Markets didn’t take a breather even though the calendar changed to a new year. Stocks rocketed higher propelled by bullish calls and more companies giving their employees benefits due to the tax law change. But, are things too good?
Karl also discusses what investors should expect from their portfolios.
Karl Eggerss: Hey, everybody. Welcome to the podcast. My name is Karl Eggerss. I am the President and CEO of Eggerss Capital Management, and we thank you for joining us each and every week here on “The Eggerss Report.” It’s your investing playbook.
Eggerss Capital Management is a registered investment advisory firm. We are not affiliated with any company. We don’t get paid commissions. We only get paid by our clients for our advice. And our telephone number is 210-526-0057. Our website, eggersscapital.com, E-G-G-E-R-S-S-capital.com. We’re on Twitter, @karleggerss is my handle. And let’s see, we also have our iTunes if you want to stream the podcast; it’s on iTunes. It’s also on Spotify; you can get it on there. Stitcher Radio, iHeartRadio, lots of different ways. Or you can just go to the website and make sure you check on our articles throughout the week, etc. We also have an Instagram page, Eggerss Capital Management, with charts on there. So, lots of different ways to get the information.
You’ll have to pardon my voice. You’ll probably hear some of the sloshing around of a cough drop, as I’ve been coughing for a few weeks actually. So, apologize for that in advance, but I’m going to power through. I don’t know if I’ve ever missed a podcast or a radio show even when I’ve been sick; powered through. So that’s what we’re going to do today because we’ve got a lot of good information for you as we enter the new year, and what a beginning of the year it’s been.
Right off the bat, you thought maybe we would see some pull back given that the end of the year finished so strongly, and yet there hasn’t been a pull back. Really, the only pull back has been things like bonds and utility stocks, which you know we are a bear and have been, which has been painful to be a bear. But in the last probably month or so, we’ve seen utility stocks really sell off quite a bit, down over 10 percent. So they’ve gone through their correction; we think that there may be more to come there.
But what a year we already have seen in 2018. And it’s interesting because not a huge surprise that the most beaten-up areas are the things leading the most. You look at some of the countries that were underperforming last year; you look at some of that retail stocks that were underperforming last year, a lot of those types of things had really good, really good first week. And we only had four trading days this week because New Year’s Day, of course, the markets were closed. So we only had really Tuesday through Friday.
But you saw steel stocks up over six percent this week; and semi-conductor stocks, really strong; and emerging markets, really strong; and the triple Qs, the FANG stocks, the material stocks. Why are we seeing this, number one? And number two, is it about to end? Well, we’re going to go through what happened this week, but we are still in a bull market, and it’s important to note that we’ve talked about an expensive market. There’s a lot of things in this market that are expensive; this is not a cheap stock market. But having said that, it was expensive before the presidential election. And so you can’t just avoid an expensive stock market just like you can’t go in and buy a cheap market. The market got cheap in 2008 during the financial crisis, and it got cheaper and cheaper until it got so cheap that people bought. But there is a catalyst, and sometimes that’s the way it is with the markets. They keep going further than you think. So just because the market may be overpriced, that doesn’t mean that it should go down.
What we look at is sentiment, how people feel about the market; the underlying fundamentals of the market, including earnings and the economy; and those are the most two important factors that we can look at. Now we know that the economy has been improving; there’s just no doubt about it. It’s been improving and continued to improve. And what’s going to happen we think is that the comparisons, which is what this market’s always about; it’s always looking at … okay, we’re looking at the economy and the earnings, but is it going to be as good as it was last year? Like, is the growth rate going to be as good? And so the comparisons this year are going to be harder and harder to surprise people, and that’s probably the biggest concern. But when we look at the supply and demand of the market, people are still buying stocks.
Now what’s changed as we enter the new year is optimism; it’s back, baby. Optimism is back. That sounds like a good thing but it’s actually a bad thing in the long run because what you want, is you want as an investor, you want to buy good deals. Right? You want to buy when other people are fearful. You have a neighbor that lost their job and has to move, you’re going to get a good deal on their house if you want. That’s why people buy foreclosures, and you’re looking for a good deal. And you get the good deal when there’s fear. You also get a bad deal when there’s too much optimism because when there’s too much optimism, everybody’s already in the market. Everybody agrees there’s not as many good deals. And that’s what we’ve seen.
