3 Things About This Market

The first six months are in the bag and investors have been frustrated so far in 2018.  On this episode, Karl explains how that might change in the 2nd half of the year and which sectors may outperform.

Transcription:

Hey everybody. Welcome to the Eggerss report. It’s your investing playbook. My name is Karl Eggers. We appreciate you listening as always, we bring you this podcast each and every week to educate you on the financial markets to help you navigate through, really, your financial future.

And that sounds a little cheesy, a little cliché, but I can tell you there is a lot of changes going on, which we’ve talked about in the last few weeks and they’re all pretty much, I think for the better, to help give you more tools, more ways to accomplish your financial goals.

Whether it’s to leave money to the next generation, a charity, to spend every dollar you have, who knows what. We all have different goals in mind and so our job is to tell you what’s going on somewhat in front of you and somewhat behind the scenes. And so we talk to a lot of people. We read a lot of articles. We watch what’s going on in industry and we tell you about it.

So not only do we update you on the markets, but we tell you about the things that are that are really changing. And we talk about financial planning. Try to give you some tips here and there and that’s what we’re going to do this week.

If you want to, ever go on our website and get more information, our telephone number is 210-526-0057 and our website is EggerssCapital.com, E-G-G-E-R-S-S Capital.com.

And we’re going to be doing some new things in the next few weeks, so we’ll keep you updated on that, in terms of bringing you more information that you can use. And so again, we appreciate all you listeners. Another listener this week reached out to us, who was one of those people that we often talk about. We don’t just make it up, but there are a lot of you that have listened for several years, like literally over a decade and for whatever reason, something changes in your life and you need our help.

And that’s what we’re here to do. We’re here to give you information. And if you need us, you reach out to us. If you don’t need us, you continue to listen. Hopefully, you tell people about our podcast and what we do. And we always appreciate that. So, to that caller, we appreciate it. Thank you for being loyal. We have a very, very loyal audience. And I want your feedback. Look, you obviously like what you hear. We try to be transparent in what we say. We try to tell you about mistakes we’ve made and that we don’t know everything, and we try to be extremely transparent. But we also want your feedback, because that feedback helps shape the show and kind of what we bring to you. So again, thank you for that. All right, let’s get right into it. We’ve got a really jam packed show.

We had really a very busy week on Wall Street. We started off Monday. Remember we had this Dow eight-day losing streak, and we had a one day respite and then down it went again. Markets tanked on Monday. We now have China in a bear market. We’re getting this tariff fatigue.

The rhetoric has been stepped up, right? We have … upped the ante is what China’s doing, what Canada’s doing. We have Mexican elections coming up. There’s just a lot of rhetoric, geopolitical rhetoric happening, and it’s not about nuclear talk anymore, is it? I mean, we hear a little about that, but you know, ever since the summit, that’s on the back burner. It’s all about tariffs and how we’re going to tax each other to death. And again, I’ve been saying this is negotiations. This is rhetoric. What actually gets done? We don’t know.

Does it have some repercussions that could be negative for us? Yes, it does. But let’s not jump to conclusions just yet. But we know the stock market is a forward looking indicator and it discounts news in the future. And so that’s really what it’s been doing lately. So, we have this tariff fatigue but it’s really hurt the Chinese stock market.

Again, technically, in what they call a bear market, which is anything over a 20% drop. I think the Chinese stock market’s down 20 to 23%, something like that since its high this year, got a little bit of a bounce back on Tuesday. We got some consumer confident numbers that came out. And here’s what’s interesting. While the numbers were good, people believed the future won’t be as good as it is right now.

So in other words, they say, “Hey, how does everything look now?” And nobody says, “I feel pretty good.” Well, what do you think about the next six months, a year? “I don’t feel as good.”

That’s actually a bullish sign in my book. Those people are, if you think things are going to get worse, do you go out and buy more stuff? And do you go out and build a new house? And do you go buy new clothes and do you go and, you know, buy more stocks and invest and take risks? Probably not, right?

So, maybe that’s what we’re going through right now. But that leaves room for … The reason it’s bullish is that it leaves room for improvement. So I thought that was an interesting picture. We hear about consumer confidence being so high, but when it comes to the future, it may not be.

Wednesday was the weird day, right? Wednesday, we had the huge reversal. The Dow Jones was up over 300 points and finishes down 160 points on the day because we had two people from the administration, President Trump’s administration, say two different things.

Now, I’ve been saying for a while, the last couple of weeks, hey, if you want to see the stock market stop going down, we need an official to come on TV, say it’s no big deal. We’re just negotiating. We’re talking about this. Don’t worry. It’s more of a spat and not a trade war. Right?

