Tariff Tantrum

On this week’s show, Karl discusses the last time investors threw a tantrum over a big headline.  Also, what areas look good now that we’ve had a “correction”?


Karl Eggersss:     Hey everybody welcome to the podcast, my name is Karl Eggersss and this is the Eggerss Report it’s your investing playbook. 2105260057‘s our telephone number if you ever need anything we are here to help. If you need some clarification on something, if you need some really education on something and regarding the financial markets obviously we help people doing their financial planning. We help with education funding, we help with social security analysis, all of those things in addition to actively managing portfolios as well so if you ever need any help 2105260057 and we are also have a website. Eggersscapital.com. You can go on there and there’s a green button that says get a free advisory consultation. If you click on that we’d be glad to help you out, There’s a blog on there, there’s all kinds of things on there, all of our podcasts are on there a little bit about what we do.

So all of that information on Eggersscapital.com. And by the way we are on Twitter Facebook Instagram, lots of ways to get our information in different formats if you’re more technical, we have something for you, if you like to read we have something for you, we even transcribe the podcasts so if you would like to read those you can certainly do that.

All right we had a pretty crazy week. Last few weeks have been crazy, especially relative to what we had been going through. We had this very unusual market, kind of similar to 2013 this market that we had. Where it just went up and not a lot of volatility. Very unusual because the stock market typically does have some volatility. That’s just the nature of the beast. That’s why over the long term you do get better returns generally when you invest in stocks is because you take on more risk but over the long term it pays off.

But we’ve certainly seen volatility pick up so 2017 we didn’t have any volatility, 2013 we didn’t have any volatility and sandwiched in between we’ve had bouts of volatility really going back I think 2014, was probably the first time we saw some in the last few years. 2014 remember we came off 2013 very smooth, everything was great, we had a little bit of an interest rate scare in the middle of the year and then 2014 comes, remember what it was? It was the taper tantrum, the feds said we’re going to stop doing quantitative easing.

That was Ben Bernanke saying that. And they said we’re going to do it and they actually stopped in 2014 and the market went through a sell off. And then they said but we’re going to keep with our zero interest rate policy, so short term interest rates the fed funds rate’s going to be still zero. Then they started hinting that may actually raise it and in December of 15 it was the first time they had hiked interest rates in nine years so they hike them, the stock market actually went up immediately like the next couple of days but remember January of 2016, we start off with the worst start to a year ever for the stock market.

The first six weeks or so was down I think 12% so a pretty nasty sell off and then lo and behold we went on that nice run and came in to really still some apprehension and it was surrounding the presidential election. So we come into the summer and fall of 2016 and there’s apprehension, Donald Trump wins, the stock market that night, the futures go down 800 points only to rebound the next day, I think they were down 100 the next day. As you can tell my memory is best when it has to do with the stock market.

I know each year in my world is defined by what the market did and what things happened so I can recall these things off the top of my head just because that’s the way my mind works. So we came, the election came, market took off, we had this Trump bump, 2017 comes along. And everything it seemed to shake off crazy headlines. We had headlines about North Korea, headlines about these nuclear bombs and just crazy stuff like that and yet the stock market just ignored it and it was very strange to be honest. But something changed and by the way this continued into January of this year.

We had a really good January but right at the end of January what happened? A good jobs report again. And the fed hints around that they may raise interest rates four times. In 2018. Investors go, whoa we’ve been begging for a good economy instead of this lethargic economy we’ve been getting the last several years and now we’re getting and guess what, good news is now bad news. Good news economy’s getting better, bad news is the fed’s going to ruin the party because they’re going to raise rates and slow it down.

They don’t want inflation too much inflation and so they’re going to slow it down. Now they would say they’re just normalizing which they are, interest rates are still probably too low. But we’ve been in a world of low interest rates for 10 years. And through that time, longer than that, and through that time people have habits that they create and the habit is anytime I want to borrow money I can go do so and I know that the interest rates are pretty low so it makes sense to go borrow money to do something because pretty much whatever I do with that money I borrow is going to be pretty productive relative to the interest I’m paying on that loan.

That’s the idea. So buildings get built. Cars get bought. It’s old fashioned stimulus. Well now that the fed says we’re changing that. And not only are we changing that, there’s threats around the world that other central banks may be taking away the punch bowl and the stock market doesn’t like that. Better said, investors who control stocks don’t like that. And so we started to see a sell off, nothing major, and then we know about the volatility products, the VIX products, investments that cause the market to go caddywhompus, it created an extremely oversold condition in a fast amount of time. We went from record highs to over a 10% correction in nine days.

Very very fast. And it created a buying opportunity. We went in and we’re buying it, market pops and not only does it pop, it almost, the NASDAQ did get back all of its losses. But we’ll call it about two thirds to three quarters for most of the indices. We come into this week, everything’s going okay, it looks like the recovery is okay, worst is behind us. What happens?

