On this week’s show, Karl discusses how volatility has returned and it all started with a simple tweet from the President. The trade war is back on.
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Well, coming into Sunday, or Saturday, no I guess it was Sunday, we the most… The biggest thing we were talking about was Maximum Security. Maximum Security, what looked like the Kentucky Derby winner, and then was disqualified of course, and so that was the big controversy. The markets were pretty smooth, and then came the tweet. Yes, the tweet to basically reignite the trade war, and that tweet basically said, we’re going to impose tariffs coming up here because as we get to this deadline, and that deadline was Friday morning at midnight, or Thursday night going into Friday morning, and that’s exactly what happened.
As the week started, it started out on this sour note. It became a very volatile and interesting week pretty quickly. We were talking about the last several weeks that the economy was doing okay. It was a little vulnerable. We talked about the vulnerability. Meaning that if there was some shock, like the government shutdown last year, that we could see things start to slow down a little faster, but things were doing okay. China’s economy, the slowdown they were seeing looked like it had bottomed a little bit, and there was progress on trade. We saw all of that. And then, we just get this tweet. It’s like, what’s going on? Why would the president talk this way?
We find out that according to the US that China decided to toughen their stance on some things. We, meaning the United States, were accusing them of basically changing the deal saying, we had a deal, but we don’t have a deal anymore, and we’re changing it. And so, through that you started to see the markets get volatile, not only in the United States, but primarily in China as well. China had a big, big drop after they had a nice run, and more and more stuff started to come out. By the way at the same time, we see that an aircraft carrier of the US is being sent to the Middle East to deal with Iran, and aircraft as well. And so, we saw this drop on Monday. The market bounced back Monday, and you thought, okay well, that was quick.
We’ve seen a pattern over the last year and a half. Every time we have seen a drop off in the stock market due to trade, we have seen that its bounced back pretty quickly that day. That’s exactly what happened Monday. In fact, I talked about it Monday morning. I do an interview once a week on the Trey Ware Show, which is a radio show talk show where I go on there on Mondays and talk about the economy, talk about the stock market, talk about portfolios, whatever is going on. When I do those that’s at 7:20 a.m. Central Time every Monday morning. I usually post a repeat of it on our website. But if you don’t listen to it, he asked me about this.
At the time, the futures were down about 500 points, and I said, “Look, the data suggests that we’ll probably bounce back from this today given that, that’s been the history over the last year. Every time there is some trade sell off the markets tend to bounce back.” That’s exactly what happened, so we got almost all the losses back that day. But then we come in Tuesday, and this starts selling off again. It got worse, and worse all day. At one point, the Dow Jones was down about 650 points. It closed down about 470, but still a pretty nasty day, not as bad as it could have been, but still bad.
Now, we need to take inconsideration again that psychologically we still see 100 points, 200 points, 300 points in the Dow as a big, big number, but percentage-wise, we’re talking small, small percentage points because look, in the month of May the markets are down 2 to 2 1/2%, right, off of their all-time highs. But, when we start to see 3, 400 point moves our minds still go back to the ’90s when 3, or 400 points were 4% in one day, but they’re not. They’re a smaller percentage move, but nevertheless, some volatility picked up, so Tuesday was actually worse than Monday.
And then we started getting other news on Wednesday. We heard that there was some bitcoin stolen, which by the way, bitcoin has more than doubled since its low. If you go back a few episodes I actually talked about that. It would not surprise me to see the cryptocurrencies actually start to work again simply because after they crashed… They went through this bubble, and then they crashed and went down 95%. And now, everybody gave up on them and said, “I knew it was a fad.” And now, here they come creeping back again, so interesting to watch that. But, we did see bitcoin stolen, which is never a good… That’s never a good positive if you’re a proponent of cryptocurrencies, right. They’re supposed to be anonymous, and safe, and they’re away from the government and yet, they’re getting stolen.
