Rolling Bear Markets

On this episode, Karl discusses rolling bear markets.  What if the past is not a guide to help investors navigate in the future?  We could possibly see a very different type of stock market in the years to come. Karl explores.


Karl Eggerss:                      Hey, good morning everybody. Welcome to the Eggerss Report, it’s your investing playbook. My name is Karl Eggerss. is our website; E-G-G-E-R-S-S Capital dot com. Our telephone number, 210-526-0057. You can call us anytime. You can also go to the website, a lot of information on the website that will pop up right when you go on there. If you say, “I like all the stuff on here, but I really just need to talk to somebody,” there’s a green button that says, “Get a free advisory consultation,” and we’ll reach out to you and see if there’s something we can help you with. Of course, the blog is there. So all of our past shows, articles, all of that information is right there for you to see on the website. Of course, there’s links to Twitter. There’s links to Instagram and Facebook and as I said, you can just call us as well.

We get listeners really all over the world and all over the United States especially. They come from all different places. Many of you we’ve said before have listened for well over 10 years to the podcasts and have followed our work. I say, “Our work,” because it used to just be me and the company has grown into multiple advisers. So I get feedback and information from those guys as well just to get you a good show and to get some content to you, something that you can use that makes sense. So we always look at what’s going on in this world from an investing standpoint and then we try to look at it through several different lenses in order to help you out. In other words if you hear about everybody is saying this, we go back and look at the data and say, “Is that really true? Has that ever been the case when XYZ is happening and then we always know the outcome?” So we like to do those types of things and then again I bring it to you on the podcast.

Really, I don’t have a tremendous amount of notes in front of me or anything like that when I do this podcast. It’s really just you’re hearing kind of a raw feed of me telling you what we’ve been chatting about in the office and what’s going on and the things I’m reading, the things I’m seeing and the research we’re doing. That’s really the point of the show is just to give you information. Again, lots of you have come from all over the place, found us lots of different ways.

One of the things we’ve been doing the last few months is transcribing our shows. What that does is it enables you to read it if you’re in a place where you can’t listen to it, so we try to transcribe almost everything. The other thing it does is allows you if you’re searching around on Google and want to find some information about something that we’ve been talking about, it probably is going to pop up in there, so the transcription has been very popular. As always, feel free to share the show with your friends. E always try to grow the audience. We reach as many people as we can. So if you have a friend that work or a parent or a child that you think could benefit from the show, absolutely sure we have no problem with that.

By the way, next week, we’re going to do something special. We’re going to talk about portfolio construction. This going to be a podcast that you don’t want to miss. What we’re going to try to do is maybe start from the top and work our way down. So portfolio construction is underutilized I think. Really, when we meet folks, oftentimes we look at their portfolio and it’s really a hodgepodge of different investments that really have no rhyme or reason. They have their own reason for buying them, but how do they fit in your portfolio? When one asset class is moving, what’s that going to do to something else? Sometimes you want to own multiple securities not just from a diversification standpoint, but you want those things to work well together.

So we’re going to spend some time talking about that next week. Really, we’re going to try to dedicate the whole show to it and start from the top, defining what you’re trying to accomplish and then drilling down from there and help you try to build and construct a portfolio because that is extremely important to not just about the latest stock tip or those types of things. It is really important to really put this portfolio together for you to accomplish your goal so we’re going to do that next week. This week, we’re going to talk about what’s going on right now specifically with the market, the way it’s been very volatile back and forth. Of course, we’ve had the tariff tantrum we’ll call it over the last couple of weeks here. So let’s get right into it.

So we’ve been in this market that obviously was going along fine. Everything was great and then we hit a good employment report. The stock market and investors specifically say, “Yes, that was a little too good and down we started to go.” People say, “Well, just a little drop. No big deal.” What were they worried about they were worried about rising interest rates. Remember we had been getting rates going up really all through January. So wasn’t as if this came out of nowhere, but interest rates were going up. So the bond market was kind of predicting better and better job reports and the stock market finally dropped. Then, of course, it dropped very fast because of the interest rates going up and the fact that people start worrying about the Federal Reserve raising rates. Then, of course, with had all this stuff with Vicks products and these investments causing more and more volatility and we had this very swift 10% correction. Really, 12% from top to bottom for the Dow Jones in 14 days, so very quick and that was 14 regular days.

