On this week’s show, Karl explains what Fed Chair Powell said (or didn’t say) that caused the markets to sell off even more. Plus, have we seen this before? Karl gives 3 examples of other times in the last few years that the market has had similar moves and the outcomes.
Hey, everybody! Welcome to the Eggerss Report, it’s your investing playbook. Thanks for joining me. Appreciate it as always. Our telephone number 210-526-0057, and our website is eggersscapital.com,
eggersscapital.com . You’re going to find all kinds of information on there. If you need help with anything, obviously, you can just click the green button, it says get a free advisory consultation, we’ll be glad to help you. But if you want information on what we’re thinking, you can click on the financial education button or the blog and it will take you to the articles we’re writing, the videos we’re doing.
I did a video this week, as a matter fact, on how much is too much of one stock in your portfolio. That is an example of something that we put on there that you can watch. Of course we do the podcast you can listen to. As always, we write some articles as well. Thank you for joining me and an early Merry Christmas to you guys. We have 1/2 day on Monday. Of course, the markets will be closed on Tuesday. Nobody will be disappointed in that given the recent market action. Let’s jump right into that market action because it has been one hellacious quarter. A lot of this has happened in this quarter.
It started this year, I should say, earlier this year. We had a 10% selloff in January and February. Remember we had that volatility spike in some of those funds, that short volatility and the long volatility, a couple of them blew up and it cost extra volatility, remember that? Then the market climbed its way back all year long. Not really a lot of international stocks and a lot of just general stocks didn’t go to new highs, but the S&P 500 did. I think the Dow Jones did.
Then we came to October and what really started this October selloff was when Chairman Powell, chairman of the Fed who took over for Janet Yellen, made the comment and I’m paraphrasing him, it’s something to the effect of, “we’re still below our neutral rate”, which means we’re going to keep hiking until we get to a neutral or what they believe is fair value for where interest rates are. The market at that time was going, that’s not what we want to hear. We want you to stop raising rates and then we started to get economic data showing that the economy was slowing. Not stopping, slowing. Not a recession, not a financial crisis, but slowing.
that combination which I had told you for literally over a year, the combination of raising rates and a slowing economy is one of that the market hates. Again, we weren’t predicting it was going to happen, we were just saying that that combination, if it does happen, the market won’t like. That’s what’s happening. Now, what we have going on is the Fed is, raised rates this week as expected. Some were hoping they wouldn’t but most knew they would, but it was all about what did Jerome Powell, Jay we’ll call him, what did he say in his press conference that spooked the market? Investors wanted to hear him say, “We’re done right now. We’re not raising for the foreseeable future till we see evidence that we need to raise again.” Markets would have celebrated that.
Instead, he stuck to his guns, basically said, “Were not going to let others”, meaning President Trump, “tell us what to do. We will let the data dictate it.” But he did say, he did say in there that they were essentially going to be data dependent. We’re going to let the data speak for itself. I thought it was an okay speech. I thought he was trying to play Mr. Tough Guy because he wasn’t going to acquiesce to the president, but at the same time say, “We’re data dependent”. He also said, “We are at very close to or at the neutral, below into the neutral rate”, and in which he had said, I think a couple weeks ago, he’s already changing his tune from where he was in October. He’s getting more dovish as they call it.
The market took it as, “nope, he’s raising rates”, so the 300 point gain that day turned into a 400-and-some-odd point loss. It continued on Thursday and then Friday, what did we get? Interesting. We had a lot of stuff going on. We have the government shutdown looming. I joked on Twitter about, why do we use the word looming when it comes to government shutdowns? But it’s looming. We had that going on. We had quadwitching.
Now, this isn’t something of the Salem. This is quadruple witching. It’s when you have, for this different expirations happening at the same time, options and futures and stock futures, they’re all maturing or expiring on the 21st, which was yesterday. They all did at the same time. It was going to cause some volatility, then we got economic data that came out. Some of it lackluster, but okay it wasn’t horrible.