We also got an article about China default. Their defaults have tripled, so you’re starting to see is there something else going on with China in terms of their loans? The other thing that was interesting on Wednesday was, they have these auctions where every week for treasury bonds. The 10 year treasury bond auction was the weakest since 2009, so are we starting to see the appetite for treasuries finally start to give away? And will interest rates start to rise? That’s really something interesting to watch going forward.
And then again, Wednesday the deadline was looming, right, Thursday night at midnight into Friday morning. And then all the reasons started to come out. Why did Trump, why did he get so aggressive Sunday night? We finally got some of that. It was interesting. There was an article in The Wall Street Journal discussing the fact that the fact that Larry Kudlow, President Trump, and a lot of people in the administration are pushing for lower interest rates. China took that as a signal that perhaps our economy is weaker than what we’re saying. Therefore, we don’t have as much negotiating power as we thought, the US that is.
And so, China said, “Do you know what? We’re going to go back on some of the things we said, and we’re going to change the deal a little bit. That was some speculation. The other speculation was that President Trump has been too complementary in his tweets about President Xi in China, and because of that they said, “Well, he’s not a tough guy as we thought, and he’s being so friendly he wants a deal to get done.” Again, he weakened his negotiating power. All of this is Negotiating 101, right. This is high stakes negotiations. President Trump uses the Twitter platform quite a bit.
I wrote an article Monday or Tuesday night about the tariffs, the market. Essentially if you want to go on there, and take a look at eggersscapital.com. On the blog section, if you click on that, you’ll see that article on there. Basically, the article is named, A Perfectly Timed Sell Off. The idea was technically we are at a place where we could’ve sold off, should’ve sold off. It was like investors were waiting for one news event. We got that news event, which was the tweet Sunday night.
But I also said, “Look, we’re one tweet away from new highs, right, not new lows, new highs. We’re one tweet away.” That’s what happened throughout the week. I mean tweet, after tweet, after tweet, we saw the markets go up. They’d go down. I mean look at Friday alone. What happened on Friday? Markets were down about 350 points, 360, 70 points at one point during the day. After about an hour of talks, the trade talk negotiations end. It seems like bad news, right.
But Steve Mnuchin Treasury Secretary comes out and says, “The talks were constructive.” That’s it. “Talks were constructive,” and boom, stock market goes positive on the day. The power of the tweet, the power of the comments, the algorithms that are controlling these portfolios that affect your portfolio amazing this up and down we’re getting. We even had a tweet this week from President Trump saying that President Xi followed him back on Twitter. I mean that’s news, and that’s moving the markets, unbelievable.
Thursday we saw the market down about 500 at one point, and finished well off the lows. We keep getting these sell offs, and then it bounces back. Technicians would call it hairy bottoms. I don’t really like that term for obvious reasons. But, we’re holding around the 50 day moving average, if you’re a technician. We reached the old highs, and then the sell offs started. But, we’re only 2 1/2 to 3% off of the highs, so let’s take this all into context right now as we go into the weekend here.
Where do we go from here? We see the tweets. We have news flow. I can tell you this, bear markets don’t start because of a tweet. They don’t start because of a news event. They don’t start because of a lot of things. They are a process and they happen over time. They’re usually caused by profits continuing to go down, economies getting weaker over time. And then what leads to the bear market is a withdrawal of demand. There is just nobody wanting to buy stocks, and there is plenty of people wanting to sell them.
We’re not seeing any of that right now. We didn’t see it all of last year, which is why we were saying, you can continue to buy the dip. In December, we were talking about buying the dip, and we continue to buy the dip, and we’re going to continue to buy the dip now. By the way, if you look at some of the stats that have come out this earning season, a lot of people complain about this earning season, 90% of the companies in the S & P have reported earning so far.
This is according to FactSet: 76% of them are reporting above their estimates, right. They’re beating their estimates, 76% of those, which is higher than the five year average. Usually it’s not that high. 59% are reporting sales, the revenue, the top line above the estimates. That’s about the equal, so earning season hasn’t been stellar, but it’s been good. It’s been fine. We haven’t seen that turnover yet. We haven’t seen any leading economic indicators turned down yet.
