The longest streak in history of no 3% pullbacks is officially over. The stock market had a rough week. Karl explains why it happened and how to handle it. On this week’s show, Karl explains where most of the damage was and specifically what areas got hit the hardest.
Karl Eggerss: Hey, everybody. Welcome to the podcast. It’s the Eggerss Report. It’s your investing playbook. Thank you for joining me. Appreciate it as always.
Wanted to give out our telephone number, 210-526-0057. 210-526-0057 is our telephone number if you need anything from us, if you need financial planning help, if you need education planning, Roth conversion analysis, social security analysis. I actually had met with a couple earlier this week. They were given some advice. “Hey, we should take social security in this particular manner.”
We analyzed it. We said, “They missed it.” There is actually more you can do, and it’s going to actually give them tens of thousands of dollars over their lifetime, assuming they live for a while. Tens of thousands of dollars, so sometimes, even though it looks fairly simple, there are some things you can do that can improve your social security. Claiming strategies can be changed, and then be very different from what you thought they should be or what you were going to do.
That’s another thing we do, and of course, we do investment management if you need help with your investments and looking at the big picture, and after the week we had, maybe you do, so let’s jump right in. Our website by the way is EggerssCapital.com. E-G-G-E-R-S-S-capital-dot-com. We are, let’s see, also on Facebook. We’re on Instagram.
Eggerss Capital Management on Instagram if you want to see some charts. Twitter, @KarlEggerss is my handle. If you just want to email me, Karl@EggerssCapital.com. We had a lot going on this week, and what’s interesting is we’re going to start backwards because Friday of course, the market did some I hadn’t done in a while. We had a pretty nasty day yesterday, and the Dow Jones was down 665 points.
Now, before you go jump off the cliff, keep in mind that 665 points, while bad and one of the worst days we’ve seen since, let’s call it just prior to the election, percentage wise, it’s bigger than we’ve seen, but percentage wise, 665 isn’t what it used to be. Remember, if this was, let’s say 2011, when the Dow is around 10,000, this would have been a six and a half percent move. This was two and a half, so a bad day, but a garden-variety day. This would be like 250 points back in 2011. You get my drift?
This is something that, and we’re going to talk about the why, but this is something that’s been brewing, but nobody could predict when it was going to happen, and again, it’s just not anything close to … It’s not even a correction just yet, and we’re going to talk about ways to prepare for a real correction because what we are seeing right now may be the beginnings of a correction, but it certainly isn’t a correction just yet. It may become that, but this is nothing, and don’t let the news scare you and think, “Uh-oh, I need to abandon my plan. I need to do something because boy, the news says this hasn’t happened in a long, long time.” Again, keep in mind that the news is basically talking about points on the Dow Jones.
Before we get to Friday, because really, it was a weak market to begin with coming really just this week, but let’s talk about what happened. Of course, we had a down Monday. We had the market was down pretty big on Tuesday relatively speaking. Nothing like Friday, but down pretty big, and we ended up coming into Tuesday night with … By the way, the market, the Dow lost about 4% this week, and we’ll go over some of the numbers in just a minute, but remember, coming into Tuesday evening, we had the State of the Union address, which was really entertaining to watch, wasn’t it?
I mean seriously, despite the fact that you can hate somebody like a lot of people hate this president, they hate him so much, that even in something’s good, something they would fight for, they don’t acknowledge that. This black and white type of mentality, it’s very analogous to when I tell you, “Don’t overdo your investments. Don’t have an all or none mentality.” Meaning, “Hey, the market went down, so I’m going to move everything out of the market into the money market, or the market’s racing up, so I’m going to move everything into the market.” Making those big moves like you have the crystal ball is a recipe for disaster, and it’s just amazing to me in this day and age that no matter what happens out there, President Trump can do no right, just like President Obama could do no right for some people and vice versa. Right?