Then we reversed on a Friday up we went, kind of got back about two-thirds of the losses. Then what was the next thing? It was the tariffs. Now send everybody’s word about, “Great, here we go.” We just got a tax cut and everybody is against these tariffs, but except for maybe a couple of people, which is Wilbur Ross, Steve Mnuchin and Donald Trump. So what it appears? Everybody is going, “Wait, wait, wait a second. Yes, we know we’re going to take advantage of trade, but should we go and tax, put these tariffs on because it could unwind the tax cut you just put through.” So that was a fear that, oh no, now we have a Federal Reserve that’s raising interest rates. Will do so in March and could do so three more times in 2018 at the same time that these tariffs could actually have a reverse effect and slow things down. As they do that, the economy starts to slow down, the Feds raising rates, double whammy. That is not good for bonds and not good for stocks.

Then, of course, we get news that Gary Cohn resigns, chief economic adviser. This was the guy that was seen as the parent in the White House, the one that brought stability and calm. Apparently, there have been some rumors that he might leave and sure enough he departs or says he is departing. Futures go down right off the market closed and down we went and the futures were down 400 points. They fought back, climbed back. So we continue this choppy pattern, but we’re getting higher low. So picture a wedge, like a wedge you stick underneath the door. What happens is we’re getting higher lows out of the market, but we’re also getting lower highs. So you’re getting this tighter and tighter range, market has got to give one way or the other.

Now here’s the thing. I think the longer we move on without falling apart the better it is. This correction sometimes can just feed on themselves. So the longer we just move sideways would be good. Now obviously the thing that’s getting hurt the most during this tariff tantrum is the big blue chip stocks. In fact, we’ve seen a few days where the small caps have really outperformed the large caps. It kind of makes sense and in fact even a few have posted some technical patterns recently where the small caps kind of went above their tariff drop. So you had a peak and then often we started getting tariff talk, things went down. A lot of the stocks haven’t come back, but the Russell 2000 went above that.

So that’s what got the market all up in a tizzy? Look, it makes sense. At the end of the day, we need economic growth. Yes, we need a better deal. Is it the best way to do it? Probably not the way he’s executing it. Many folks are saying, “Look, we are seeing that China has taken advantage of us. They cheat.” China is not the one that would get hurt by these tariffs. It’s Canada and Mexico. So then later in the week, you start to see the backtrack. Well, Canada and Mexico will be exempt from this for security purposes. Then so the market kind of say, “Okay, okay, things are little better than we thought,” but we’re still on this what if. We’re at this point now where it’s kind of we’re restarting the prove-it-to-me economy again where, okay, economy is, this is good as it gets and the Feds is raising rates now and is the party over as Goldilocks is about to end and Goldilocks may be ending.

When you have an accommodated Fed and an economy that’s growing and tax cuts, those are all really good things. Now we have a Fed that’s tightening and economy that is growing, but it’s going to have to prove to us that it’s going to continue to improve as all the good news baked in there and that’s what you have to look at. We know a lot of people are still, they’ve embraced this market, but there are still a lot of pessimism about the Federal Reserve intervention. There’s been reports that when the market was dropping in February that the Federal government came in and propped it up somehow by the plunge protection team, whatever it might be, there’s a lot of intervention. You can only kind of hold that thing so long. What happens, it’s almost like you’re holding a big beach ball under water. You know that pressure? It wants to come up and you go, “I can hold it down forever,” and all of a sudden it slips out of your hands and poof up it goes and hits you in the bottom of your jaw. That’s what could happen to this.