Now, there are some things when we tear down all the numbers in the economy, tear down some of the companies, there are things to worry about. There is things to be concerned about. As I’ve said earlier, and have said in the previous weeks, the economy is in decent shape, but it is vulnerable to shocks. And so, if something were to happen like this trade war continues to drag out, and companies, and executives, and people, consumers worry more, and more, and more about it because it’s pounded down their throats by the media, if that continues to happen, and the economy does slow, then it can be enough to tip us into a recession.
But again, as we’ve said, a recession is very different than a bear market. Those two things aren’t linked together, number one, so I always look at these economic indicators. And then I went through a lot of them this week. Some are good, some aren’t so great. But at the end of the day, how do those economic indicators translate into the performance of the stock market going forward, right? That’s what we’re trying to figure out here. What we like to do is look at sentiment, supply and demand. Again, nothing has indicated to us that we’re entering a bear market.
Now, as we said in that article the other day, corrections can happen because of all those things like tweets, like news events, right. That corrections, meaning short term, violent moves can happen for any reason at anytime. Bear markets don’t usually happen that way. These tweets are very powerful for volatility to pick up. Look, I would rather, and I’ve said this numerous times on here, I would rather see a few days where it goes down 3, 4, 500 points, and volatility spikes up, fear spikes up, rather than the slow motion grind 50 points down for 20 days in a row, right. That’s what I would rather see because fear is what drives stocks to a point where you can buy them. This week, fear bounced 28% this week. Okay, now it had been up much higher. In fact, from the peak this week until the close on Friday it dropped about 30%, so it moved quite a bit. But on the week, it went up about 25%.
Now, the things that were moving the most this week were on the plus side of volatility, of course I just mentioned that. Bitcoin, GBTC, which is the Grayscale Bitcoin Trust, the ETF up about 17%. Natural gas was actually positive on the week. Bonds were up a little bit, not as much as you would think with some of this fear. Gold popped up a little bit, a little less than 1%, but it looks good. We actually in our aggressive strategy added to our gold miner’s position that we have. Oil, and gas, and exploration of production companies were up on the day, or excuse me, up on the week, and bonds in general. You can see there wasn’t a whole bunch up during the week in a big way.
The things that got hit the hardest, international stocks. No big shock, right. International stocks because of the trade war and tariffs, and so forth. Semiconductors were the worse, down 6%. I’m continuing to hear and see more and more data coming out suggesting that there is some stuff going on in semiconductors that’s not great, and a lot of those stocks are very expensive, so if they were down 5, excuse me, 6% on the week, and as I mentioned emerging markets, foreign stocks in general were down. Some commodities were down. Tech sector down about 3%. Transports down. A pretty broad based selling across the board. But again, we’re talking about the averages down 2 1/2%, or so for the week, which is very mild given some of the news flow that we’re seeing right now.
We’ve talked about this a lot, but what do you do during times like this where volatility picks up a little bit, and you’re watching the futures in the morning, and they’re down 300. And then, you come back from lunch break and the market is back up 200? What do you do, if anything? Most of the time you do nothing, right. But, what do you do? Well, the first thing is, your asset allocation, your positioning in terms of how much stocks, and bonds, and private investments, and lending that you do, all of those things together really determines… That big picture is going to do a lot of the heavy lifting for you because if you have that done correctly you should already have built a portfolio that can withstand some of these bumps along the way whether they’re 2%, or 10%, or whether they’re 20%. We had almost a 20% drop in the fourth quarter of 2018. Here we are still near the highs, so that was a bump. It’s scary, but it’s a bump nevertheless.
Now, some of you, a lot of you that listen like to be a little more active in your portfolio, at least a portion of it, and like to do some trading, so what do you do? Well, you could be looking at the charts and saying a week ago, “Boy, we’re here on a Friday, or a Thursday, or a Wednesday and the market is near an all-time high. I can see that it hit this level a few months ago, so I’m going to start selling. I’m going to take some off the table.” A logical place to do that, but as you’ve seen at times, what happens if it breaks through to upside then what do you do? Now, you’re sitting there in cash. Do you buy the new highs, or not. That’s a tricky thing to do, but you’re being proactive. You’re selling into strength.