Then you had Mattis leaving yesterday, but you had a lot of stuff going on, all in one day so we didn’t know what kind of day it was going to be, but the Fed’s Williams comes out and he says, “Hey, we’re not locked in to raising next year. We’re going to let the data speak for itself, and we do or I do, I think he said, look at the financial markets. Immediately the market went up 300-and-some-odd points because that’s what the market wanted to hear.
In my mind, I’m thinking this is good cop, bad cop. Jay Powell is going to come out, talk tough, because he doesn’t take anything from anybody, especially the president. I’m the head of the Fed, I’ll do what I want to do. But, meanwhile, we’ll put the message out there to our little minions that, “Okay, we’re really data dependent and we’re not going to [inaudible 00:06:49] early raise next year.
That rally faded. Did it fade because it just keeps doing that? Did it fade because there’s something else going on? Did it fade because it’s quadruple witching and there’s just extra volatility involved? Who knows, but we went from up 300 to down 400. Yet another 700 point swing. What we’re looking at here as the week wrapped up was another nasty, nasty week, one of the nastiest week. I think this was … we’re on pace right now for the worst month. Forget December, November, October, whatever month it is, the worst month period since 2008. I think it was October of ’08.
The Dow Jones was down with 7% this week. The Standard & Poor’s, 7%. Did value do better in growth? Not by much. The Russell 1000 value Index was down 7%, the growth was down eight, so nothing material. The NASDAQ down eight, small caps down nine. It was selling across the board indiscriminately.
Now, if we look at the things that did work, and we’ll get into the why’s. By the way, let me start with the things that were much worse than that, Biotech. Biotech, why did biotech get hit? Don’t know but it was down 14%. The oil and gas, equipment services, the exploration, production, 13% this week. The service companies are down 50% this year. It has been brutal in the energy space. Pharmaceuticals also were down this week, down 12%. Oil down 11.5%, the commodity itself. Aerospace and defense, 9%. Consumer discretionary 8%. It was a lot of stuff.
Now, there was some things that did okay. Number one, if you owned volatility, if you owned the VIX, it finally closed above 30 it. What’s been strange is I’ve been walking around during our meetings in our office, and saying, “You know, we’ve had these down days, we’ve had some selling, but we, the VIX has been pretty tame. It’s been in this 19 to 20 range, which is elevated for … that’s the average for a long time, but it’s elevated compared to where it was in 2017, but it just doesn’t seem like there’s real panic out there.
For some reason, 30 seems to be the magic number. It’s the number where I get some calls about people asking, “What do you think? What’s going on?” Remember, we got to 50 in early January or late January because of the VIX, all those funds, but this is the highest we’ve been since then, but we finally went over 30 on Thursday came back down, then we went over 30 on Friday and it stayed and it stuck. But that seems to be now we’re starting to get a little panicky. I’m not saying that we want that, but from a short-term perspective, we do want that. But the things that we’re up this week were volatility was up 37%.
Bitcoin, remember Bitcoin? Yeah, the GBTC was up 12 1/2%. Gold miners, which we own on our aggressive strategy. The junior ones were up 4%, The regular gold miners were up 1 1/2%, bonds were up, and then there were some foreign countries up on the week, believe it or not. There was a couple places to hide, and of course, there’s a lot of things that did well on a relative basis, but it was really, really a brutal week, and you look and go, “What’s going on here?”
The market is, again, they’re selling stocks saying, “We’re not going to buy stocks.” I say, “the market”. I hate when I say that because it’s people. It could be computers, programming, people could program in the computers, but it’s people. The market’s not a thing. It’s people buying and selling. People are selling because of several reasons. Number one, it’s because growth is slowing, and number two the fed’s tightening. They’re not just raising rates, they’re doing quantitative tightening. In other words, those training wheels we’ve been talking about the last decade? They not only have removed them, they’ve taken them completely off. They stored them in the garage, never to be seen again in the attic. They’ve let the bike go and they’re saying, “You’re on your own kid.” you’re 18. You’re getting out of the house. Do you take your bike with you ridden to be out of the house you take your bike with you. The markets going, are we ready for this? I think the market is ready for it, but it doesn’t want to be, doesn’t want to leave, it’s like a boomerang kid.
