On this week’s show, Karl discusses whether or not the stock market is a bubble. And if so, is it the whole market or just part of the market?
Hey, hey, hey, welcome to the Eggerss report. Thanks for joining me. Appreciate it. If this is your first time joining us, welcome aboard. My name is Karl Eggerss, I am the host. We do a lot of things on this shows. As some of you, most of you may know, we cover financial planning topics. We cover investment items. Anything having to do with the markets and all in an effort to help you become a better investor and keep you informed on what we think is moving in the markets and really trying to also filter out some of the noise because a lot of it is noise that really doesn’t impact your portfolio and maybe you think it does but when we analyze it, you go, “Yeah, I can see how that maybe was just noise.”
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All right, let’s jump right in. We got a big show for you today. Let’s jump in, because what happened this week? A whole lot of nothing. So, while you have a big show, we got big topics to cover. There’s a lot of news coming out and the markets moved around, but at the end of the day, didn’t move a whole bunch in terms of from start to finish. S&P 500 pretty much dead flat on the week down like two points. The Dow was up a little bit but all of this stuff pretty much started the week … ended the week where it started.
Now the outliers, Bitcoin started to move and technically looks pretty interesting if you’re trading cryptocurrencies, Bitcoin, it’s setting up pretty technically looks pretty good to me, but Bitcoin was up about 19% this week. Volatility up a little bit. We’re still seen a move out of I would say Mexico, Brazil, some of these areas. Still working their way hard after just getting destroyed in the earlier part of the year. The grains had a nice comeback. They have been beaten up. That is an area in our aggressive strategy that we are long, grain commodities that is. The banks had a good week. The railroads had a good week up about 3%. The airlines which we really like on valuation up about 2 1/2% this week and interest rates were up.
Now on the flip side, what were the outliers on the losing side? Things like oil and gas equipment down. Oil itself down about 2%. The telecoms down about 2%. So, really you can see that whole trade bonds. We’re down. So, if you own bonds, you lost money this week. The TLT was down about 1.6%, but again most things kind of in the middle.
So, what was moving the markets at least on a daily basis? Well, what we saw was really on Monday of course we had the summit with Putin in Russia. The market didn’t really move much which I had said earlier in the week I didn’t expect it to move much, because there was no reason for it to move much on something like that, but it did have little more of a negative tone to it. Oil got hit hard, down about 4%. So, to see where oil really came from and what it did late in the week was kind interesting to watch, but all got hit hard on Monday. On Tuesday, of course, Jerome Powell who’s the still pretty new head of the Fed testified to the Senate Banking Committee. Again, didn’t say a whole bunch I didn’t think, but it was a pretty good day for the markets overall after the bell Monday. On Tuesday, Netflix got crushed in the morning but recovered and the NASDAQ itself, recovered quite a bit. I mean it got hit and you just thought, “Well, here we go.” Tech is going to be down and yet it recovered along with Netflix. We’re going to talk about this.
Not only is the NASDAQ a bubble but is a stock market a bubble? Are we in a bubble? That is kind of the big theme of the day we’re going to talk about. Also, Tuesday showed a nice little recovery in cryptocurrencies that we mentioned earlier. Wednesday, we got the Fed beige book, giving you an outlook on what’s going on with the economy. Larry Kudlow came on the same day and said, “Hey, we\re going to see growth probably around 4% at some point for maybe a couple of quarters.” and the market and react as much. In the past, when Kudlow has come on TV and kind of rah, rah and of course, he’s uber bullish all the time, right? He comes on and says, “Oh, we’re going to have 4% come. He’s doing fantastic. The market would just take off.” It didn’t really do that. Reasonable day but just didn’t really do that.
Then we come on Thursday evening and you see the CNBC interview with President Trump. This was interesting. He says, “I’m not thrilled with the Fed’s rate hikes.” Now this aired on Friday morning. Said, “I’m not thrilled with the Fed’s rate hikes.” He said, “Because we go up,” this is quote, “because we go up and every time you go up, they want to raise rates again. I don’t really …” and he stops and says, “I’m not happy about it at the same time I’m letting them do what they feel is best.” Now here what’s interesting. The first part of the sentence got all the publicity. He’s going after the Fed now. He’s going to start trying to control interest rates. The Feds undoing what he’s been doing. So, he did tax cuts. Economy is better. Things are going up. Then the Fed comes in, raises rates and just trying to slow it down. That’s what got all the publicity. Again, market has moved a little bit but nothing major I didn’t think.