What if we start to get that where … They can’t control it. What if the Chinese stopped buying our bonds? There are still some fragile things that could tip this market. As I’ve said before, I know many of you are concerned about the next big bull mark, a bear mark excuse me, and that is a concern. As I’ve said before, I think we are not prepared; I shouldn’t say we as an Eggerss Capital Management, but most people are not prepared for a stock market that either perpetually loses money a little bit at the time or one that doesn’t go anywhere for years. Remember we’ve had this pattern of Vs, looks like a W where we go down like in a dot com bubble 50% and then a few years later you just held on, you get your money back. Then we fall again and you’ll wait and you just hang on for a few years and you get your money back.

What if instead of losing 50%, we lose five to 7% for five or six years in a row? Or what if we fall and we have kind of an L shape where it goes down and just move sideways for multiple years? Are we prepared for that? Are you prepared for that? So the question is we don’t know what the pattern is going to look like. So a couple of things and I’ll tell you how to prepare for that market in a minute.

Number one, let’s identify where we are. So the things we want to look at is sentiment, the economy, earnings. Those are the things that drive this market in. Earnings have Bull market bear marketbeen going up. Record revenues, those are all really good things. Leading economic indicators, new highs, those are all things that are really, really good. The market is saying, “Yes, we agree,” and so people have been buying stocks. At the same time, they’re realizing that the bond market is not good. The bond market is a place that finally is starting to knew it wasn’t a great deal, but they kept piling the money into it. Now they’re losing money in bonds and going, “Okay, we don’t want to do that anymore.” So money is starting to come back out and so you’re seeing this. So what we need to watch is are the earnings going to start getting weaker. Our people are going to literally stop buying stocks. Right now the supply-demand picture is still pretty good. Remember a bull market going to a bear market is not an overnight event. It is a process.

So as I’ve said before, you look back at the peak recently and you say, “What if we make a new high and everything is great?” Fine, but what if we marginally make a new high or what if we just go to the old high and peak and the advanced decline lines are weaker and the breath isn’t as good? All these things, now you got a picture. When you stand back from market, you get a picture of this rolling-over effect where the moving averages are going sideways not up. That’s a concern. That’s something we have to watch, but you can’t determine that now. So you have to monitor these things and that’s what we are doing obviously.

Now as I said, what would you do if we got into one of these markets that just moves sideways, sideways, sideways? We’re not making any traction. Of course, you don’t really know that until you look backwards. How do you prepare for that? Well, many of you listening are in that phase of life where you’ve accumulated wealth and you say, “Okay, now I’m not in principal protection mode necessarily, but yes a lot of my money I don’t want to see it go backwards over time. I can have some volatility, but I don’t need the huge gains anymore.” Well, this is where income comes in. We’re going to talk more about that next week because I promised about constructing a portfolio. My point is that when you move sideways for a number of years and the stock market doesn’t just go down and up and down and up. It goes sideways. You have to have things in portfolio that pay you income.

It’s really not a matter of how old you are. It’s a matter of what’s the best way to make money. Is it by buying assets and they’re appreciating? Could be real estate, could be stocks, could be precious metals, could be cryptocurrencies. I don’t know, whatever. Or is it income where you’re getting literally a paycheck each month from something where that something is not that volatile but you get a paycheck every month? That’s how you get through sideways in weaker markets is by having some of that. How much you have is another question, which again we’ll try to talk about next week.

So I really think this is a time to start, again, the time to look at your portfolio and determine whether or not you have too many stocks is not when it’s falling 10%. It’s now. It’s today. Look at your portfolio and say, “What am I trying to accomplish? Am I trying to keep up with the Jones’ next door who have pensions and they’re going to inherit money?” So yes, they can afford to have a lot of stocks. They can afford to watch them go down 20 or 30%. What if you’re just getting Social Security to count on down the road? You have to just live off of mostly what you’ve saved. That is a different animal. That means yes, you have to have some stuff in there that produces income. It’s been hard the last few years to get income. We’ve managed to do it through various ways. We’ve talked about those various ways on previous podcast, many times how to get income. You can’t just roll the market all the time, and so but it is.