There’s something would think President Obama hung the moon. He could do no wrong, and some people think President Trump’s just doing everything right, and hung the moon. It’s neither. These guys are sinful, prideful, arrogant men, both of them, and they’re doing some things some people would believe to be good, and they’re doing some things that some people would believe to be bad. Of course, you’re going to have your opinions on how much of it, but let’s have a little gray. Let’s acknowledge that sometimes, there are some good things that they’re doing and some bad things.
When they say for example in the State of the Union on Tuesday, “We want to see lower healthcare premiums”, and half the audience doesn’t stand up and clap for that, interesting. Right? “In God, we trust”, and half the audience does not stand up and clap for that? Entertaining, frustrating, all of that, but it was a, “Look what we’ve done. Economy’s rip-roaring. Everything’s great”, and with that, and what we’ve seen is this confidence building since the election, and as it’s built, we’re seeing record amount of inflows into ETFs, and we’re also seeing …
This is something that was recent. We’re seeing leveraged bulls. You can look at … There’s these double and triple beta ETFs. You’ve seen those, the ones that move two times the S&P 500 or three times the S&P 500, or technology, or any sector. Right?
The amount of money going into those financial instruments, compared to the ones going into the ones betting against the market are at a record by far, like it’s not even close, and you say, “Is that good or is that bad?” That’s a bad thing. That’s a contrarian indicator screaming. Right? Almost as contrarian as everybody and their mom piling into Bitcoin. Right?
I mean, I have seen the last few weeks, just the tipping point, what I believe when just the most random people are asking me about Bitcoin and thinking they’re about to get into it, that “Get into it”, and it’s just … Then, what do you see a few days later? Bitcoin cratering along with all the other cryptos. Right? Some of them down 60, 70%.
By the way, if you’re long-term, this is just part of the game. If you’re holding it, you shouldn’t even blink an eye that this is happening, but if you’re somebody that’s been obviously trading it or thinking this is the get rich quick scheme, you’re in some financial trouble right now, and I’m not going to say, “I told you so”, because that’s not what I’ve been doing. I haven’t been saying, “Watch out”, but there’s going to be a lot of people over the weekend tweeting and writing articles, “See, we told you. We told you not to do this stuff, but you know what? There’s people that have made millions from it, there’s people that are going to lose millions from it, there’s people that are long-term investing in it, and there’s a bunch of people just avoiding it”, so back on track with the stock market though.
We had the State of the Union. Market comes out, doing pretty well, kind of bouncing back the next day or so, and we had this ADP Jobs Report beat. We were somewhat almost oversold on Wednesday believe it or not, and then, we had the drug stocks that got hit, which I thought was just hilarious because I was like, “Hey, President, the election’s over. You don’t have to talk about that”, because that’s what politicians do. Right?
They all get up there and say, “We’re going to have drug prices come down”, and everybody claps. Hillary Clinton did it. Donald Trump did it. They get into the … President Trump gets in the White House, and you haven’t heard a thing about it, and the drug stocks, poof. Off they go back up.
Right? Biotech recovers, all of that, which we talked about that months ago that that would happen. Now, he’s bringing it back up again I believe because he doesn’t have a lot of things to agree with the democrats on, and so this was an olive branch. You saw him look over at them, say, “We want to have drug prices come down, don’t we?” Like, “Come on. Join in”, and they clap.
“Yes. Yes. We agree with that”, but that’s just an olive branch. That’s just, I don’t think they’re going to do anything about drug prices. The rhetoric may be there, but that’s going to leave some opportunities I think in the drug space, and I think it already is, so there are some companies right now that are cheap that are in the drug space.
That was really Wednesday what happened. Then, on Thursday, with the market down, and it really bounced back, and then Friday, Friday, the bottom fell out relatively speaking. Again, two and a half percent, but let’s take the percentage. Right? Let’s just look at the percentage because even if you take in the percentage and say, “Yeah. I mean, it’s two and a half percent.”
Two and a half percent’s still a pretty good chunk. We haven’t seen a two and a half percent day since June of 2016. June of 2016, the market fell 3.39% based on the Dow Jones. Now, we did see one of these all or none days just after the election. In fact, I think it was the day after the election.