Here’s the second part what he said. At the same time, I’m letting them do what they feel is best. So, he made his feelings known, but he understands he can control the Federal Reserve. He can’t control interest rates. Yet that part got left out of a lot of news feeds. It was just the part about Fed saying, “I’m not thrilled with the Fed’s doing.” Now what’s interesting is he said, “Look, the market is up about 40% since the election.” It’s really about 30 something percent but it wasn’t 1.40%.
He said, “If I wasn’t doing these tariffs things, it would be up 80%.” So, he understands and he alluded to the fact that he’s using his capital right now on these tariffs. So, in other words, he’s saying, “Hey, the market would be of higher, but I’m doing what I think is best with the tariffs and that’s a governor on the markets keeping it lower and it’s not going up because of what I’m doing.” So, he acknowledges that which I think is the main reason. He said, “Without that, it’d be another 40% higher.” I don’t know about that but it certainly has a lid on it or a governor if you will on this market with the tariffs.
Speaking of tariffs, Friday morning we wake up, and what do we see? Trump threatens another over $500 billion of Chinese tariffs. What was interesting was the market held up pretty well all day, pretty flat on the day. So, are we just getting numb to this market or these tariff talks? Are we getting numb to it, our investors ignoring it because nothing is really happening? It’s interesting that they are up in the ante when nothing is happening. So, nobody’s is giving here it doesn’t seem like. So, what happens? When nothing happens, we going in and say, “Boom, we’re going to slap another $500 billion of tariffs.” Then the Chinese come out and say, “This is ridiculous, preposterous.” Again, everybody is jockeying for position here but nothing’s really happening in the big picture that could affect the economy.
Now, again, if all the stuff being talked about does go through, it does affect the economy. I don’t like tariffs. I think, again, there’s a lot of people say, “We need to get a fair deal but I don’t know how else to do it.” The criticism that he’s feeling is from people saying, “You think it’s a zero-sum game and it’s not.” What’s happening is if China is doing better, we may do better. It’s not if China is doing better, we do worse and we have to fix that, but it’s not that easy. I think as I talked about last week, I think President Trump can fix the trade imbalance. The problem is all the collateral damage that comes from that and the repercussions.
I mentioned at the last few weeks you are seeing and going to see companies holding back because they’re concerned about this. So, they’re anticipating an all-out trade war. Now we’re starting to see some of the statistics come in that that’s indeed what some of these companies are doing. Now, what we’re looking back in the rear view mirror is good earnings. We got good earnings coming in. They been fantastic. Over 90% of the companies beating earnings estimate I think. We have also inflation data coming in that we’ve we been trying to get some inflation that now you’re starting seeing it. The Philly Fed Prices Paid Index is at one of its highest level since 1980. That was reported this week. So, you’re getting good stuff, so why isn’t the market going up? Well, number one, remember we’re kind of almost getting into a correction in time. Now, we are at the highest level, near it. The highest level we’ve seen since March. And, real close to getting back to the old highs in January. We’re close to that, so we shouldn’t be complaining too much. But, the fact that the market really, from point to point hasn’t really gone anywhere in 2018, especially the more diversified you are, which I hope you are. It hasn’t really gone anywhere. And so, it’s frustrating to us because we’re coming off of 2017 where it went the direction most of us want, which is up.
But, when I say a correction in time, earnings keep coming out better, the markets not going anywhere, that makes the market cheaper as we move along here. Again, you can accumulate shares and things that are cheap, much more now than you could have back at the peak in January. Because, companies have reported two quarters of profits now that are higher, and yet you’re paying the same price for the overall market. Some stocks are just downright cheap.