That’s going on. And then again, you do have pockets of international weakness. You have, you know, people leaving the White House. You have the trade war, which is still right there, you have a government shutdown. So, a lot of stuff to digest. But at the end of the day, what are we buying when we invest in the stock market? Is it just fluff? No, it’s corporate profits of companies. Are those corporate profits going to keep going up over the next, five, 10, 15, 20 years? And the answer is yes. Was the S&P expensive? Yes. Is it more fairly valued right now? Absolutely. It had a PE of 23, now got a PE of 16, if you look at last year’s earnings.
So, it is cheaper now, because those earnings, the E part of the equation isn’t going to go down. It just may not rise as fast, for a couple of reasons. Number one, it can’t keep going up at 25% per quarter like it was for a couple of quarters there. And because the dollar has been so strong, the big companies are going to report probably weaker earnings. They’re still going to grow, but they’re not going to grow as fast. But even if earnings go up 5%, the market has discounted a lot. And it’s projecting that we’re going to have a recession, which I don’t think we are. So, I believe still, that we are going through a correction. And remember, we’ve talked about corrections can be 5%, 10%, 15. They can be 20, they can be 25, you know? And the news is going to tell you, a correction is 10%. A bear market is 20%. We’ve entered a bear market, we haven’t entered a bear market. That’s all rubbish.
The October of 1987 crash was technically a correction. It was swift, violent and ultimately, recovered. But when something lasts like from 2007 until March of 2009 and when you get something like the dotcom bubble that goes from 2000 to 2003, two a half, three years. That’s a bear market and the magnitude. You look at the whole package. But these swift, violent sell offs in the middle of a bull market, aren’t bear markets.
I sent out a client video on Friday and basically in there, I was showing three timeframes, 1998, if you recall, Russia defaulted on their loans. Think about that. Imagine being back then again, and I was three years into the business. Imagine Russia defaulting, that big country can’t pay their debt. There was a hedge fund, long term capital, and that hedge fund was levered quite a bit. They borrowed a lot of money to buy financial instruments.
That Russian debt hurt them, and a lot of banks and other investment places were invested in there or lent to them somehow, and they were going to be hurt, so The Fed was worried about financial crisis, The Fed went in and bailed them out, 3.6 billion. But during that time, the market fell about 20%. That was a correction, it was not a bear market, but it was over 20% and it was within a great bull market, so it happens.
I’m going to skip the two big, the dotcom bubble and the financial crisis, but fast forward to 2011 when we lost our AAA rating on our bonds. The USA lost it, our rates were going to go the moon, Chinese are going to sell all our bonds, oh my gosh. Stock market went down 21%. The Dow went down 18, the S&P went down 21 from high to low intraday, reversed over time two or three months, and then finished the year flat that year, but very scary and very violent. Especially that time, because we were just coming off the financial crisis.
Fast forward to 2015. We had Brexit, we had oil collapsing, oil went all the way down to $26 a barrel, we had the worst start to a year, 2016. That period of August of ’15 all the way to February of ’16 was awful. It was horrible, and it was down maybe 16%, very similar to what we’re going through right now. Again, it resolved itself.
Now, they’re not all going to resolve themselves. Some of them you may go through an actual bear market that’s going to last a long time, but this does not have the characteristics of a bear market. This has all the characteristics of one of these types of corrections, and look, if you’re going to fall 15 or 20%, which by the way we’ve said this numerous times, 15% is pretty much average for the stock market to fall, at some point during the year. That’s average.
If you’re going to do that, would you rather get it over with? Would you rather rip that Band-Aid off, or would you rather say, “No, we’re going to lose 3% per year for five years?” To me, you want the swifter, violent selloff, which is not fun. Make no mistake about it, going through these is no fun for anybody, but would you rather have it, see the spike in fear, and then go back and look at all the charts over time and say, “Wow, every time that has happened, it has been a buying opportunity?”