Now we’ve seen ourselves as an investment advisor, we talk to hundreds of people every month, both clients, non-clients, you name it, friends. Everybody wants to talk about the markets. When you’re in this business, whether I go to a party, go out to dinner, go to church, lately it’s been the market and Bitcoin. And so what I try to do is take those conversations, bring them to you because you’re probably thinking the same thing. But I like to tell you what’s going on because I talk to so many people, and my staff does as well. All the advisors here talk to so many people we get a really good sense of what the consensus views are, and really what people are concerned about, what they’re feeling.
And so what we want to report right now is that really the optimism that kind of first presented itself after the presidential election is building. I mean, obviously the optimism has been going up because the economy’s been growing, profits went up, and the stock market had good gains. I mean, just to give you some stats real quick, the S&P 500 never had a three percent drop in 2017. Now remember, the average drop since the 1980s is, like, 14 percent. Like, at some point during the year, you’re going to see a 14 to 15 percent drop in the stock market if you invest. That’s just part of the deal.
Last year, we didn’t even get a three percent drop. We also finished with 71 record highs for the Dow Jones; never been done before. We had volatility the lowest, some people say ever, some people say since the ’60s, but it was really low volatility. So because of that, naturally optimism is building. And really since the first time since the Great Recession of ’08, we, as advisors, our own, what we’re seeing is that stock market optimism is back. We are getting calls from clients that are saying, “You know, with the tax cuts and everything going on, I feel better about this market. I want more stocks. I want a bigger risk. I want to take more risk than I’ve taken in the past.” And that’s fine. But when you get a lot of those calls, it becomes an issue. And we’re not there yet, but we’re starting to see calls like that. And you contrast that to calls that we used to get, which were, “When’s the crash coming? When’s this bubble going to pop?” Now we’re getting, “Hey, this thing could keep going so I want to increase my risk to the market.”
And we see other signs of kind of optimism because if you look around, there is frothiness. And how do we know that? Well, look no further than the new asset class called cryptocurrencies. When you see stuff going up 300, 400, 2,000, 10,000 percent in a year like we’ve seen some of them and people moving to that, that’s excess money, that is optimism. Now, you could argue that those people are fearful that the government’s going to implode. Well, maybe. But I think that is a sign of people having extra money that they can afford to lose, and so they put it in stuff like that. I mean, we see that type of behavior during bubbles with mania.
How about the art market? Leonardo Da Vinci’s “Christ at Salvator Mundi” painting sold for $450 million a few months ago. Remember that? The estimate for that was going to be $100 million. It went for four and a half times the estimate. And another painting that looked like something I would have done in the 3rd grade scribbling, also sold for a record. This is the type of stuff … the collector car market; these are the types of things that you see when optimism is high; New York real estate high, San Francisco real estate high. All those things.
So what we see is confidence can easily turn into over-confidence, and eventually turn into euphoria. And I don’t think we’re in the euphoria state yet, but we’re certainly moving towards that. And to us, that’s a big negative for the stock market. That is something that could put the brakes on this thing. Even if things get better economically and fundamentally, what do people pay for stocks? And right now there’s what’s called multiple expansion; profits are going up but people are paying more for those profits. Well, what if the profits are still going up but they pay less for the profits? That means this market goes down.
Now we’re not just seeing this type of evidence. We’re also seeing evidence on the statistical front. Some of these consumer surveys like the Conference Board’s consumer confidence monthly survey, the University of Michigan’s monthly consumer confidence surveys, levels not seen since 1990s. And before you go, “Uh oh, I need to get out,” these things have gone higher, and because of that we still could see there’s room for more improvement.
So are we at the euphoria state? Probably not. But we’re at a place where it’s getting there. So what’s going to happen now is we believe we’re going to enter the period where, number one, we could see a blow off top where it’s like everybody’s in the pool right before the cops come; parents aren’t home, everybody’s there; probably time to leave. And what’s going to happen is we believe that this market is going to start entering the phase of “prove it to me.” It’s going to have to justify this valuation at some point.
Now, many of the estimates that are coming out are saying, look, with this tax cut you’re going to see profits going up by 10 percent this year. Okay, profits go up by 10 percent, the stock market should go up 10 percent. And we’ve already had a bunch of estimates eight to nine to 10 percent for the stock market; some of these projections as they do each year. Rarely are any of them right but we see them. So can it do that? Now look, regardless of what you think about President Trump personally, or even from a presidential standpoint, things are improving, things are getting better economically. And the market, whether you want it to or not, is telling you so. Markets are telling you things are getting better. I mean, when you see these tax cuts that just got put into place and you immediately see dozens of corporations giving $1,000 bonuses, that’s good stuff. They’re not forced to do that, they’re doing it. Real money.