You remember how the market was way down the day after the election, and then it reversed, but it still finished down on the day. That was one of these all or nothing days. Now here’s the trick. Here’s the key. We have this all or nothing day.
We have this, “Throw in the towel”, “Just sell”, “Just hit the sell button”, and a lot of stops getting triggered, and people that have been moving up their stops, they get triggered, and it’s margin calls, and “Oh my gosh”. When that happens, maybe we get another day like that. Maybe we get couple days. I don’t know, but here’s what you look for, because we are oversold now. We are oversold.
Now, if you think it’s turning into a bear market, then we’re not oversold, but if we are not still in an uptrend, but just garden-variety, we are oversold. This is the deepest the market’s been oversold in a while, believe it or not, and it’s only been a couple of days. Here’s what you’re looking for. The selling to exhaust. Right?
Everybody’s throwing in the towel. “Get me out. Get me out. Get me out.” Then, what you look for is the complete opposite, “Get me in at whatever cost.” That’s how you know it’s a buy the dip, everybody wants in.
In other words, the people that have been saying they want to pull back and they want to take advantage of some stuff, do they really do it, and if they do, that’s, you’re done. The correction is over. I don’t know if that’ll come. If it came Monday, and we had an all, everybody in, and the market rallies hard and almost every stock’s up, and all the volume is all up-volume, that would tell you it’s over. The little correction that we had, which isn’t even technically correction because a correction is 10% is over, so we’ll have to see on that, but it’s interesting because we sent our client newsletter out just on Thursday, so a day before this nasty drop, and two things we wanted to point out in that newsletter.
‘Don’t Abandon Your Plan’ was the name of the newsletter, and it was essentially what we’ve been talking about on here for the last several weeks, which is just because the market’s going up, and you’re a conservative income investor, don’t throw that aside and start jumping in there because your friends are making more money than you. That was the main theme, or conversely, you’re supposed to be a long-term investor, but you’re getting a little too cute, and you start getting too conservative, and the market just whipsaws and goes right back up, and now you’re sitting out, so ‘Don’t Abandon Your Plan’ was the theme of the newsletter. Now, specifically in there, one thing that was pretty interesting is we’ve talked about how to prepare for a correction. I didn’t know writing this that it would happen maybe the next day, but look, 10 to 20% drops are not fun. Right?
I mean, those are not only are they not fun. They’re sometimes downright scary depending on how they happen, but on average, and we’ve told you this numerous times, on average, there’s typically about a 14 to 15% drop in any given year. We didn’t see it last year, but any given year of 14 to 15% drop. We saw it on early 2016, but we didn’t see it last year, so are we due? Absolutely we’re due. How do we prepare for that?
Number one, you want to prepare in advance, and I talked about some of these on the Trey Ware Show on Monday, which if you want to hear me on every Monday, Trey Ware Show KTSA in San Antonio and surrounding areas so you can stream it KTSANews.com I believe, KTSA.com. Probably get you to the same place, or we put it on our site. About a five-minute review, and I talked about prepare for a correction because again, the tone has been, “Everything’s great”, but let’s look the other way. Prepare for correction, so the first thing you do is prepare in advance. How do you do that? You stress test your portfolio.
For example, you look today, the market is down … For the week I should say. Market fell for the week, let’s just call it 4% of the stock market. How did you do during the week? Did you lose 2%, 1%, 6%, because if you did, then that tells you where you are on the [RISCO 00:16:39] within reason. Right?
There are some things moving differently and all of that, but stress test the portfolio because then, you can expand out and say, “Look, if it falls another 15%, I’m going to lose X percentage, and that translates into X dollars.” Now, it doesn’t mean you lost it, but you’d be down that much. Can you handle being down X dollars? That’s how you start mentally preparing, is do a stress test and mentally prepare for it. Number two is don’t overreact.