Because remember when we go through these times, as it falls, there are forced sellers, okay? The forced sellers are hedge funds that are levered, there are mutual fund companies, all of those people have to sell. You don’t have to sell. Now, again, all of this comes back to asset allocation, because what we’re talking about right now is the stock market. There are some bond things happening too, right?
Junk bonds had a really bad week. In fact, let me pull it up here, but junk bonds for the week, let’s see here. Junk bonds were down 4%. That’s not a great week, is it? For junk bonds. But if you look at something like the overall bond market, it was flat this week. Again, it comes down to asset allocation, and the other thing is, and I’ve been preaching this, it’s not just about stocks or bonds.
The way we do it is, when somebody comes in to see us, we don’t say, “How much stocks versus bonds should you have?” That has worked very well the last few years to have just stocks and bonds, but a lot of times stocks and bonds go down together. They both are down. It’s important from a diversification standpoint to have alternative investments, could be commercial real estate, it could be lending, all types of things we’ve talked about numerous times. That’s diversification. That’s how you get through these times.
Now, if you’re someone that only has stocks, the reason you have stocks is because hopefully you’re not going to need that money for a while. I don’t worry about times like these, personally. Because I’m not using that money right now. I want to take advantage of dips, I want to see this, and if you’re somebody putting money in 401(k)s, or in any investment, do you want to buy it cheaper or higher?
What’s interesting is you hear people go, “Boy, I’m really worried about the market. What if it falls?” You say, “Well, what are you worried about?” “I think it can fall 20%.” Well, guess what? We’re almost there. The thing you’re worried about just happened, are you okay buying now? You should be, because that’s what you stated you were worried about.
Again, we’ve got a lot of things down. We have foreign stocks down 23-24% off their highs. We have American stocks down somewhere, small caps are down let’s call it 25%. You have the S&P 500 down about 18% from its high. I mean, it’s across the board, and pretty much everything. If you look at the sectors, what’s been hurt the worst, there’s no question, energy is down 27% just since October 3rd. But industrials, information technology, the only thing that’s up during that time is utilities are up about 3% and REITs are actually down about 1.9%, and consumer staples.
We’ve seen that recession trade in full effect. We have seen that. But those were some of your big winners and losers you can see this week, but pretty much everything across the board was down quite a bit. We’ve got some really interesting things going on. This comes from Ryan Detrick who says, this was as of Monday, we’ve had a range this year of as of right now, we’ve got a range that is about … I’m adjusting, because as the week went on it got worse obviously, but as of Monday, we had a range of 14 and a half percent. You know what the average range is for the stock market since 1950? It’s 23%.
If you tack on what we’ve lost in the last few days, we’re getting closer to that, but what we’ve been seeing, and this is my point, is that the volatility that we’ve been seeing, and the change is normal. That’s why people over the long term, the ones who stick with it, they get compensated for that. It’s interesting to look at that. Oil down Tuesday, about 7%. A bloodbath going on there.
Of course, we had The Fed day on Wednesday. They did go from three hikes next year down to two, they lowered their GDP forecast a little bit, but if you look at The Fed’s forecasting, it’s always wrong, so you know. We’re also getting a lot of big, heavy hitters. You’ve got the Jeff Gundlachs, you’ve got the David Teppers saying a bunch of negative stuff, but I still go back to, and I think this scenario’s going to play out, if you go back to the Paul Tudor Jones effect, if you go on our website, go on our blog and read that.
Not the effect, I should call it the indicator. I call it the Paul Tudor Jones indicator. One of the best traders of all times. If you go on our website, we wrote an article a few weeks ago, and the essence is that The Fed raises rates, they go too far, and by the way I don’t think two and a half is too far, but if we have a slowing economy, then it may need to be paused.
But if they go too far, the market throws a hissy fit, basically forces their hand, and at some point The Fed says, “Okay, okay, we’re going to pause.” And they pause, and then the market rebounds and goes to new highs. Then, eventually all those hikes and the slowing down they were trying to do actually kicks in, and you get some sort of bigger selloff.