That’s what Steve Mnuchin did a couple of months ago that soothed the markets. Well, Steve Mnuchin came back on Wednesday morning. Think he was on CNBC saying, “Don’t worry,” you know, this, that and the other. Boom. Market was heading up. Everything was fine. Okay, here we go.

And then Larry Kudlow, who’s recovering from his heart attack, comes on and says basically that President Trump’s not going to back down, and the market just reversed and had about a 500 point swing from high to low that day.

And then after we saw that Judge Kennedy is stepping down, which didn’t really have an impact on the market, but again, another little news nugget. Then we come in on Thursday, we find out that Amazon is buying an online pharmacy. Now here’s the interesting thing about this, and remember, we wrote an article just a couple of weeks ago about Walgreens being added to the Dow Jones and why we thought that was a mistake and it should have been Amazon, but it couldn’t be Amazon because the price of their stock is too high and it literally can’t fit into the Dow Jones.

But here’s the ironic thing. We have been watching Walgreens for some time internally. We’ve been considering purchasing Walgreens and at the end of the day we decided not to, and it’s a good valuation. It’s not an expensive company. It’s reasonably priced. Everything’s going well, but here’s the reason why we didn’t buy it.

The reason we didn’t buy it was we said, what if, not what if, but really, when does Amazon come into this business and disrupt it? There was rumblings of this for a while, and remember Walgreens, you go in their stores and there’s a lot of stuff they sell. That’s the higher margin stuff. Some of it. Some of it’s low margin, but most of their business is prescriptions.

And low and behold, lo and behold, Walgreens comes out with a good earnings report. They had some weak same store sales, but overall not bad, and yet Amazon comes in. The timing is almost comical and says, “We’re buying an online pharmacy.” Think it was called PillBox, if I’m not mistaken.

And poof. So not only did you have Walgreens fall, you had CVS, you had Rite Aid, you had all these companies down 10% on Thursday, in addition to some other medical companies. So Amazon just comes in and just drops the bombshell. This is exactly why we didn’t buy Walgreens, was this was the fear that we had, and it played out just like we thought it would.

Actually, I think Walgreens is an interesting stock right now. We’re still not buying it, but just it is interesting. Isn’t it kind of comical that the Dow Jones falls very quickly when Walgreens fell because remember, Walgreens is now in the Dow Jones. And what has happened? We said that General Electric, which full disclosure, we do own in our dividend plus strategy. We said General Electric is likely to go up after being kicked out of the Dow Jones.

But the whole thing’s ironic because they take out GE, which starts going up, had a good week. They include Walgreens which has a horrible week, which drags the Dow Jones down. Right? And then on top of that, the company that should have replaced them in the Dow Jones is the reason that they went down. I mean, the whole thing is filled with irony.

So that was kind of the big news on Thursday. After the bell on Thursday, probably even bigger news was these bank stress tests that came out and some failed in some past basically failing, meaning hey, you can’t raise your dividend, you can’t pay out more until we say you can. Right. So we’ve kinda had the pendulum swing, where now the government’s controlling these banks and how much they can pay out and what they can do.

But there were some winners in there. And so the bank stocks kind of got a little boost from that after hours. A lot of them did. And this was, again, these stress tests. So, JP Morgan, Bank of America, Wells Fargo, and Citigroup said they’re going to spit out $110 billion through dividends and stock buybacks, so that was a big move. Goldman Sachs and Morgan Stanley, they were blocked. Those were the ones that the federal government blocked from boosting their payouts, so again, this happens every few months, I guess, and here we go. That was on Thursday.

Then, of course, Friday we kind of get an end of the month, end of the quarter, kind of some maybe caught window dressing. Not a huge day. Dow Jones finishes up about 50 points. Nasdaq is up a little bit. It was up stronger earlier in the day and kind of faded, but you had some of the things that had been so weak, like some of the foreign stocks were up, some of the home builders were up, and things like that.

Before the week, as we always do, let’s talk about how the week went. What we saw was the big winner on the week … drum roll please. What was it? Oil. Oil up almost 8% this week. A big move for oil, and even bigger winner was the Volatility index. Of course, we had some movement, but a lot of the things that had been lagging really came back. Oil and gas came back very strong this week. You had the utility sector, which has been beaten up strong this week. But overall there wasn’t a lot of standouts. I mean, there were some stuff marginally up on the week, but when you’re looking at some of the major indexes, Dow Jones was down 1%, the SNP was down a little over 1%.

