On this week’s show, Karl discusses how the leadership is changing and why instead of the overall market falling, perhaps we continue to see “rolling bear markets”.
Also on this episode, the difference between cap weighted and equal weight ETFs.
Karl Eggerss: Hey, welcome to the Eggers Report, it’s your investing playbook. Thank you for joining me. We appreciate it as always. My name is Karl Eggerss. I’m the president, and CEO of Eggerss Capital Management, a registered investment advisory firm, we’re a fee only firm, means we don’t work on commission. We essentially work with people on a fee only basis. What that does, is while it doesn’t guarantee success, it does guarantee that we don’t have these conflicts of interest where you are wondering, “Well why would he be recommended something like this?” Again, on this particular show, we’re not recommending anything, but when we talk with clients, and sit down with them, and we’re giving them strategies to go on, and to invest in, they understand that we charge a flat fee.
What that does, is it allows them to know that we’re not pushing them one direction or another, we’re doing what we think’s in their best interest, because that’s our fiduciary obligation. That is a very important distinction if you are looking for an advisor is how are they compensated? Who are they compensated by? Those types of things, those are fine to ask those questions. A lot of people don’t ask those questions, and then they find out later on how somebody was really being compensated.
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Well Happy Easter to you, coming up tomorrow. An important day obviously in the Christian world. Markets were closed on Friday, and it’s been rather interesting couple of weeks hasn’t it? The volatility that was completely absent in 2017 is certainly here in 2018. It doesn’t seem to be going away any time soon. Now, that’s not necessarily a bad thing, it definitely makes people more uncomfortable, but it’s not necessarily a bad thing in term of … it gives you opportunities, that’s what it does, it gives you opportunities if you have money to put to work. It also gives you opportunities if you want to take profits in some things at times.
If we get into a market that’s volatile but sideways, you can only make money one of two ways in that environment, is either A through trading, or B, through income. Because buying and holding in an environment doesn’t work. Now that’s if we are in a sideways market. How do we know we’re in a sideways market? We don’t, right? You don’t know until after the fact, so it’s not as easy as saying, “Okay, now we’re in a sideways market, let’s flip the switch and start doing this.” But we do know volatility’s back, and until proven otherwise, you have to deal with a volatile market.
Either A, you can do nothing with your long-term investments, which is totally fine, and just say, “I’m going to ride through some of the volatility, or B, you can obviously err on the side of being out with some of your money and just saying, “I’m just going to wait until the volatility subsides.” But oftentimes when the volatility subsides, the market is higher at that point, and you missed out on some gains. Never easy, there’s no simple solution, or you know, very simple easy answer in terms of just knowing, “Well we’re in this environment, so we just must do this,” but here is one thing that you can do, which is to determine are we in a bull market, or a bear market?
We are on record in clearly saying that we are still in a bull market. Are we in a correction mode? Yes. People want to define it as 10%, or 12%, or 15%. That doesn’t matter, the bottom line is that are we getting a big enough draw down, a pull back, to make you start questioning what you’re doing with your retirement money, or any of your investing, and if the answer’s yes, then you pretty much know we’re in a correction. If we’re in a bear market, that is a, to me, a sustained pattern of weakness that is going to last for months, if not years.
I don’t think we’re headed there yet. A lot of what we’ve been seeing so far, has been very news driven. A bear market, again, as we’ve stated many times, is a very … it’s a process of rolling over from a bull to a bear. It takes months, not weeks, not days, but months. We have to analyze what’s going on. Right now the supply/demand picture in the stock market when we look under the hood, is still pretty good, okay? Again, that doesn’t mean you necessarily own all stocks, and just take it, and don’t do anything about it, but you step back for a moment and say, “Okay, if this is temporary, and it’s mostly news driven, then my longer term investments are still okay.” Yes, they’re going to be volatile, that’s why you get compensated over the long-term to be in stocks.
If stocks made 2% a year, you wouldn’t be in them, right? They make more than money markets and CDs, because they’re more volatile, and they have more risk. More risk, more reward generally speaking. But before you even do that, you step back and obviously you’re looking at your own specific situation to determine, do I need to play this game? How much of my money do I need to put at risk? Then you start constructing and putting the building blocks in place, to put a portfolio together.