We get the testimony from Powell, the new fed chair and he’s been talking tough. I’m not going to let market volatility sway my decision, we’re going to raise rates if the economy justifies it. And we’re going to fight inflation. The interesting thing is that caused a little sell off but his second day of testimony he actually sounded a little more dovish, a little more not as, we’ll play it by ear, inflation’s not … Wages aren’t growing as fast as we would like so people read between the lines and said maybe he’s not going to raise them four times, maybe two or three.

And the stock market actually went from down to up. It was up 165 points. On Wednesday I believe it was. Then what happened? Remember we had the taper tantrum back in 2014 now we have the tariff tantrum. President Trump who had been hinting around at this and actually ran on that we’re not going to let other countries take advantage of us, comes out almost unscripted, unannounced, or unplanned I should say. A lot of people in his cabinet apparently didn’t know, I don’t know if that’s true or not. Comes out and says hey yeah, we’re going to slap tariffs on aluminum and steel and 25% for steel coming in to our country and we’re going to slap those on because we are getting taken advantage of.

He ran on that. He ran on the fact that the US isn’t going to be pushed around anymore when it comes to trade. We’re going to win big. That’s what he said. And he’s doing that. And I think the motive behind it is correct. We need to get the best deal. Remember this is something that the previous president always seemed to, the other country always seemed to get the best deal. Not a great negotiator. Trump is a great negotiator.

And in fact that’s what’s different about this tariff deal. Instead of tossing it out there and saying if something doesn’t change we’re going to put the tariffs on, he skipped that and said we’re going to put the tariffs on. This isn’t a president who says it and then doesn’t do it. He’s going to do it. I can’t imagine him backtracking him a little bit. Now again the devil’s in the detail on how it’s done but it’s interesting as we’re listening to this because the stock market immediately sells off, you go back and history and look and people are pointing to the tariffs in 02, and saying see, when George Bush implemented them or put the tariffs on the stock market went down.

Keep in mind we’re in the middle of the dot com bubble collapsing, we’re also in the middle of a year after 911 so coincident indicator. You can’t just say the market was going down because of tariffs but this tax is again we need to get a good deal. I don’t know if the execution’s been correct. What we’re seeing now is already other countries, Canada saying, “Oh yeah? We’ll put tariffs on you.” And Trump doubling down and saying, “Trade wars are good and they’re easy and we’ll win this thing.”

That’s not what the stock market wanted to hear, so down we went. Two or three days in a row. And it’s mostly, I don’t want to say it’s isolated but it’s lot in these big mega cap international companies. The baby getting thrown out with the bath water has created some opportunities but it was as if everybody said forget about the interest rates, that’s what we were worried about interest rates going up. We were worried about that, that’s what caused a sell off a couple weeks ago. Now what we’re worried about is this tariff situation because do we want a trade war?

TaxesBecause is it going to take away the tax cut? Remember the tax cut is going to add to GDP. Would the tariffs take away from GDP? There’s been some estimates that it could take away .2 to .3% off of our GDP each year. So there’s already debate. You listen to Wilbur Ross who’s sharp gentleman come out and say listen, you’re talking pennies on a soda can, you’re talking $200 on a car, this is not going to disrupt anything. But the other side of that is yes, tariffs are going to trickle down because the companies are going to pay it at the border and then guess what they’re going to do. They’re going to make it more expensive to buy their goods it’s going to be inflationary.

So that’s a concern, it’s a legitimate concern because right now it’s kind of anti-capitalism to do this. You’re saying we’re going to change this and then the other country says we’re going to do this and the flow of capital slows down. And Wilbur Ross is saying, and Donald Trump. They’re saying, “Look we have been getting the status quo is that the US is the cheapest place and we get ripped off.” And that’s just the way it is. So the fact that we’re just getting it back on par is not a fun process but we are going to do this because we’re not going to keep getting pushed around.

Again that narrative is correct but the execution may not be. Some people want targeted tariffs. Again could he have thrown this out there? He had been throwing it out there but could he have gotten a little more stern with it and said if y’all don’t do something we’re going to do this. But instead he said we’re going to do this. And it’s not like him to say, “Yeah never mind.”

He does change his opinion quite a bit. We’ve seen him just with gun control, taking guns away, and then back off, and the NRA saying you don’t want to say that. Who knows how this will go but the stock market clearly did not like that because we’ve been going up previous to February, we’ve been going up on the fact that we were seeing less regulation, less taxes. Those are all very good things that we were seeing. This is throwing a rock in this pond.