How about some of the things that were hit this week, which there was plenty of those? Airlines, which we like. Of course, the higher oil prices, airlines don’t like that, but we think airlines are a good value. Yes, they’re going to get hurt dependent on how they’re hedged, but they are very cheap stocks already. This is only making them cheaper, so we still like the airlines quite a bit. A little longer term play. Not a technical trade, but a value pick, if you will, so we like the airlines. Some we like more than others. Transports just in general down about 4%.

Bitcoin, throw that in there. Down about 4%. The bank stocks overall got hit. Remember we had kind of the relief rally on some of them after the stress test, but banks had a kind of a rough week, whether it was regional or the larger banks. Retail had a rough week. Semiconductors had a rough week. We had been drawing some pictures, technical pictures on our Instagram feed, on our Twitter feed, which our Instagram feed, Eggerss Capital Management. Our Twitter feed is @KarlEggerss, or @etfcharts if you just want to follow some ETF charts. We posted that semiconductors looked vulnerable, and you’ve been seeing that happen. So really, I mean, everything across the board, small caps down, et cetera.

Having said all of that, where are we right now? Well, here’s the thing. What are some items that would normally tell us we’re in a bear market? Number one, and probably the most prevalent thing, is we need to see more supply and less demand. We’re not seeing that in the stock market. We’re seeing, when the market struggles like it is right now and has for this year, we’re seeing really a pause in the buying. People aren’t antsy to sell their stocks. They really aren’t, but do they hold back on buys? Yes, because of tariffs, because of, you name it. They hold back. There’s a big difference in that. There’s a difference between active sellers and buyers, and in people just pausing in their buying, and so the supply/demand picture still looks pretty good.

But the other thing that we’re seeing is what has been working? Technology, semiconductors, medium and small cap companies. Those things usually go down well in advance, in advance of a bear market. What’s been struggling recently? It’s been the large caps, the large companies. Why? Because we’ve had a stronger dollar. We’ve had some companies with international exposure. We have companies that are going to be subject to tariffs, potentially. So you’re seeing risk-taking in small and midsize companies, but you’re not seeing it in the large cap companies, especially value companies, right? But that’s not a formula for a bear market.

What we would see in a bear market is small caps and mid caps roll over. Then they would infect the large caps. We’re seeing the opposite. Small and mid caps are near their all-time highs. That’s kind of the main thing we’re seeing right now, so there’s no evidence yet of a bear market. Could we have a correction? Sure. We almost feel like right now we’re having this correction in time where we’ve gone, what? Six months now and the market hasn’t done anything. It’s flat, and I know that can be frustrating if you’re an investor because we want to make money every month, but do not force the issue.

One thing that I think is very concerning that I’m seeing is … remember, the biggest risks in the stock market is that you’re over-weighted in certain areas and don’t know it because you invest in a cap-weighted index fund. That’s a risk. The other risk is if you’re in a bond index, your duration, which essentially means how volatile is your fund going to be with interest rates moving. What’s happening is most bond funds right now are taking on way too much exposure, and a little move in interest rates can cause a big move in the price of the bonds and bond funds, and most people are allocated that way.

Those are the biggest risks right now in this market, but look, this year has really been a year that we’ve had to be patient, and we will continue to have to be patient because what is the theme this year? It’s a federal reserve that’s consistently raised interest rates. They say they’re going to do it four times. We’ll see, but they seem like they’re going to. We’ve had a trade war. Plenty of tariff talk for most of this year. And we’ve had a lot of volatility. I don’t see any of those three really going away any time soon, so we may slug around here for a while, so there’s a couple of things you can do.

Number one, you can be patient. I know investors don’t like to be patient, but we’re going to have to be patient. Number two, have some income in your portfolio. And number three, you can trade a little bit if you want. You know, things that are beaten up like financials are beaten up. They had, I don’t know, a 13, 14-day losing streak. You know, that kind of stuff is going to bounce. International stuff is going to bounce.

If you look at stuff like what worked this week, take a look at Mexico. I think we talked about a couple of weeks ago, how it was looking like something that you could trade because it was so beaten up. Mexico was up 3% this week. So there’s trades you can do, but do you want to nickel and dime the market for 3% of a portion of your portfolio or not? If you want to do that, there are always trades available, sectors, ETFs, individual stocks, so that is the way you navigate through this, but just be patient is the name of the game here.