To get back to this point about where are we in the cycle, yes, look. We have a mature stock market. We have a mature economy. What that means is we are later on in the cycle. I mean, if you think the recovery started in 09, we’re in 2018 already. They’re starting to raise rates and everybody is acknowledging. Yes, the economy is good even the people that said the data was fake, governments fake numbers. I’m sure they’re not accurate, but we know the trend is going the right way. Things are better. I mean, look around. Things are better economically.

The question is … These things don’t go up forever. I mean, the economies go through cycles. That’s what they say economic cycles. They go through cycles. The question is where are we in that cycle and we know we’re not at the beginning. Now that doesn’t mean we’re in the ninth inning. One pretty cool stat is when you look at things like manufacturing PMI, which really tells you the hell of a manufacturing. That’s something the just peaked recently or I shouldn’t say but got to a new record. When it got to that new record typically, you see recessions many years away. So that’s a good thing.

Now it doesn’t mean we just roll that one thing. The point is that there’s no imminent signs of recession. What we’re talking about is if the economy’s growth rate stalls out instead of growing at 1% and then two and then three and it’s kind of accelerating. It’s like your car going from 20 miles an hour and then 40 then 60. People in the passenger seat know at some point you’re going to reach a plateau of speed, say it’s 55 miles per hour at some point. When that happens, you’re coasting. Well, the adrenalin rushes kind of over especially for those of you who like fast cars. You go from zero to 60, that was the fun part. Sitting there at 60 and just cruise long is not the fun part of the journey. That’s how an economic recovery is the fun part when things are recovering. That’s when things are moving up the fastest. If we’re just kind of humming along, then it could be okay. Remember the Fed is out there trying to raise rates and not a lot of people trust. They’re going to know exactly how to do it and the timing of it. So that’s what’s got the market kind of man this isn’t as fun as it used to be. We like the zero interest rate policy. We like an economic recovery.

Where are we now? Are we at the eight inning’s deal? Listen, the stock market always tries to sniff that stuff out. So going through this correction is obviously part of it, but a bear market would signal that something else is drastically wrong. If we coast at 60 miles an hour to use my analogy, I think we’re still okay. We don’t want to see is a thing going to 50 miles an hour and then 40. If we do that, what does the passenger say? The passenger is going, “We must be coming to a stop.” If you’re on a hill, what happens when you come to a stop and you let you go the break? You start going backwards, AKA, a recession.

So these are the things the market is worried about and then, so it’s all about growth. Listen, it’s also about what are other countries around the world doing in terms of their interest rates. Are they starting to tighten? Are they taking away the stimulus that everybody is addicted to? Because look, we have and we’ll throw ourselves and you listening into that camp. We’ve been used to low interest rates for a decade. You want to borrow money? Go borrow money. That’s what we’ve been used to. We don’t have to really worry about interest rates. The interest doesn’t cost that much. Now all of a sudden, interest rates are going up and it’s making people go, “Man, if I was going to borrow money, I should do it now,” because it could cost more in the future. Those are the things that’s got the market a little shaky the last few months.

Look, we know that 2017 was not normal from a volatility standpoint. It was very smooth, not normal. What we’re going through in the last few weeks is a little more normal not that it would last that way all the time, but we’ve already had twice as many 1% up and down days in 2018. Now we had all of 2017 and we’re only a couple of months into this year. So again, it does create opportunities but it’s harder. It’s not as easy. I think this is really why I want to spend next week talking about portfolio management because it is vitally important that you understand what’s in your portfolio and why it’s doing the things it’s doing. Again, if you think the stock market is expensive, that doesn’t mean that you necessarily go and sell all your stocks. What it means is you say, “Okay, maybe this is the time that I haven’t bought a lot of individual stocks, but maybe I start to drill down into the individual stock area because I know if a market is expensive that doesn’t mean every stock is expensive.”

So that would be my goal for you is, again, really start focusing on what’s in your portfolio, how much of your stuff is really in interest rates sensitive types of investments. Look, if you want to know, go look at the last couple of months what’s been hit the hardest from an income standpoint. You can see it. It’s been utility stocks. It’s been real estate investment trusts, public ones. Those are things that are very sensitive to interest rates. Not only that, I mean, take a look at the other things like, I don’t know, McDonald’s or Procter & Gamble. Those Procter & Gamble, those are companies that have been overpriced for some time. So are we seeing an unwinding of what I would call the income trade? It’s the search for yield, yield meaning income.