He thinks that’s going to happen and I think so too. I think that is a high possibility, because rarely does The Fed orchestrate it so perfectly. Hopefully they can do that, and it is a little … You have to admit, it’s a little refreshing to have The Fed going, “Yeah, we’re hiking. Take it or leave it. We don’t care what the market does.” Isn’t it a little refreshing? Because you can’t bash The Fed for leaving rates at zero and acquiescing to the markets all the time, and then continue to bash them when they’re doing what you wanted them to do, which is normalize rates. They’re doing it.
Now, again, we get into the weeds, they’ve probably, they waited too long to start raising them. They didn’t start raising them until that December of 2015, they could’ve started raising them in 2013, but they didn’t do it. But they are doing it now, and again, the markets don’t like that, but it is a little bit refreshing. Unfortunately, it’s not refreshing watching the stock market go down. Now, we’ve got … There’s some interesting stats. The percentage of stocks falling to a 52 week low on the New York Stock Exchange and the NASDAQ spiked to the … This is on Thursday, spiked to the most since 1987 and 2008. I mean, think about that. You’re getting fear not necessarily showing up in the VIX, but securities falling to 52 week lows. In ’87 and ’08, here’s another one, the S&P has dropped at least a percent and a half to a new low four out of the five past sessions. That’s the first time since ’08 that’s happened. We have the most eager put buying on any index ETF since March 10 of ’09.
Does March 10 of ’09 ring a bell? You know what that was? The bottom of the financial crisis. That was the golden buying opportunity. People are freaking out right now at potentially just the wrong time. It’s been 65 trading days since the peak on September 20th. The last time the S&P fell 17% in 65 days, yep, March of ’09. Then we had put call ratios this week going up to the highest since the last 20-something years. I mean, you had some crazy statistics this week and they’re scary. Again, I don’t want to minimize them, but those are all the signs that have typically led to exhaustion on the downside, panic selling. It could be machine-related, who knows what? We’ve been talking about in our office for a while, and I may have mentioned on the podcast, that I always thought that over the last few years a bear market was less likely, but a crash was more likely.
Why? Well, because if you look in May of 2010, we had flash crash 1.0. Remember that day? Back then, the DOW fell a thousand points. I think it was only around 10,000 at the time. It fell a thousand points and it led to kind of a pretty nasty selloff in that summer. Remember that? But it wasn’t really answered what happened there. Then we fast forward to August of ’15, flash crash 2.0. That was when we woke up and there were stocks down 20 or 30% and then they recovered, but we had a nasty selloff. But again, unanswered. We have a lot of auto investing. We have a lot of computer algorithms. We have a lot of, oh, people borrowing money to buy stocks, levering up, selling volatility because it was so calm last year they sell the VIX to collect money that enhances returns. All of that, when it unwinds, it causes extra volatility. I’ve always thought that we could have a crash.
Again, that’s not the end of the world. That doesn’t change anything. That just means that you have a selloff that happens faster. Maybe we’re getting that now spread over some days. In other words, maybe that answers why the stock market has fallen the way it is, right? Where it’s just selling, selling, selling, selling is because you already do have these algorithms. All these millennials who say, “Well, I’m going to invest in a computer automated system,” and they’ve never seen a downturn, so maybe they’re selling their selling, right? You have all of that happening. Again, what it does is it allows for golden opportunities long-term. Now, I know it’s cliché to say, “Think long-term,” but again, go back and look at charts had you bought at the peak, before the financial crisis and road stocks all the way down. If you owned 100% stocks, look where you’d be at today.
There’s these stories of people selling at the lows in the ’87 crash and you look at what their portfolios would’ve been worth today had they simply just left it alone. But again, I want to circle back around, this is about … At the end of the day, this is about allocation and allocation that has non-stocks in it is the ingredient that’s going to keep you invested. If you have all stocks, you may lose sleep, it’s going to cause you to bail at the wrong time. You add in these other things as a comfort, right? And if you need the money. That’s what they’re there for. If you put that all together, you let your stocks do what they’re going to do. When others are selling, like they are, you kind of get out of the way. Now again, in between all of that, yes, we make some tactical moves. We’re going to trade some. We’re going to obviously own sectors we think are beaten up and so forth. In our aggressive strategy, we own India right now.