But, to go back to what I asked at the beginning, are we seeing a bubble? This isn’t … I don’t want to jump into this flippantly. Some of you are uber, uber bearish. Those things about the collapse, there’s plenty of perma-bears out there in the market, you see their tweets, you see their comments that are always negative. Then, of course you’ve got to the people that are the perma-bulls. No matter what’s going on, how bad things really are, they say, “Well if you liked it yesterday, you should like it cheaper today.” We’ve got to be somewhere in the middle. We have to be agnostic and realize when things are good, they’re good. When they’re bad, they’re bad.
I think things right now are good, I think there is a threat of things that could be bad. And, we have to know that a recession is going to happen at some point over the next couple of years. That’s how it works. It’s cycles. It’s not the end of the world if we have a recession. Remember, we can have contraction in our economy for two quarters in a row by .000001%, and that would count as a recession. Again, recessions are going to happen. Everybody’s that’s saying, “We’re going to have a recession.” We’re probably going to have a recession, yes. That’s part of the normal business cycle that, at least I studied back in economics. That happens.
Now, again, as we talked about last week, what does that mean for your portfolio? Well, we need to find out what things matter to your portfolio, and what things do not. A lot of the stuff doesn’t matter to your portfolio on a daily basis. The things that matter to me that I’ve seen, that correlate with the stock market, are doing pretty well right now. Is today the top and things could get worse? Absolutely, I think that could happen. But, I don’t see a bear market upon us yet. I’ve been pounding the table on that.
I’m not some uber bull, an uber bull leveraging the house to go by stocks. But, what I am saying is that I think if you have a portfolio of stocks, you can keep them. You don’t need to get ultra defensive at this point. Now, it does beg the question though, are we in a bubble? I think what’s interesting about it is, it does seem like there are pockets of bubbles. As I mentioned earlier. Look, why diversify? I said you need to diversify. Why? Well, to be honest the last few years you haven’t really needed to. In fact, it’s hurt. It’s really hurt. Not from a protection standpoint, but from a return standpoint. Because, if you owned international, it dragged your portfolio down. If you owned commodities, it dragged your portfolio down. If you owned this year, the bond market, it dragged your portfolio down. For the last few years it’s been about the S&P 500.
The S&P 500 is again, 500 companies, cap weighted. These are companies that are the bigger, the higher the price, the more weight it is in the S&P. If that stock does well, you’re going to see the whole index do well. Here’s what’s interesting about it, and there’s a chart, some of you may have seen it floating around this week on the webs. Basically, it was showing, it was a chart of … It was a pie graph. I’ll probably put it in our client newsletter this month, because I think it’s a really good chart. But, essentially what it showed was, how much of the S&P, the top five stocks are. I mean look, the biggest five stocks control the market. Again, you have to know what you are going to own. If you own just a plain jane S&P, you’ve done fabulous the last few years. But, just know what you own.
Again, what does that mean? Well, you’re just taking more risk. You are basically buying the Facebook’s, Netflix, Google’s, Amazon’s. You’re buying those stocks. If you think those are going to continue to go up, you can own the S&P 500. If you think they’re going to go down, then you need to start diversifying away from the S&P 500. Even if you go to an S&P 500 equal weight.
Now, before you start saying, “Boy, if the market’s being controlled by five stocks,” which it is. We have to say, “Is this abnormal?” A gentleman named Bill Sweet basically did some research that showed that the … Or, at least he put this out on Twitter. That, the top five S&P weights, the percentage of the total S&P, has been between 10 and 15% for a long time. The point is that what we’re seeing right now isn’t unprecedented that a few stocks control the markets. It’s not unprecedented. Just, realize the next bear market we go through, I think is going to look like the dot com bubble bear market, the subsequent one. Do you remember … Where there’s a lot of different things that were working. It wasn’t just the whole market went down. That was 2008. The financial crisis took everything down. I mean, you had to be in cash, otherwise you were going down.
2000 through 2003 was not like that at all. There was plenty of areas that made money. Hedge funds did just fine during that area of that timeframe. Again, if we move forward, imagine a market where you start to see stocks that go down, but the overall market does not maybe, in terms of what all is moving. Imagine a market where, what if technology just starts to lag? Boy, you’re going to see the S&P, some of the DOWELL, certainly the NASDAQ do very poorly. But, maybe if your portfolio’s diversified, you’ll be doing just fine.