Your return over your lifetime is going to be lumpy. Your returns are going to be lumpy. What does that mean? Maybe you got over-compensated last year and you’re getting under-compensated this year, and when you average amount, it’s kind of where you need to be. So that’s the theme, is patience, and I think it should continue and it probably will continue, so we just have to be patient because the market doesn’t always go straight up. And when you aren’t patient and you start forcing the issue, guess what. You start to make bad investment decisions.

Now, I did want to talk about a couple of things in this podcast. Number one was that we have target-date funds. I wanted to talk about target-date funds. We have these probably available in your 401(k), and what are these? These are funds that you’re supposed to look at the date you’re going to retire, and if you’re going to retire in 2050, then you’re supposed to go in your 401(k) and buy the 2050 fund. You set it and forget it, and move along. I wish life was that easy.

Now, here’s the good and the bad about these funds. Number one, the good thing is I think it’s causing people to invest even if they don’t know it, because what we often see is conservative people will sit in a money market or stable value fund and never invest in the stock market. That’s not going to get them to retirement, so having a target-date fund in there as your option, it makes those people think that that’s some magic formula, it’s perfectly calibrated to them, and they invest not knowing that it’s probably a lot of stocks, but it gets them where they need to be over time.

It is a one-stop shop. You can’t put everything in that. You don’t need to buy the 2030, the 2040, the 2050 and you’re doing some kind of fancy lottery. That’s not the way this works. You’d be over-diversified, but here’s the thing I don’t like about them. If I am saving money for a child, it makes sense for me to use some type of fund like this in a 529 because at 18 I’m going to use that money for college, so it needs to get more conservative as it gets older. I have a 16-year-old. He’ll be going to college in two years, so I need that to be conservative in the next couple of years. I don’t want it to go down.

But who’s to say that in 2050, when you’re retiring, you want your retirement funds to be conservative? You don’t know what the market is going to do at that time, so that’s the negative. Now, some are meant to get more conservative and be real conservative at that time. Some don’t. They’re kind of called through-funds where they go through 2050 or 2060, but I do like the fact that that’s an option. There’s a ton of money flowing into them, and they make sense, but I would look into what they consist of, because don’t worry about when you’re going to retire. Look at what they’re investing in and work backwards. Even though you may be retiring in 2050, maybe the 2035 is more appropriate for you, so look inside. Look under the hood of what they’re investing in and because it’s just an asset allocation. Tells you how much stocks, bonds, international and then you can pick what’s according to what you’re doing. Again, as I said, don’t over diversify. You don’t need four of those funds. I mean owning one of those target date funds, it’s a fund of funds. It already owns a bunch of stuff in there so you don’t want to end up owning 10,000 stocks. That’s not the goal, but we’re seeing this be very, very prevalent in 401(k)s. In fact, some of them are really taking away all your individual options and that’s all their offering. I would like investors to have the ability to be able to choose.

For example, what if you wanted your existing money to be in a 20/40 fund and you wanted your new money to go into emerging markets, right? Because, you think, “Hey, I want all my new dollars going in there because it’s aggressive, it’s beaten down, that’s where I want to be.” Some of these plans don’t allow that, because they don’t have those options or what if you want to invest in real estate or a sector fund. So, I think companies though because they feel an obligation and they’re scared from a fiduciary standpoint, an easy out is just to offer 10 target date funds and call it a day. I think having a brokerage option in your 401(k) is a nice feature, I don’t know if most people need that. I think some people could be reckless with it by putting too much in one stock, but do I like the option? Yes, I like the option, but I do think having the target date with some other options in there in terms of different funds would make me a happy camper.

Switching gears real quick. There’s a chart floating around Wall Street this week talking about corporate debt and we’ve discussed on this podcast that you really saw a shift from personal debt and all that shifted over to the corporations. In other words, we had a lot of personal debt in 2008. That’s really what led to some of the financial crisis. Yeah, it overleveraged people and people lending to those people more and more and more, now it seems like the personal balance sheets are getting better for the most part and yet we’re seeing the corporations take on a lot of debt. So, the chart go around Wall Street this week was corporate debt as a percentage of GDP. It’s pretty much at its highest level right now. The other time it’s peaked, yeah you guessed it, around 1990 during the savings and loan bubble, around 2000 during the .com bubble, around 2007 during the housing bubble, and here we are again.