I just told you, these corrections are normal. What’s not normal is what happened last year. That’s not normal, so going through it two, three, 10% correction is normal. It’s not fun, and I’m not saying it’s easy at all. I’m telling you, when we have a 10% correction, it’s going to feel like the end of the world, but focus on long-term indicators, focus on your goals, focus on your buy spots, where you want to buy things, and don’t overreact.
Then the last thing is stay in your lane, which is basically don’t abandon your plans, what I’ve just said. I mean, look. Once a goal is determined and you’ve put together an action plan, don’t deviate from it. That’s critical. Don’t compare your portfolio to your neighbors. This causes you to begin investing in the fashion it doesn’t produce the results that you want and/or the volatility that you desire, and obviously, rebalancing the portfolio can achieve that.
For example, if your 50% stocks and 50% bonds, just to keep things simple, and it’s growing over the years to 70% stocks and 30% bonds, at some point, you need to take the 20% and go back to 50/50. How you do it, when you do it, there’s some finesse in there, but do that. Those are my three ways to prepare for a correction. Now, the first two things, preparing in advance and don’t overreact, those are things that we want to educate people on. That’s what the point of the show is.
The third thing, staying in your lane, that’s what my job as an advisor is to say, “Look, this is what you need. You need to stay in your lane here. Don’t deviate from that.” That’s an advisor’s job if you don’t have one. Why did this … Let’s go back to the market and how nasty it was relatively speaking this week.
Why? Was it memos? No. Was it State of the Union? No. You know what it was?
It was a Federal Reserve. Number one, it was just time. Right? I always say that. It’s just, look, more sellers than buyers, but the Federal Reserve told you that inflation is becoming an issue. They see it as an issue, and then we get a stronger than expected jobs report, stronger than expected wage growth, and poof, the 10-year treasury bond, which look, prior to the election was sitting at 1.3%.
It’s at 2.85%, so interest rates are moving up, so not only are bonds losing money, the bond market is down for the year, but it’s now tipping over the stocks. Now, where is the real tipping point? We think it’s more like 5%, but it’s certainly affecting people to go, “Uh-oh, interest rates going up”, because remember, here’s what happens. It’s not just about that interest rates are higher, so bonds are a better deal than stocks. That would happen much higher levels.
What it is is about if the interest rates rise too fast, you stop borrowing, I stop borrowing, corporations stop borrowing, this whole credit thing that we’ve been doing the last umpteen years ends, and if that happens, then it could slow the economy down, and if it slows the economy down, corporate profits don’t grow, hence the stock market doesn’t keep going up at this rate. That’s the premise. That’s the idea. That’s what I think happened this week. Now, look.
Again, people have been fighting a reason to sell stocks, like, “Give me something, and I’ll sell them because it just can’t keep going up like this, and so you knew there was going to be some day like this. In fact, I’ve been believing and saying that a crash, a real crash, maybe down 10% in a day, 15% in a day seems more likely than a bear market right now. Will this continue or do people really say, “You know what? Things are so good. I’m going to take advantage of this.”
We’ll see. I mean, certainly, the fact that people are flocking into ETFs at a record pace, they were buying art at a record pace, they’re buying crypto currencies at a record pace, all those things, do those have an impact on the market? Yeah. They do. I mean, it shows you the risk appetite that’s out there, and it’s been high, and the stock market’s gone along with it.
Is it ending? I don’t think the bull market is ending, but are we due for a correction? No doubt about it. Now, on the week, you can imagine what the winner was. The winner was the volatility index, the volatility index at its highest level since about just prior to the election.
Around the election, so volatility picking up, people finally getting paid to own volatility. Volatility remember can be a really good thing depending on what type of investments you own. We have some investments that feast on volatility. I don’t like when volatility is low, and we’ve had a low volatile environment. Interest rates were a winner this week.
If you were short treasuries, meaning bonds went down and you made money, you did pretty well this week. Some agricultural things went up. Grains, the grains commodities went up. We like that area. Then, the things that got hammered, oil and gas, which we took some off the table at least a couple of weeks ago.