We don’t think we are in a bear market. We think we’re in a correction. We can’t tell you when it’s going to end. We know that bear markets are normal, they’re no fun, but they are a part of the process. This pattern that the markets going on is kind of similar to 2015, where we kind of fell really fast like we did in February this year. Then we bounced, then we went back, and kind of visited the old lows.
It just feels to me, just because I’ve been doing this a while, that usually when these things turn, they turn when nobody expects it. Right now, given where the market is, bouncing off of its 200 day moving average, double bottom from the February lows, it feels a little too convenient that it would just methodically bounce, and that would be the end of it. It could happen, but it feels like we are probably going to need to break the old lows, have a panic sell-off whoosh down, and then a reversal.
Do I know that’s coming? Absolutely not. I think there’s things to be buying right now, especially if you haven’t written all of this down, I still don’t believe this is a time where you take your overall allocation and change it and say, “Okay Mr. Client, you are 70% out of the stock market. This is a time to go and reduce that down to 50%, change your whole allocation.” I don’t think that’s the case, but if you have stock money to put to work, is it better than it was a few weeks ago? Yeah, because it’s lower, and there’s better deals, and there are some nice technical setups.
Before we get into that, let’s go ahead and run through, what were some of the big winners this past week, and we had abbreviated week, we had things that were … it was kind of a mixed bag, and it was because there was a bounce late in the week, but it was a mixed bag. I mean, at the top of the list you had things like REITs, public REITs, rates came down which is interesting, right? I mean this whole sell-off started because people were freaking about rates rising, and guess what? Rates in the last few days have been falling. When they fell, that means bonds go up, but they were rising originally because people were fearing inflation, and the economy’s going to grow too fast, and now that seems to be in question, and rates are coming down.
As rates went down, REITs do better, consumer staples have done well, bonds have done well. It’s going back to utility stocks, it was going back to this, “Well maybe the economy’s not growing as fast, and we don’t have to worry about wild inflation, therefore we can go buy those good ole’ income type investments that feast on lower rates.” REITs were up 3.5%, staples were up 3.5%, you had utility stocks up 3%, that whole group of investments.
Now, in addition to that, you had India’s stock market up 3.5%. You had retail stocks up 3%, you had Mexico up 3%, steel stocks 3%, emerging markets 3%, financial 3%, so you see what I’m saying is that it was a very mixed bag. There was a lot of things that did well this week from start to finish, but at the same time, rates are coming down, are they coming down, and this is important to ask yourself, are they coming down because now the economy’s not going to grow as fast, and therefore it takes the Fed out of play, and we’re back into being able to buy stocks again. Maybe, maybe it’s starting … I mean there’s definitely some signs, and some of the analysis we do that some of the leading data, may be getting a little softer.
Now, keep in mind, this is not softer meaning we’re going into recession, and we’re going into prolong bear market, but the acceleration that we saw in the economy, maybe that part’s behind us, maybe the car that was going from 20, to 30, to 40, to 50 miles an hour is now putting it on cruise control at 50, or maybe just coasting, and you know what happens when you coast, it starts to slow just a little bit, right? It can’t go at 50 miles an hour forever. It’s going to start going 49, 45, 44, are we in that part of the economy?
If we are, a slow patch we’ll call it, which a lot of people believe we are, then guess what? Rates don’t keep going up, they settle in. These things like utilities, like we talked about, start to bounce back a little bit, but more importantly, the Federal Reserve says to themselves, “Hey, we don’t have to raise rates as aggressively as we thought.” And the stock market loves it. Maybe that’s where this Goldilocks situation again. But we’ll see, because remember the Fed hasn’t said that. The Fed could keep raising rates. The worst case scenario as we’ve mentioned is the Fed raising rates in to a weakening economy, that would be the worst case scenario.
You would see stocks continue to fall under that scenario, and I don’t think that’s the case. I think the Fed isn’t going to do that. They are reactionary. If they see data getting weaker, they’re going to not keep tapping the brakes on with rising rates, okay? But that’s something to watch. Now the other part of what the sell-off has been about, has been about just … we’ve had obviously a lot of turnover in the Trump Administration, Donald Trump hired Larry Kudlow, economic advisor, and to me, I like Larry Kudlow, but it felt like Jerry Jones hiring Jason Garrett, right? Kind of a yes man if you will, we’ll see, we’ll see. I don’t think Wilbur Ross is that way, but I think Larry Kudlow is that way.