So the recovery that we were seeing from the lows of a couple weeks ago were interrupted this week and the result was some things getting hit pretty hard. The Mexican stock market down 3%, the US stock market down about 3%, the [transports 00:14:47] down about 2%, this is all just this week and keep in mind this was after we had a couple of updates. Copper down 3%, the home builders got beat up the most, the home builders were down oh 5%, oil and gas companies down about 5%. Material stocks down about 4%. So those were the weakest of the bunch.

The things that did okay this week, one of the things we actually own, we like the agricultural area, the grains. We like specifically, we like commodities in general, and commodities did well. You had gold holding in there. Some of those areas, there were places to make money and that’s what was interesting, the last couple of days, both Thursday and Friday it was not a every stock was going down. In fact Thursday even though the DOW was down 46 points on Thursday, it was a very mild sell off. In fact almost 100 of the points on the DOW Jones were attributable to one company which was Boeing.

So it was interesting to watch that because it was really focused in these big multinational companies. And it should, those are the ones that use a lot of steel, etc. Those were the ones that got beat up but it took a lot of things down, just more severely … There was places to hide out is the point. There was some green on our screen most of this week. That was good, there was places to go, individual stocks that were going up. So it was interesting week and I think really this could be how this year goes where the more plain vanilla things you own, you do poorly.

That’s really a reversal of the last four or five years. The last four or five years has been all about plain jane investing. Buy the index and set it and forget it. That’s not what 2018 has been. 2018’s been very interesting to watch whether you own volatility or whether you own individual stocks or whether you own gold. Shoot even Bitcoin. There’s different things moving and dependent on how you’re positioned you could benefit or not from that.

And there’s trading in there which we haven’t done a lot of trading other than the fact of obviously using some of our … We lightened up in January, actually I take that back. We were lightening up in December coming into January. Not much just a little bit and we talked about that. As that sell off started to happen we started to put that money back to work and we still have some cash and some of our models. But if we continue to get this over sold which we went from over sold to over bought back to over sold within a matter of a few weeks. If that condition happens we may pick up our trading a little bit.

So you have to look at the environment you’re in and it’s easy to get whip sawed which is why you have to be careful but this is an environment that really you get rewarded for trading if you do it properly. So those were some of the winners and losers but really Monday the market was up 400 and then Tuesday we get the Powell testimony and interest rates are going up. We saw two year treasury yield hit 2.275% the highest we’d seen in 10 years. So even your money markets and CDs are starting to pay something now. So we saw the market down Tuesday and then Wednesday and then of course the tariff thing on Thursday. And then Friday we opened down, we were down 500 points on Friday only to see that reverse. The DOW was really the only major index not up on the day on Friday. The DOW finished down about 70 points, but the NASDAQ was up over 1% on Friday.

So really interesting to watch what’s going on. They’re definitely getting some movement. And there’s some areas. The areas that we like just in big picture and keep in mind that we have strategies that take advantage of some of these areas and we have some strategies that don’t because they are not as tactical. We manage money for different people for different reasons, so it’s very difficult for me to talk in more general terms because if I say I like this sector, I don’t want people to think why wouldn’t we own that? Well because maybe that sector is something that’s too volatile for a particular strategy we’re doing.

So I’m talking in generalities but here we go. We like international still. We like commodities in general, specifically agricultural commodities, but commodities in general. I’m kind of neutral on oil right now. But we own some energy. We also really like the airlines, I think the airlines as they group, a lot of them are cheap. They’re just cheap stocks right now. So they’re just good old look at the balance sheets, income statements, in fact Warren Buffett, he used to not own airlines as far as I can remember and didn’t really like them. I think he owns four, recently he said he wouldn’t mind adding a fifth.

So a classic value investor sees the same thing as we see which is airlines are cheap. So we like the airlines. Of course if you buy a basket or individual, depends on your situation, we like those areas. There are some biotech companies we like. I think this type of market that is still probably a little overpriced, it’s interesting to watch that this is where individual stocks come into play. The more specific you get the more you can fine tune, be more surgical with your purchases. It’s one thing to go buy the S and P 500, it’s another thing to go buy a specific stock. You get opportunities. We got companies making headlines this week, all types of companies making headlines about guns or whatever they’re going to do. Some of them pretty funny. The types of comments they make and you go, how much of that is your business? Is it a political comment? What’s the deal here?

So really interesting to see that but those are where the opportunities are, but there are some baskets that are still good as I mentioned earlier. Those are some of the areas that we like. See if I missed anything here. We still are avoiding public rates, we still like private rates. Master limited partnerships, great place for income. We still like that area which of course is tied to energy but we still like that area as well. By the way, this stuff about tariffs may or may not happen. How’s it going to affect companies? Everybody thinks they know, they don’t really know.

There’s a lot up in the air but obviously the market’s discounting that right now. Let me give you a few facts here of just where we are from an economic standpoint. There are some negatives going on with the economy too but some things that we’re seeing right now, leading economic indicators all-time high, remember those are the blender of economic indicators put into one index and it usually tells you where the market at least the economy’s going in the next few months.