The other thing you could do is wait. You wait, and you start selling on the way down. And that means you’re waiting for various technical indicators to cross. You’re waiting for moving averages, and all kinds of technical things, but you’re giving up some of the gains already. You’re figuring in your mind that we’re in a third inning of a sell off, and we still have a few more innings to go, six more innings to go here. And so, you’re going to try to sell it, and then you’re going to try to buy it back cheaper. Most people don’t do that correctly. The problem with doing that is, I’ve tested this a lot over the years, a lot of indicators that I use are very good at getting out during these volatile bad times.
The problem is most of these are temporary. Yes, it’s volatile. It’s a little bumpy, and then you get out. You pay capital gains probably, and some taxes, and transaction fees, and whatnot. And then you get back in, and when you look at where you got back in versus where you got out, it saved you volatility. It kept you sleeping at night. However, it didn’t really produce any fruit. It didn’t make you any money. That’s really the idea here, so if you’re wanting to reduce volatility you can use all the indicators you want. If you’re wanting to actually profit from it, you’re going to have to sell into strength and buy into weakness, which is very difficult for most people to do.
Now, some of these reactive indicators I talked about that will reduce volatility, obviously if we get into a 2008, or a dot com bubble then yes, you’re not getting out to late, and it will be a productive trade, but those are rare. Most of what we’ve seen, especially since 2009 until now are short term corrections. By the time your indicators go back to a positive, if you will, the markets already recovered a lot, and you’re buying back in at the same place you sold, so it’s very difficult. But, you have to choose what you’re going to do. You start with the basic asset allocation. Then you determine do I need to have any protection, any tactical strategies, or not? And if I’m going to, where do you do it? Do you do it in a taxable account where you’re going to get hit with taxes each time you buy and sell, or are you going to do it in an IRA, which will would be a preferable place? And then what indicators am I going to use?
The best way I’ve seen to do it is to use some type of longer term indicator to get out, but you have to buy into the fear. That’s the part that most people will not do on their own. They will not buy on days where it’s down, 300, 400, 500, 600 points. They just won’t do it because they think the next day is going to be the same, and the next day, and the next day. By the time they’re comfortable, it’s back up again. That’s the problem with doing some of that, so if you know that’s your inclination then you have to come up with a different strategy.
A lot of times us, as advisors, that’s what we help people do is come up with a strategy, stick to it, and we are the ones that know to pull the trigger and buy into the fear, and sell into the greed. Nobody wants to sell into a chart going up. Nobody wants to buy into that chart going down. That’s just human nature. We’ve trained ourselves as professionals to do that because we know that’s more productive over the long term. That’s just a little bit about if you’re going to trade in this type of environment.
But again, what’s happening right now is this is a lot of noise, and these aren’t insignificant issues with China, but it is short term noise. But, nothing so far has given us any indication that there is a dramatic shift going on in the market. Could it lead to that? Absolutely. We don’t know what the future holds, but none of our indicators have told us so. You see what happens here. The market has bounced back almost every day that its been down. You still have a tug of war going on, and it’s based on algorithms, and short term news events. But, these tweets are really interesting to watch because it’s such a fast news flow now, and your portfolio sometimes can move pretty quickly just because of one tweet. It’s amazing to watch, but we’re in a new time, aren’t we?
Hey, don’t forget, if you want to email me at Karl K-A-R-L@eggersscapital.com, and I’ll try to answer your question via email, or on the podcast here. Don’t forget you can listen to us on Spotify, or Stitcher Radio, or iHeartRadio, or Apple Podcast, as I said, every Monday morning live 7:20 a.m. Central Time. It comes on 55 KTSA in San Antonio, or you can stream it on their website. But, we do post the interviews generally on our website, eggersscapital.com that same day, so if you want to listen to that feel free to do so. By the way, if you want to give us a call, (210) 526-0057, or just visit our website, eggersscapital.com. Have a great weekend, everybody. Happy Mother’s Day to all the mothers out there. Take care.
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