India was up this week. India was up 1% this week and we bought this, I believe, in late October. It’s been a good investment for us. There are things you’re going to do still from time to time to tweak. But again, what we’re talking about is when you get these types of selloffs, let’s stay at the higher level. Let’s stay at the 30,000 foot level here, because at the 30,000 foot level we’re talking about allocation, when do you need your money, what are things you’re going to invest in, stock market cycles. It’s not about buying biotech and selling it three weeks later, right? That’s when things are kind of normal. Right now, this is about looking at your portfolio and really adjusting to take advantage of some stuff that if you’ve been sitting on conservative things, or cash waiting, this is the time to start putting some of that to work. We’ve talked about this. You don’t want to right now, because again, that’s what happens. People wait, and wait, and wait until they’re comfortable.
When they’re comfortable, it’s already back up. I think, again, looking at some of these things that are very stretched, we’re in the ballpark of a reversal. Again, I can say that and we actually went in and bought some on Friday. We bought some … We had some cash, as I mentioned. One of our strategies, what we call our growth strategy, and we had raised some of that cash back on … Don’t remember when it was here. A few weeks ago. As the market fell, we knew at some point we’re going to get so panicky, we’re going to start buying. That’s exactly what we did. We’ve started to nibble on that. We bought 5% a few days ago and then as the market fell, we bought another 5% on Friday and we have five more percent cash to go and we will buy another 5% when we see fit, which maybe Monday, or maybe Wednesday, or maybe Thursday. But we’re getting to that point now where the … I don’t know how I say this, the chart is going vertical, but it’s downward, right? It’s almost touching the volume chart.
If you look at charts, you know what I’m talking about. The volume’s spiking, the chart’s falling, and they are almost about to touch. That’s when you know you’re getting a little bit of panic. It really felt like this was the first week that we did see some of that panic and unfortunately we have to go through that to get to the buy side, to get to a low. It’s almost like going into the eye of the storm in a hurricane, those guys go into it and then once they get in that smooth eye of the hurricane, unfortunately there’s only one way out of that thing. They’re going to have to go back through it again. Sometimes we have to do that. Really, what we’ve been looking for are some of these bad days may be an intraday reversal, but one that sticks and really strong to where you really regret not buying. When you tell yourself, “I should’ve bought two days ago because it was much lower,” that’s when we may have a bottom. We really need a couple of back-to-back strong strong days, which we have not seen in quite a while.
When we get that, that’s when you will know things have really turned around right now. Longer term, what we need is, obviously any improvement on China trade deal will help, the government opening back up in some form or fashion will help, not having some kind of … All this stuff overhead. Also, having the fed continue to put out dovish comments. Then we also need to see the economy stop decelerating, right? We need to see it just level off and go back on cruise control. If it keeps decelerating, then we worry it’s going to keep getting worse and worse. Again, we don’t see that. What we see is a bull market correction. Doesn’t feel good, it stinks, but it happens and it’s normal. Again, coming off of 2017 like we did, where it was unusually calm, it feels much, much worse than it is.
But, long-term investors do get rewarded. Again, if you don’t know your allocation, what it should be, what tools are available to you, you can give us a call, 210-526-0057, or just go to eggersscapital.com. Well, hey guys, as I said, have a wonderful Christmas. We are not doing our live interview on the Trey Ware Show on Monday, so don’t look for that. We’ll probably be very light on the writing and so forth next week, but full intention on going and doing the podcast through next week. Next Saturday we will continue to do that. Appreciate you guys listening, as always. Feel free to share and I hope you found this useful. Let me know what you’re doing right now. Again, during these times I like to know what you guys are buying, and selling, and kind of what’s going on. Take care. Have a wonderful weekend and a Merry Christmas.
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This show is for entertainment only and information provided by the host, guest, and this station should be not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As President and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.