Infrastructure spending. Infrastructure’s the next thing on the agenda and that’s probably something that the Democrats and Republicans will agree on. This is all turning into profits. This is all good stuff. But what do people pay for those profits? That’s the thing. And if people are too optimistic, it becomes a concern. So it’s good. We’re still in a bull market, we still like this market, we’re still invested in this market in the short-term. About timeframes, in the short term we’re stretched. We believe that some of the tax cuts are priced into the market and we would not be surprised to see some type of pull back. We’d probably be buyers on that pull back still because we’re not seeing any evidence of economic slowdown, we’re not seeing any evidence of any of our long-term indicators rolling over, but a correction can happen for any reason. Right?
This week – and it didn’t affect the market, as usual – but we’ve got two leaders comparing how big their buttons are. No, that’s not an analogy for something else; they were actually comparing how big their nuclear buttons were. And neither one of them really do have buttons on their desks, or under their desks like Matt Lauer, but they have buttons. But they don’t really have those buttons, so calm down everybody. But you would think the market would get a little spooked by comments like that between two leaders, and it didn’t. But stuff can happen and the market can drop 10, 15 percent, 20 percent and still be in a bull market. So let’s watch for that, but right now in the short term in one of our strategies that’s meant to reduce volatility, we’ve taken a little bit off the table; nothing major. But we’re still heavily invested and still happy with the market. So that’s kind of a synopsis.
Now, if you’re looking at this week, had some interesting stuff going on this week. Of course, Monday the markets were closed. Tuesday we come in and the market’s up big … poof, and last year’s losers were the ones that were up the most. And then these companies continue to hand out these $1,000 bonuses; that was the big news on Tuesday. Wednesday, we got the Fed minutes. The Federal Reserve essentially said, “Hey, because of tax cuts and more growth, we think we may be able to speed up our hikes.” So what’s the implications to you?
That means interest rates could go higher, so you’re seeing things like utilities get hit, bonds get hit. And if we go over two and a half percent, could we go over three percent? And you’re seeing, what’s interesting is you’re seeing commodities I think had their longest winning streak ever. They’ve gone up like 11 or 12 days in a row because the market’s sensing inflation. Interest rates are creeping up, the Fed’s saying, “Hey, this is going to be real economic growth because of the tax cut and because of that, we may have to raise rates a little quicker.” And at some point, if they really do that, it could spook the market, but right now they’re saying it’s because the economy’s growing. So interest rates going up aren’t a bad thing if it’s because the economy’s growing. If they start raising too quickly or raise it unjustifiably, then yes, it could be a big problem. But right now the implications for you is that inflation’s higher. Look at your portfolio. What do you have that is going to get hurt by inflation? Interest rate-sensitive types of investments, which we talked about the last few weeks.
We also saw the Intel chip flaw on Wednesday; can infect billions of computers. Full disclosure: we own Intel in our Dividend Plus portfolio, which was our best performing strategy last year. And so we are keeping it; we have no problem with Intel. I think this’ll get fixed. A little overreaction but it is a big deal in the big picture of computers and vulnerabilities. Thursday, the Dow Jones went over the 25,000 mark. I mean, amazing. I remember specifically people telling me, “Hey, the Dow’s at 13,000. Get me out.” And it went to 14, then 15, then 16, then 17, and then 20. It seems like just yesterday I was saying, “What’s going to get there faster, Dow 20,000 or $20 trillion in debt?” Well, the Dow Jones 20,000 got there faster, but we did finally get to $20 trillion of debt.
And then we saw yesterday the jobs report that came out and was weaker than expected. Very noisy number; the previous one was revised up, so again, look at the long-term averages. We have seen the numbers in the last few months start to tail off a little bit after kind of an impressive run, but we’re still doing okay there. By the way, on Thursday, David Tepper, the famous hedge fund manager, came out and said, “This market’s … I’m still very bullish on stocks, and the tax cuts are going to help quite a bit.” He’s got a lot of weight; he’s one of the best, so markets are obviously … investors believing that, taking stocks higher.