Maybe a week ago. I can’t recall, so we took a little off the table because we felt like it was a little stretched, so that was a good move because we can always buy that piece back if we choose. We’re not overweight energy or anything like that. We’re kind of neutral, maybe even underweight a little bit, but that got hit hard. Home construction got hit.
The gold miners got hit and are aggressive. We’re along the gold miners. Steal got hit pretty hard. Retail got hit, home builders, emerging markets. Pretty much, everything went down, anywhere from four to 9% on average it seemed like, and the things that did the best, banks.
They were down, but they held up pretty well because as interest rates go up, banks make more spread. They make more money. Long-term rates go up faster than short-term rates. That’s their spread. They borrow it low rates, and they lend at high rates, so that spread, that bigger it gets, the more money they make.
That did pretty well this week. Gold held up pretty well this week as the dollar continues to get pummeled. Our favorite sector to hate, the utilities area continues to get beaten up. We think those are still overvalued. Technically, they could rally a little bit, but they look overvalued still.
That’s kind of a synopsis of really what was working, which was basically nothing this week. It’s up to a couple of things. Of course, if you were short the stock market, you did pretty well this week depending on how you dit it, but did you do it two, three days ago, or have you been short for a couple of months, because if you are, you’re still down. You’re still losing money on that. Now, I do want to talk about quickly the crypto blood bath that we saw, and again, I alluded to it that, look, is it a new technology?
Is it something that could be sustainable? Is it this? I mean, there’s arguments on both side, but the pattern itself of something going vertical is, it seems to not matter what that looks like because when something goes vertical, it tends to come crashing down, and that’s what we’ve seen. I mean, if you own the Bitcoin Investment Trust, GBTC, which is the ETF that’s been around for a little bit, I mean, that literally, we’re sitting here back in, let’s call it in May of last year, there’s about … Let’s see.
May of last year, it was sitting at a dollar 51. It got all the way up to 40, so think about that return. Since it hit 40 roughly, it’s fallen dramatically, and it’s down like I said about 70% from its high, but what’s interesting is if you look at a chart, you could make the argument just coming back to the trend line. Remember, and I’ve said this before, Amazon.com fell 95% at one point, so if you were sitting there back in the ’90s, and then 2000’s, it fell 95%, and there’s plenty of people who said, “it’s over”, and yet, it’s been one of the best stocks since, so could we wake up and Bitcoin continues to the best thing in the next few years? Absolutely, it could.
Do I think it will be? I don’t think so, but this parabolic move and talking to people on the streets that keep asking me about Bitcoin, everybody. I mean, everybody. It’s not a shock that it’s doing this, but here’s what’s going to happen potentially like I said is that maybe everybody starts going against it now and saying, “I told you. I told you”, and then, all of a sudden, it comes roaring back.
Wouldn’t that be what the stock market does and the financial markets? They trick you. Right? You think you’ve got it figured out, and then they go the other direction. Wouldn’t it be ironic or typical, whatever you want to say for the stock market or the crypto currency market as it were to fall 90% from its high only to finish the year up strongly? I could see that happening, but please, you see what volatility does.
You can see why these are not considered currencies yet. Are they cash payment systems? Do they have different algorithms? Are they something that people want to park some money in? Yeah, they can do all those things, but high schoolers trade in crypto currencies.
They’re learning a nice lesson. Right? They learned what maybe took you and I a longer time to learn that your money can go poof pretty quickly by investing in things that you really don’t understand, and some people may claim they understand it, but at the end of the day, I think m most people invest in crypto currencies don’t understand them, and so yeah, we had a pretty nasty week for the crypto currencies. I mean, look, GBTC is down over 40% just this year. Now, what’s ironic about the stock market switching gears is that we just came off the best January since 1987, and then we’re getting off the horrible start in February, so a little ironic.
We’ll see if it continues, but look, long-term, we are still in a bull market, I believe. I think the economies continued to do well. Could it peak? Potentially, but if the tax cuts go through the way people think they’re going to go through, we could see that the earnings do go up a little faster than we think. Now, I put an article out this week.