The companies that have reported profits they always have these analysts come out and say we think the estimates are going to be this for this particular company. Those companies have beat the analysts estimates by the most since 2006. We’ve had the best beat rate since 2006. Revenue, corporate revenues the best beat rate since 2004 so big big numbers here. Which again, earnings, revenue, that’s the thing that moves stocks. It’s not tariffs, it’s what’s going to happen with the companies.

Initial jobless claims those people filing for employment benefit for the first time, lowest since 1969. Even if you’re bearish you gotta look at that and go, oh man, maybe things aren’t as bad as I think. Consumer sentiment, second best level since 2004. Wages are now growing at the fastest pace in nine years. There’s a lot of debate around that, they’re growing faster and it’s improving but they’re still low. That’s why there’s a lot of debate what the fed might or might not do.

Rising interest rates, that is starting to affect, we’re starting to see existing home sale numbers and some of these numbers in the home area slow down, we’re starting to see car sales look like they may be plateauing a bit. So it’s not all rainbows and ponies and lollipops, there’s still some negative things going on but overall on balance still looks very good and also we don’t typically see a stock market just out of nowhere become a bear market. So what would be more likely as I’ve said is that we would go up either test the high, even go above the old high from January. And maybe we fast forward six or nine months from now, we haven’t really made any progress but we haven’t fallen either. Now you start to get a picture when you zoom out of something that it looks like it might be rolling over. It was going up but this trajectory and then it flattens out and rolls over.

Maybe that’s what starts to happen but you don’t typically go from a new high to a correction that just turns into a bear market. It’s just not that way. So that’s encouraging if you’re still bullish. Obviously there’s going to be some volatility still here for awhile. But overall things still look okay but certainly news can cause volatility especially when you haven’t had volatility. When you haven’t had it, a little bit of volatility feels like a lot. We know that.

Also want to give you some … I may have given you some of this information in the past, I can’t recall. There’s a pretty cool chart, this comes from Our World Data. Actually OurWorldInData.org you can check it out. And they’ve got some pretty neat things over the last 100 years. I’m sorry the last 200 years, they have some neat things like poverty stats, literacy stats, basic education, vaccination, child mortality, democracy. In 1820, actually all the way up until about 1940 whooping cough, tetanus, diphtheria there was no vaccinations for those things up until looks like maybe about 1950 or so.

Now 86% of the people are vaccinated against those. Child mortality 43% of kids die before they were five years old back in the 1800s and as we entered the 1900s it’s now down to 4%. Democracy, back in the 1820s there was no such thing as democracy. At least people living in democracy I should say, we had democracy but not living in democracy. Now you got about 56% of people living in democracy. About 44% of people not. Back in the 1800s 94% of people lived in extreme poverty. And now only 10%.

Basic education, back in the 1800s, early 1800s 83% had not attained any education really at all. Now it’s the opposite. Only about 14% have not done that. 86% have some basic education or more. Literacy, this is a big one too, 12% back in 1820 12% of people were able to read. Think about that, it’s pretty amazing. Now it’s 85%. These numbers if you look at them they’re continuing to rise more favorable.

There’s a lot of complaining going on nowadays, it’s not how it used to be back in my day and this, that. And there’s a lot of truth to that. It’s harder to raise a child nowadays, it’s harder to be a kid nowadays than it was back when I was a kid, back when you were a kid. Those things are true, there’s a lot more pressure, there’s a lot more information coming up people fast, it’s keeping up with the Jones. There’s all this stuff and you want to do and you want to simplify.

But there’s a lot of good things going on and that gets overlooked a lot because everyone’s got an agenda and bad news and breaking news sells and that’s what you see on TV. I joke around all the time that most of these networks now have breaking news underneath all the time. 24/7 it says breaking news even though it’s not breaking because they know your eyeballs are going to say I need to turn it up, what’s going on.

Good news doesn’t really sell unfortunately. So that’s a little bit of positive stuff to leave you with on this weekend. At least in south Tex we finally got some sunshine in the last few days but the weather’s probably a little iffy the next few days. Anyways guys, thanks for joining me, don’t forget Eggersscapital.com 2105260057, make sure you share the podcast with friends coworkers parents children, whatever it might be, enemies I don’t care, that’s fine.

We want to obviously broaden the audience, we like the two way communication, a lot of you send us questions and really good dialogue, so thanks for that. If you need any help obviously you can call us to get help on your personal situation.

All right that’s going to wrap it up. Have a great weekend everybody and we’ll see you right back here next week on the Eggerss Report, your investing playbook. Take care.

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 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 Eggersss may hold securities mentioned in this 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.

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