Again, is this a bubble? I would say there are aspects of the market that sure feel like a bubble. What do I mean by that? Well, I mean look, when people buy stocks without doing research on them, and they just basically don’t care what they’re paying for it. They’re not doing any research, an evaluation. It’d be like going to buy a car and not even looking at the price tag. When they’re doing that, and when they think that they’re going to continue to go up, so the sentiment it’s there. It’s overly bullish, and nobody can see why a stock would go down. Yes, that is a bubble. There are parts of a bubble going on, especially in the technology area.
I’m not saying any of these companies are bad companies. Some of them may not be over valued, but they’re over loved. If you go back to look at Apple a few years ago, it was an over loved stock. Micron Technology, go look at a chart of these companies, an over loved stock. These stocks went down 30, 40, 50, 60, 70% because they were over loved, and distribution came. People started selling them. I feel that way with the Facebook’s of the world, the Netflix of the world, the Google’s of the world, the Amazon’s of the world. Great companies doing amazing things. I mean, it all makes sense why they’re where they are. But, again, when people can see no reason why they should go down, you should be concerned.
Netflix to me is probably the most concerning one of the FANG stocks, F-A-N-G if you’re just being dropped in this planet, don’t know what FANG is. It’s the acronym for Facebook, Amazon, Netflix, Google, and Apple. Through that in there. It’s FAANG. But, Netflix, when you really think about the business, they’re spending a ton of money, a lot of cash burnt to make all this content. Very competitive business, right? They produce some bad shows. Guess what? Amazon produces good shows, everybody’s going to jump to Amazon. It’s a rough business.
Whereas Google has a very diversified business. Amazon has a very diversified business. But … And, Apple, hardware. But, trying to go into some other areas as well, and are doing a good job of it. But, still a hardware company, tough business. When you look at Facebook and Netflix in particular, I just … They’re very, I think the barriers of entry are going to be more difficult. Or, should I say less for those companies? To where, they can be overtaken at some point. Those to me are the most risky. I think if you look at Netflix, it had a classic double top, if you’re into technical pictures, around $420. It went up to 420, went down to about 380, went back up to 420, but when it did it the second time, there was a lot less momentum. You could see it in some of the technical charts.
Then, they come off the earnings and the stock drops dramatically, 14% I think. But, bounces back and finishes, they’re only down four percent. But, since then, the last three days, it has fallen. Wednesday, Thursday, and Friday, it started to fall again. And so, now we’re looking at it, closed on Friday around $360 but, remember, this is a $420 stock, so we’re talking about 60 bucks off 420. So, it started to fall, but these things can fall rapidly a lot and, remember, why am I talking about these companies in particular? Because they control the indices. When they go down, your S&P 500 goes down but, if you own a mutual fund that doesn’t own these or is under these, or you own an equal weight fund or a smart beta fund or you’re picking stocks yourself or you have a smaller weight of these, even if you own them, you’re okay, so I’m not picking on the overall market. I’m more concerned about segments of the market, especially in these areas.
When people say this a bubble, I would say the stock market is not a bubble, but there are pockets of bubbles, and I think technology, not all technology, I think that’s what differentiates now versus the dot-com bubble. I don’t think it’s all technology is a bubble but, man, the stuff that is going up is so loved, you could see it. The fact that Netflix could bounce back and didn’t even take 24 hours to really get all the losses back, you know, it tells you how loved these are. Go ask around what people think about Amazon. “Oh, I buy two or three things on there every week.” We know that, but that’s why the stock is where it is.
Again, these have been amazing runs and, if you own them, pat yourself on the back. Some of these I’ve owned often on, but would’ve been better just to hold them, but that doesn’t mean it comes without risk, and Amazon and Google of the FANG stocks are my favorites in terms of those because I like their businesses, but that doesn’t mean they’re any cheaper. They’re of value. I mean, you know. They’re not, but they have gone on a … They’re in beast mode, but they can bring the market down and so let’s watch that but, again, let’s watch for rotation because when they start to get hit, we need to watch other areas and, if other sectors in other industries take leadership, that would be a healthy thing.