So lot of news this first week. And by the way, we’re on the verge here, we’ve had 382 days where we have not seen a five percent drop in the market. 394 is the longest. Now usually, about every three months you get one; you get a five percent drop, and we’ve gone more than a year. The late ’90s, we had a bigger streak. 394 days is the record. We’re at 382, I believe. So actually we’re at 384 or 5, so another couple of weeks we’re going to be there and have the longest streak ever without a five percent correction. When you start to see stats like that, that’s neat if you’re in it and we’re all going “this is great.” But when stuff’s unprecedented, you tend to need to look the other direction and say, “Okay, what’s going to happen next because …” Not that we expect a crash or anything like that, but to expect this volatility or lack thereof to continue this way wouldn’t be normal, and we don’t think to expect that. So expect some volatility in 2018.
Also, one other thing, I mentioned we like commodities a lot. We think that commodities are something that have been a serial under- performer the last five years, just like we had been saying that about emerging markets and they finally came through with a gangbuster year last year. Commodities relative to stocks tend to cycle, and they’re at the bottom of a cycle right now. So we believe if inflation picks up and even if it doesn’t, you could see commodities go on a multi-year run. Now, does that mean I believe you should open a futures account and start trading commodities? No. Of course there are ETFs; you need to check them out. What do they do? How are they structured? The tax implications. Some of them issue K-1s. So be very careful about which ones, how they’re constructed, how do they re-balance. But we like commodities in general.
We also saw a long streak in gold here this past week. But we think you could see an out-performance by commodities versus stocks over the next few years, so take a look at your portfolio; that’s an area we really like right now. And of course, you could do commodities themselves or companies, but those are a few things that happened this week.
So I’ll kind of wrap up with this so I can go drink some more water, coffee, whatever; take some more cough drops. What kind of returns do you expect when you look at your portfolio? It’s easy to look at the CD market, money markets and say, “I just want to beat that.” It’s easy to look at the stock market and say, “Oh, I want that.” But first, you’ve got to back up and say what do you, personally, need from your portfolio? And if you need five percent, do you need to take eight percent risk? So you need to look at your own specific situation.
The other thing I would say is that … in other words, don’t take risk you don’t have to. But the other thing I would say is if you buy and hold stocks because you say, “I want a stock return and I want to be the stock market, I want to make those types of returns,” you have to put up with 50 percent drops. We’ve seen two of those in the last 20 years. You have to put up with that if you’re going to want those returns.
So really, to me, and we know based on some evidence that historically, the average investor makes about two percent a year. And it’s not because they’re avoiding stocks; it’s because they panic at lows, they buy when things are great. Right? In other words, there are people that are looking at Bitcoin and saying, “That looks like a good deal,” when they should have said that five years ago. Or looking at Facebook now as opposed to when it was 13, and then when it goes to 13, they panic out.
So the average investor makes about two percent a year. So really to me, your goal should be, be better than an average investor. So if you decide based on, “Hey, I can have a comfortable retirement if I make five percent” – and the average investor’s making two, we know – you should be happy with that. And so it is relative to your risk. If you’re taking a tremendous amount of risk – and I’ve seen clients that do this; they take a tremendous amount of risk and get horrible returns – if you’re taking less risk and getting less returns, then you can adjust it. You can dial it up.
And I’ve had that conversation with multiple people over the years to go, “Look, you had less favorable returns last year, but you took a lot less risk. Now because of your situation, I think you can afford to take more risk.” And they say, “Okay,” and we up the risk and the returns go up as well. But I don’t think you should be comparing yourself to, “Well, the stock market makes 10 percent a year, so
that’s what I think I should get.” If you’re going to do that or if you say, “Hey, Amazon’s made 30 percent a year since it’s been public,” just realize Amazon went down 95 percent at one point. So you can’t have your cake and eat it so, so you need to realize if I’m going to get those types of returns I’ve got to put up with some severe volatility. Or, or I can put a portfolio together that reduces risk a bit, it achieves my goals, and I’m better than the average investor. And to me, that’s success.
And I still see people that are sitting on the sidelines or in a bunch of bonds or municipal bonds, and “Well, the market’s too high, I just don’t know.” You’ve got to put a plan together and execute it. That doesn’t mean jumping in the deep end of the pool, but you’ve got to get in the pool because inflation – if it picks up this year, which we believe it will – you’re going to need to have your portfolio beating inflation. As a retiree, that is your biggest risk.
Eggerscapital.com, 210-526-0057, 210-526-0057 if you need our help. We’re glad to help. Give us a call. Thank you for your comments, your feedback. Karl, K-A-R-L, @eggersscapital.com is my email address. And our website, of course, is eggersscapital.com. Have a wonderful weekend. We’ll see you right back here next week on “The Eggerss Report,” your investing playbook.
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