Regardless, a lot of turnover there, markets don’t like uncertainty and change, but we also had the tariffs, and the tariffs caused a sell-off, and then what happened? Well, Canada’s excluded, Mexico’s excluded, all these countries are excluded, South Korea is excluded, and the market kind of bounced back, and then, we’re slap on 60 billion to China, boom, down goes the market again.
Now, we saw late in the week, that they’ve been working on these deals with South Korea, and Donald Trump said, “Well may put it on hold until we hear what happens with talks with North Korea.” But a lot of this has been news driven, and it’s interesting because when news headlines go across my Bloomberg machine, the first thing that happens is things move very rapidly. There are algorithms set up to read these headlines, and their computers are set to trade, if you see this headline, or this word, equals sell, so many futures contracts in these sliders, or in the S&P Futures. That’s how it’s set up to …
You get this wave of information, a quick sell-off, and so when you see tariffs come across, China signing this, that, and the other, again, a lot of this if you read through some of it, said, no, we’re going to have like a 14 day exploratory situation where we’re going to negotiate, right? And then as the market realizes that it tends to bounce back a little bit. It’s interesting to watch that, because again, markets can be emotional, just like humans are, ’cause humans are controlling it most of the time, or least programming the algorithms, but again, a lot of this is negotiating.
Wilbur Ross came on TV the other day and said, “Look, the deal the US got with South Korea was better than what the tariffs would have done for the US.” So they’re in talks with South Korea, getting that done, and they said, “We’re in daily talks with China, all the time, we’re talking to China.” So there’s a negotiating going on, that is happening right now. I think as the market’s getting used to that, it’s going, well maybe it’s not that bad, but it seems like every time, at least in February and March, every time the market tries to get off the ground, stand back up, start walking again, maybe we start recovering, there’s another piece of negative news flow. Doesn’t it feel that way to you?
Whereas last year seemed like it was all just ignored any bit of negative news, and it was overcome by positive news it seemed like. We are sitting here, and if you, again, if you look, we’re not much higher than the lows, and so technically things are setting up where we could rally. We’re definitely got a lot of pessimism, we’ve had money being pulled out of ETFs, so it’s setting up nicely for a rally. But again, it just kind of feels too easy.
We’re watching things like LIBOR rising 38 straight days or something like that, and for those of you who don’t know and … LIBOR’s an interest rate, it stands for the London Interbank Offered Rate, right? It’s an acronym, LIBOR, lot of loans are based on LIBOR rates, and as they’ve been going up 38 straight days, people are watching that going, “This is concerning, because could this really cause companies not to be able to pay back loans, and you know, defaults to pick up?” That is a concern.
That’s something to watch as all short term rates have gone up. Are they going up too fast right now? That is something the market’s getting nervous about, watching default rates, watching credit spreads. There’s this whole backdrop that’s not just about watching the stock market, there’s all these other things that we’re all watching making sure those things don’t crack. So far, they’re okay, but keep an eye on LIBOR. Now, another thing that we are dealing with as investors is the leadership in this market is being questioned, right? The leadership has been technology stocks the last three, four years, thing stocks, Facebook, Apple, Netflix, Google.
We obviously see what’s happening with some of these big companies. Well number one, the tariffs hurt the big companies that use steel, and aluminum, those started to get hit, and then it bled into technology, where President Trump was going after specific companies like Amazon, and of course we know what’s happening with Facebook. Well remember those companies, they’re big tech, but they’re also big cap, so if you look in the Dow Jones, the S&P 500, the Nasdaq, those are cap weighted, or price weighted indices, especially the S&P and Nasdaq, and so when the Nasdaq is going down, it’s usually because one of those big companies, Facebook, Apple, Netflix, Google, Microsoft, those companies, as they fall, they are controlling a lot of the points that you see on TV. When you see the S&P 500 down, it’s because those big companies are going down.