Remember, we’ve already started to have what I’ve been calling the last several months kind of a rolling bear market. See, all these bears are expecting the home market to collapse and, again, I’ve been pointing out that we’ve been having rolling bear markets where, piece by piece, a market will go through its own bear market. The energy sector, it’s already had its bear market. You can’t get much worse than what happened in 2014 and ’15, right, and now look at it. Retain, retail was dead, DOA. Amazon’s going to crush everybody. Everybody’s going out of business. There’s just going to be one retailer called Amazon.
That’s not what happened and now, when you look at the retail stocks, they’re at or near their all-time highs, all-time highs, not highs like a little bit, and this happened very quickly. A year ago, less than a year ago, and they were out there, Lowe’s, the retail stock, so they’re up 35% in the last year. When you look at that, that had its bear market, right? I mean, retail stocks as a basket went down from the beginning of 2015 to the middle of 2017, about two-and-a-half years. They went down 26% bear market, and now there at all-time highs so, to me, you check off retail. You check off energy.
Commodities are still in a horrible bear market and, man, the lower they go, the more I’m licking my chops and buying them because these things don’t go to zero, and tariffs and all the stuff has caused commodities to be the worst place, and we’ve got a small allocation in various portfolios, and I think continuing to increase that overall is going to be a nice move at some point, especially the fact that inflation is starting to pick up, but the dollar keeps going up so, when the dollar reverses, guess what happens? Commodities go up. Watch areas like that. Watch the foreign market and see these rotations happen.
I think, also, if you take a look at areas like utilities, which you know we are not a fan of utility stocks and haven’t been for some time, take a look at utility stocks. They’ve been in this massive uptrend since the financial crisis as people were searching for yield. Well, guess what? You can get short-term paper bonds, very short-term, one year, two year that pay more than the S&P 500 dividend yield. What’s happening now is people go, “You know what? I don’t have to own a stock to pay me dividend. I can sit in cash or short-term bonds to get the same thing without the risk, so that puts pressure on REITs, real estate. That puts pressure on utility stocks, and so just watch those and, again, there hasn’t been huge damage in those.
REITs have bounced back quite a bit. Utility stocks, they’re probably still, I don’t know, maybe 10% off their highs, so there’s still, to me, a long way to go for those because that search for yield where people needed income and couldn’t get it anywhere else, they went to utility stocks. They went to the dividend stocks. They went to the consumer staples. They went to even the aerospace and defense, and they went to real estate, and they got that income. Now, there are some things that compete with that where you don’t need to take that risk and so, do we see a shift? Do we see another bear market in those areas, along with technology? Meanwhile, energy keeps doing well, maybe financials.
I think financials look really interesting, too, and there’s lots of ways to to play that but, technically, they look interesting, and a lot of them had good earnings. The banks came out good earnings, so it’s interesting to watch what’s happened here, but I don’t believe the overall market is a bubble to answer the question, but I do think there’s a bubble, probably in the NASDAQ, I think there’s a bubble, and it can go on for a lot longer, guys. I mean, look, the more people that doubt it, it’s fuel for the fire, but the more people that convert and say, “I give up. I’m not buying this stock that’s got a 10 PE. I’d rather go by stock that’s got a 60 PE because it’s going up in price, and I use the products.”
The more we see that, the riskier it becomes the longer it goes on. Again, as always, know what you own. If you want to own Netflix, Facebook, Amazon, Google, fine, own them, but have an exit strategy. Make sure they’re a reasonable part of your portfolio and not too much and have a plan. As long as you know that those are riskier stocks based on their valuation and there’s plenty of cheap stocks in the market, you’ll be fine. All we’re doing is saying, “Let’s just acknowledge where we are”, okay?
Hey, have a wonderful weekend day. Don’t forget EggerssCapital.com, E-G-G-E-R-S-S capital.com. Our telephone number, 210-526-0057. Tell a friend about the show. We always get new listeners every week. Some of you email me. Continue the emails at Karl, K-A-R-L, @EggerssCapital.com. Thanks, guys. Have a wonderful weekend. We will see you back here next week on the Eggerss Report, your investing playbook.
This show is for entertainment only, and information provided by the host, guest, and this 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.