again, where the economy, if it continues to decelerate, it’ll continue to be an issue. But if it’s just slowing down, which it is so far, that’s not a major issue. Let’s see, but obviously some of the things like the tax cuts. Some of that was front-end loaded, and so it’s wearing off. But again, what I like to see is I want to see some of these CEOs go buy their stocks back, which we’ve seen in the last few weeks. We’ve seen some CEOs do that. We’ve seen some hedge funds say, “We’re buying some stocks here.” This is kind of crazy how cheap some of these have gotten.
But again, some of these things are outperforming. If you look in the last couple months, international stocks are outperforming. Commodities are outperforming. We may be seeing some shift. I’d be surprised if the S&P 500 is the leader as it’s been the last few years. Again, diversification I think will help going forward where it hasn’t really helped in the past few years, to be honest. We’re still in an interesting market. There’s people on both sides thinking … I mean the bears are screaming. The bulls are kind of quiet lately. But again, look at where things are from a valuation standpoint. I think things are reasonable, but I don’t think we should think that necessarily the correction is over yet.
We will see in the next few sessions, for sure. Don’t forget, 210-526-0057, eggersscapital.com is our website. My Twitter handle is @karleggerss, K-A-R-L-E-G-G-E-R-S-S. I put out on there things that are happening pretty quickly. Why the market’s moving, it could be an economic event. It could be a sarcastic comment by me, which I have been known to do a time or two. But if you need help, email me or go on our website and we’ll be glad to help you. Many of you have done that. Again, feel free to share the show as we enter the new year.
We’re on iTunes on their podcasts, Apple Podcast. On there, you can give us a rating. You can share the show with friends. If somebody tells you, “Hey, I don’t know what to do with my 401k.” Say, “Hey, there’s this guy I listen to, this guy. He’ll be glad to help you out.” That’s what we do. We appreciate you listening as always, and we’re looking forward to a great 2019. Have a wonderful weekend everybody, and we will talk to you soon.
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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.