It’s also important right now watch what’s happening with equal weight, ETFs, equal weight ETFs. Are equal weight ETFs starting to outperform the regular weight? And the answer is yes, that’s been happening really since the beginning of March. So all of March, equal weight’s been outperforming, and it totally makes sense what’s happening. The big cap tech stock’s getting hit, so cap weighted goes down, but most of us don’t invest cap weighted. Like if you were to build a stock portfolio, you’d probably do, at least most of us do more of an equal weight to some degree, right?
You own 20 stocks, maybe they’ll be about 5% a piece of your portfolio, I don’t think you would say, “Well, I’m going to own 20% in one stock, and a eighth of a percent in another,” that’s just not the way it’s normally done. Yes there is some differentiation between weights, but these cap weighted ones are very … that’s how it works. I mean the heavy weights have a lot of weight in them. Look at equal weight. When we buy ETFs we do tend to, not all the time, but we tend to use either equal weight, smart beta, some type of valuation metric overlay on top of the ETF, so it’s not just … because remember, when you buy just the S&P 500, you’re buying the most popular things.
The reason it’s cap weighted, the reason those things have gone up the way they have is … and they’re a big weight, is because they’ve gone up in price. Live by the three, die by the three. As they start falling, you start to see obviously the index get hurt. Watch that, that is something that’s really big. Look, I think, and we’ve mentioned before on this podcast, that everybody’s waiting for the next shoe to drop, and the bear market to start the next 40 to 50% drop. We feel like the fact that we had two 50% drops in the last 18 years, from 2000 to early 2003, 2007 to early 2009, that’s what we all remember. That’s our frame of reference, that’s what we feel like the markets are in this big draw done, up and down, and up and down, okay?
Now, that’s not normal. The markets don’t go down 50% normally. They will go down 10, or 15, or 20% normally, that is very normal, what we’re going through right now is normal. 2008 was not normal. The dot com bubble was not normal, but our minds see those pictures, and it was just not that long ago, and so we feel like we kind of extrapolate out, and say, “Well that’s just normal, that’s what happens. It just goes down that much.” What more than likely will happen is rolling bearing markets.
Let’s go back a few years. Did we see a crash in oil? Yes. Did we see a crash in energy stocks? Yes. Is that bear market behind us, has it already happened? We believe so. Retail stocks, retail stocks have been crushed, X Amazon, have they gone through a bear market would you say? Yes. Commodities in general, have they, and are they in a bear market? Yes. There’s plenty of things that have had bear markets, maybe you just didn’t notice, because you owned mostly other things.
What if the next bear market is technology stocks? Does that mean the whole market’s doomed? I don’t think so, because what if bank stocks do well? What if commodities do well? Foreign stocks do well? Energy stocks do well? You see my point is there’s things that could be doing well, while tech goes down. So you got this rotation, you’ve had utility stocks get hit lately, real estate investment trusts get hit lately, so maybe we’re getting this rotation, but in order for it to be a rotation, the other stuff has to start going up, right? Otherwise, it’s just peeling off, and eventually the whole thing falls apart.
Can we see energy, for example, really take the lead? Oil prices by the way have been really interesting haven’t they? They’ve been sitting up there holding on around $65, meanwhile, a lot of the energy stocks haven’t been. There’s some catch up to do. But anyways there are a lot of interesting areas, and I think we could see this rotation, and that rotation is something to watch, but it’s also not something to watch, it’s something to prepare your portfolio for.
That’s why you may want to drill down into specific sectors, doesn’t mean you have to own individual stocks all the time, some people don’t like doing that, they don’t like seeing how the sausage is made, and seeing a stock’s down 10, or 15, or 20% in their portfolio, but you have to realize, if you own a mutual fund, there’s stocks in your mutual fund that are down 10, 15, 20, 30%. It’s just the manager doesn’t show them to you. If you own individual stocks yourself, you can see it, but a lot of people don’t like that.
You could drill down and say, “I’m going to avoid the stocks,” but you could drill down to sectors, things of that nature. That’s another area to watch. As we enter a new month, a new quarter there’s a lot of jockeying for position, moving things around at the end of last quarter. There’s probably people that don’t want to show that they own Facebook for example on their books, because remember these mutual funds report semi-annually, they may be sending a report that their top holdings are Facebook, they don’t want to do that, so they were getting rid of Facebook.