So instead of getting interest at the bank for money markets and CDs, people have been saying, “Okay, I’m going to step out on the risk scale just a tad and I’m going to buy safe, good, old American utility stocks. I’m going to buy risk. Who can go wrong with real estate? I’m going to buy good, old Procter & Gamble and McDonald’s and Coca-Cola and all these things.” They’re not buying growth. They’re buying kind of this I know I’m going to get that paycheck in the mailbox, which they will, but they’re paying a big premium to get that. So if you go back and look at valuations, which most people don’t do, but if you look at what you’re paying for your earnings and your balance sheets, you’ll see that something has changed in the last two or thee years. It’s been that those companies are very expensive now. So the Fed has almost forced people into doing that and that could be unwinding now. So this could continue where those interest-sensitive things get hit, hit, hit.

So what we could see too is some of you think that we’re going to have this big crash at some point again. I’ve just talked about why I don’t think that’s necessary the case. I do think we could see a rolling crash; I’ve mentioned that before for example 2014, ’15. What crashed? Oil. It crashed. It literally crashed. Retail stocks, not doing so hot. Commodities, not doing so hot. So what if we fast forward and technology is the thing that let’s say for example, which has been great, isn’t working. We saw biotech get hit, too. So what if the next time, what if commodities continue to do well but tech stocks don’t? So you see it’s kind of a rolling maybe sector by sector, area by area, asset class by asset class. You start to get something that’s weak, something that’s strong. You just see this changing and instead of the whole market falling apart, certain areas fall apart. I think that’s really important to watch.

So what we’ve seen, what 2018 has shown us so far and really it started pretty much in 2018, but what it shown us is that yes, there’s a lot of things that are down this year. The things that have been hit the hardest are very interest rate-sensitive areas. So your bonds, utility stocks, your Ritz, your preferred stocks, all those types of things are going to get hit hard. So just because you’re trying to get income and you want to be safe, the safest thing you think are safe maybe the riskiest things.

You mentioned the word commodities to people. What happens is like, “Woo, I don’t know about that. That sounds risky.” Well, maybe [dirty 00:26:40] beaten down a lot. What if commodities are the safest thing? What if they’re safe within the US Treasury? We thought about that and that could be the case. So just continue to study the markets is the point as we move forward because the market may be changing character. That run we had, which was not uninterrupted, but we had pretty much a run from I would say 2013, ’14, ’16, that timeframe the last few years where we basically said forget it worked very well. We may be entered in a different time here. It doesn’t mean that market falls apart. It’s just you have to know what you own a little bit.

The people that are hurt the worst in 2018 so far are the ones that have a cap-weighted index like the Dow or S&P and a very traditional bond portfolio. Well, unfortunately, that’s a lot of 401(k)s, isn’t it? If you look at your 401(k), can you own commodities? Can you own specific types of international stocks? Because those have been places that you may be able to hide out over time, the more traditional it’s been this year, the worst it’s been, which wasn’t the case last year, last year that works fabulous, so.

All right, guys. Hey, don’t forget; E-G-G-E-R-S-S Capital dot com. Our telephone number is 210-526-0057. We always appreciate feedback, your questions. Don’t forget we’re on iTunes, Stitcher Radio. We are on iHeart Radio. We are on Spotify, lots of places to get the podcast sent to you. Then, of course, we’re on Facebook, Instagram, Twitter. So we put a lot of information each week kind of just putting out our thoughts of what’s going on, what’s moving, what’s relevant, what we think is relevant. A lot of you really like that type of information, but others of you just listen to the podcast or read it as it where and that’s fine as well.

All right, have a wonderful weekend and we will see you right back here next week on the Eggerss Report, Your Investing Playbook.

Speaker 2:                          This show is for entertainment only and the 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 adviser.

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