I thought it’d get some feedback. Maybe positive or negative, and it wasn’t meant to … I didn’t. I didn’t hear anything. It wasn’t meant to predict. It was strictly meant for you to sit back and think, and the reason I wrote it because we were sitting there with some clients earlier in the week, and they were saying, “How high can this market go? 26,000 seems high”, and it got us thinking that 26,000, if the market doubles two more times, it’s at a hundred thousand.
By the way, the market doesn’t have a cap. Right? Is it too high? That’s not a relevant question. “Could it pull back?” is a relevant question, but is it like have this cap on it?
No, so we started thinking Dow 100,000. I would imagine Dow 20,000 sounded pretty crazy back in 1980. Dow 10,000 sounded crazy in 1980, but we’ve passed 10,000, 20,000, 26,000, so we’ve put the pencil to the paper as it were, and look, long-term, the markets go sideways for a while and volatile, and then they go up for a while, and then they go sideways, and I digest it, and then they go up. We have been on an up-trajectory since ’09. Yes, we’ve had major corrections along the way. 2011, down over 20% with the debt downgrade.
Flash crash 1.0, Flash Crash 2.0, Brexit, you name it, we’ve had pullbacks, but have we been going up since the financial crisis? The answer is yes, because partly, we went sideways for years. In fact, we went sideways from 2000 until 2011. The return with dividends was zero for the stock market from 2000 to 2011. 11 years, people made zero money in the stock market if they bought and held the same basket of stocks, so could we go now for a while going up?
Yes. Could we keep going at this trajectory that we’ve seen in the last few weeks or months? No, so that’s why you’re getting some correction, but what would it take to get the Dow to a hundred thousand? Here’s what’s crazy. If we just do what the Dow’s done its lifetime, which is about five and a half percent per year, not including dividends, so before you say, “I thought it was more like nine or 10”, including dividends, it’s made more, but the price, it was at 38 back in 1896 and you recently went over 26,000.
That percentage gain per year is around five and a half percent per year. If that continued, you would probably be at Dow 100,000 in about 27 years. What would it take to get to Dow 100,000 in 10 years? 14 and a half percent per year. Let’s not be greedy.
What about in 20 years? I’m 45. When I turn 65, if I see the Dow at a hundred thousand, it would have made 7% per year without dividends, so you see how the math works. It’s pretty achievable, and at some point, it will happen because it’s just math. It doesn’t take as much as you would think, so sit back, digest that, but in the short-term, we may have a correct on our hands.
Now again, what to do about it? Maybe nothing, but if you’ve been sitting there waiting saying, “If I only had a pullback”, then you better start buying something, otherwise, you’re not doing what you said you were going to do, which is the whole point of this, is to stick with your plan. If you’re sitting there, putting in your (401)K or you’re averaging into the market on a month by month basis, boy, you should be licking your chops. Right? If you’re sitting there living off of your portfolio, if it keeps falling, you’re going to be a little nervous. That’s why you can’t have all your money in the stock market.
You have to have other things. Do you think real estate went down by 4% this week like the stock market? No. It keeps paying you. What about the people I lend money to either through a fund or personally or on property, whatever it might be, we do a lot of lending through different means. Our clients do, and nothing changed this week with the market going down, so that’s diversification.
Did everything in your life go down over this past week? If it did, you probably on too many stocks and/or crypto currencies, but if you had a balanced portfolio, you did okay. Now, here’s the other thing. Keep in mind that the bond market and the stock market both went down this past week, and that’s interesting because we have not seen that. The safe haven for people’s money the last few years has been the bond market.
Anytime you want to get on stock, just throw in bonds. That’s not the safe haven anymore, so it may have to be something different, so maybe we’ll save that discussion for another week. All right. I’m going to go sip on more coffee because I’m getting this stuff. I don’t have the flu, but I seemed to be in the minority that doesn’t have the flu, but anyways, not feeling a hundred percent, but I powered through it, didn’t I?
Speaker 2: This show is for entertainment only, and information provided by the hosts, 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.