There’s a lot of movement going around, kind of like we see at the end of the year, but it’s also at the end of each quarter, especially a quarter where we had so much volatility. What’s interesting, is remember January got off to a great start. January was up really strong, and then, of course gave it all back, and kind of went in the negative. Volatility may settle down, the fact that we continue to have these 1 and 2% days, I don’t think that will last either, so what’s interesting about this market is we went from one end of the spectrum of no volatility to the other end of the spectrum where we had a lot of volatility. It wasn’t like it just went in the middle where it was a little bit of volatility, it was one way, and then it went all the way to the other. Let’s see if that pendulum swings back a little bit.
The next catalyst going forward is going to be earnings, right? If the earnings keep coming in, and some people may say well that’s backwards looking, they’re going to report what happened last quarter, yes they are, but they’re also going to give guidance about next quarter. If those continue to do well, the stock market should, should recover, because again, a lot of the things the market’s been moving on are ifs, ands and buts, because think about it, again, some of the things it’s been moving on, turnover in the White House, doesn’t effect corporate earnings the next day. How about interest rates rising? Or potentially the Fed raising interest rates? Well, they’ve raised them one time. The market’s worried about four times, they’ve only raised them once so far.
Long term rates, everybody thought it was a foregone conclusion, they were going over 3%, and here they are backing down now. They didn’t go to 3%, they’re coming back down, so maybe that concern … these are all ifs, and worries, but they’re not real. What about tariffs? Well, tariffs sound bad, and I think they are bad, but are they being used as a negotiating tool to get the US a better deal, and keep trade going, just more of a fair deal for the US, if the answer is yes, again, how does it affect earnings?
How do all these things affect corporate profits? That is at the end of the day what the stock market is, is corporate profits, but the thing you have to do, as an investor, is filter out the noise, take advantage of the noise sometimes, but again, for you personally, what’s going on in your specific life? Are you somebody that’s accumulated assets, and now it’s about getting some of it into income generating investments? Having some in long-term to where you say, “I don’t really care if the market goes down 40%, I’m always going to have some money in the market, because I know over the longterm, that’s a thing that’s going to make the most money. Then you have some that maybe is traded, or has some defense mechanisms, and you start putting that portfolio together. Again, how much of that in each of those buckets, depends on your situation, what are you trying to do?
Once you do that, it keeps you focused more on where it’s going as opposed to worrying about, “Well, my portfolio’s down 3, or 4% in a two or three weeks.” The income’s a big part. Income coming in to a portfolio is a big deal. You can’t have a portfolio in my opinion with just stocks, and no income as you move along in life. Because the income is really the shock absorber, that’s the consistent thing, coming into the account every few days, income’s coming in. That’s the thing that A, gives you money to buy more, or B, allows you to again, have things that are maybe temporarily going down, but you have that income that’s offsetting that loss, short term.
Just a few thoughts on again, I always talk about building the portfolio, it’s very underrated about constructing, our portfolio, not just putting these little pieces together, and they’re just randomly … it’s as if people have a puzzle they’ve dropped on the floor, and there’s puzzle pieces all over the place, that’s sometimes what portfolios look like to us. What we try to do is pick it all up, maybe replace some of the puzzle pieces, but put the puzzle together and say, does this make sense? Does it fit given where you are in your specific situation?
All right, well guys, have a wonderful Easter. We’ll get right back at it Monday. We always love getting your feedback. If you want to share the show, there’s plenty of ways to send it to a friend. There’s plenty of ways to send it to a family member that needs to hear it. We would love to help you out, or them out. Any questions you might have, we’re always here just to answer questions, or we’re here to go, obviously, more in depth, depending on your specified situation. Eggersscaptial.com is our website. Our telephone number 210-526-0057.
We have advisors that all specialize in different things. We have a nice staff of people that know how to treat you the right way, and we look forward to helping you any way we can, but we always thank you for listening as always. Have a wonderful weekend. We will see you back right here next week on The Eggerss Report Your Investing Playbook. Take care everybody.
Speaker 2: This show is for entertainment only, and information provided by the host, guests, and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself, and his clients. Just don’t buy, or sell anything based on what you get from radio, or TV. Use your own judgment, or get yourself a trusted advisor.