So, if you look at this chart, you’re like, “Hey, the last four times it’s been at this level, we’ve gone through a pretty nasty stock market.” So, are we watching that? Yes, but the caveat to some of the stuff I always say is look people are being forced to take on debt in a certain regard. Interest rates have been so low that not only have people borrowed money to buy stocks, so margin is higher, but debt has been higher. Corporations are using low interest rates to do things with their money. Building factories, planes, making acquisitions as Amazon did this week. So, again, you take some these pictures and in isolation they look scary, but when you look at the back story of why, it makes a lot more sense. So, corporate debt as a percentage of GDP we have to watch. I think the sovereign debt, these countries and their debt is a bigger issue that we have to watch long term, but again, this is something right now that is something that bears watching, but at the end of the day, all of these types of charts, I always go back to what are investors doing with their money, what’s Wall Street doing.

They may float these charts around, they may say this, that and the other, but what we see right now is there’s still a reasonable demand for stocks, low supply and that’s a good formula. That’s it. By the way, the leading economic indicators continue to make new highs which is the one thing that we have that tells us what the economy is going to look like in the future. I know you’ve been hearing about a flattening yield curve. Long-term rates aren’t much higher than short-term rates, but there’s a difference as we’ve said between that and inverted. It’s not inverted yet, it’s just getting there and so it bears watching. There’s been some slowdown in some things.

I don’t think the economy is necessarily as robust as it was overall, maybe a few months ago, but look, some of the evidence I continue to hear from home builders is that they just can’t keep up. They can’t keep up. They’re selling ranches. They’re building homes. Talk to real estate people, they are saying, “Hey man, we don’t know long this is going to last, but it sure is good right now.” So, again, things are really good right now or they as good as they were. We’re already starting to see New York slowdown a little bit, those types of things.

There’s some frothy areas that should go down a little bit and slow down, but can we get through? I mean earnings continue to do well, but my fear and I said this earlier in the week on the Trey Ware Show, my fear is that the threat of terror of staying there longer and longer and longer will cause corporations to not hire new people. It will cause corporations to reign back the spending just to see how this plays out. That’s what we don’t want. We want clarity. We want people to go out and invest. So, we’re not seen a big evidence of slowdown but you’re starting to hear more and more debate about “Is a slowdown coming? Is the recession coming?” but all we can do as investors is look at the underneath the hood what are people doing and advance decline lines are broadening out. More and more people, more and more stocks participating in the stock market and so we need to watch small caps, mid caps, large caps. Are we getting a changing character?

Remember, the thing stocks have been leading this rally. The semiconductors have been leaving this rally. Energy had been lagging behind. Financials lagging behind. Well, we saw little change this week. We saw energy take off and we saw the semiconductors pullback. So, maybe we start having rolling bear markets or continue to as I’ve been seeing. I talked to a hedge fund manager this week, told him my thesis on that the next bear market I think will either A look like the .com bubble as opposed to 2008 or it will look like rolling bear markets. What do I mean by that? Well, if you’ve been listening for a while you know that I believe that we may be going through that rolling bear markets means piece by piece there are bear markets happening, but you don’t really notice it because you’re not concentrated in the one area. So, did energy not go through a bear market in 2014 and 15? Absolutely, it went through a crash but it’s doing well now. How about retail stocks?

Retail got just clobbered. You know retail is at an all-time high now, right? Near had a bad week but remember it was left for dead no long ago. So, now you have energy coming back. You have retail coming back. What about financials? Financials were doing great. They’ve really been struggling. They’re down about … XLF is down about 13% from its high, but they’ve been struggling. So, maybe they’re the next thing to struggle a little bit and then they’ll turnaround. Maybe semiconductors which have been leading start to go down and something else starts working.

So, something that goes into a bear market, a sector, a specific area, perhaps as it does that, something else takes its place and begins a bull market. So, you get this rolling effect where maybe the market is not rolling, making a lot of progress, but certain areas are. That is why it makes sense sometimes to own specific sectors and own specific areas while avoiding others. So, you really do have to know about what you own, because it makes a difference in the big picture. So, don’t lose sight of income. Don’t lose sight of trading a little bit and knowing what you own, because the character and the shape of the market can change, but that doesn’t mean that we go from a bull market to bear market. It could just be these kind of mini rolling bear markets and again the character of it can change.

Hey, don’t forget eggersscapital.com, our website is 210-526-0057, telephone number 210-526-0057. We are on Facebook. You can like us on there. We’re on Instagram Eggerss Capital Management. We are on iTunes to listen to the podcast. We’re on Spotify. We’re on Stitcher radio. We’re on iHeart radio. That’s about it. Probably the best place so just go to the website. If you have a question for us, you can always email me at Karl, karl@eggersscapital.com. We appreciate you listening as always. We appreciate the feedback and we hope you have a great weekend everybody. Take care.

This show is for entertainment only, and information provided by the host, guest and the station should not be deemed as advice. Your investment decision 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.

 

 

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