On this week’s show, Karl discusses the volatility this week in the stock market primarily caused by the U.S. and China tariff rhetoric. Are these just negotiating tactics or have we entered an actual trade war?
Karl Eggerss: Hey everybody, welcome to the Eggerss Report, it’s your investing playbook. Thank you for joining me, my name’s Karl Eggerss. This is the Eggerss Report. You can get more information about us, what we do, and all the articles and information on us at eggersscapital.com. Our telephone number, 210-526-0057. 210-526-0057. We are also in Twitter, @KarlEggerss is my handle. We’re on Instagram, we’re on Facebook, and if you want to listen to the podcast, we’re in iTunes, Stitcher Radio, Spotify. Lots of ways to get our information.
Maybe you are new to the show, maybe you’re new to what we do. We do this podcast each and every week to give you an update on what’s going on in the markets. When things are slow, we may spend time talking more about financial planning, estate planning, college savings, all those different things, retirement planning. But when the markets are a little hectic, people are tuning in because they want to know what they should do, what they shouldn’t do, how long is this going to last? We don’t have a crystal ball here obviously, but we do have history on our side, and we study a lot of history. We study a lot of similar situations in years past, we study supply and demand. We look for negative and positive divergences, meaning things that are maybe underneath the surface than the market appears, or things that are worse than the market appears, and then we report that to you.
We’re going to get into what was driving markets this week, because we continue to get a volatile stock market, as you all know. No big shock there. But we do want to talk about the things that moved the most this week, and through all the volatility we had this week, really the Dow Jones finished down about 0.7%. Not 7%, 0.7%. Keep that in mind as you’re going through this, volatility is a two way street. There’s good days and there’s bad days. We’re going to talk about those. But for the week, some of the strongest areas, home construction, up almost 2%. The grains, agricultural commodities, up about a percent and a half. Oil and gas equipment services, up almost 1%. Gold miners, gold did well, all up about a half percent. Retail did well, copper did well. So you can see it’s a mixed bag of things that did well. It wasn’t just one particular type of investment.
On the flip side, what’s getting hit the hardest? Interesting right now, biotech getting hit the hardest, breaching its 200 day moving average. Biotech’s been in this long term uptrend really since January, February of 16, over two years. It may be breaking. Let’s watch that trend. Semiconductors down 4.5%, oil down about 4%, pharmaceuticals down 3%, railroads down 3%. You get a flavor for what happened this week, which was overall it was a mixed bag, but there was a lot of stuff down, a lot of stuff up.
Of course Friday, we had a really bad day. It was real interesting this week because again, we’ve got a lot of tariff talk, don’t we? What’s happening is with that tariff talk, the markets are moving. In fact, what’s interesting is we’re sitting here, and remember, a lot of this volatility started during the time where we had a good jobs report. It was in late January, early February, we had a good jobs report, we had wage growth starting to pick up, and you heard many people start to fear that the Federal Reserve would have to raise rates more aggressively than first anticipated. That’s one of the stock market’s biggest fears, or investors, stock market doesn’t have fear, it’s not a person. Investors’ biggest fears is that, “This easy money, low rate situation we’ve been in for 10 years is over,” and it does look like it’s over.
It doesn’t necessarily mean they’re going to aggressively tighten but it does mean that they’re not going to loosen anymore. A lot of countries are starting to tighten because the economy’s been better. That’s the biggest fear, that’s what started this whole selloff a couple months ago. What’s interesting about it is that seems to be in the rearview mirror, because we’ve seen now that there’s been some data come out in the last few weeks that suggests maybe the economy has not been … it has peaked from an acceleration standpoint. Not the end of the world, it just means it’s not maybe going to continue to grow as fast. Been seeing some signs of that.
What’s interesting is we got the jobs report on Friday, and it was weaker than expected. I don’t get caught up into these jobs reports too often from month to month, because they get revised, you need to look at a trend, all of that. But isn’t it interesting that a weaker jobs report … if a strong jobs report caused it to go down, wouldn’t a weaker jobs report cause it to go back up? That’s not what happened. Remember, it looked like 10-year treasury rates were going to go above 3%, that was a foregone conclusion. They’re not, they’re at 2.77%. Interest rates have stabilized, the economy is doing well, but maybe it’s just decelerating, or the acceleration has stopped for now.
That fear of an aggressive Fed, should it be off the table? We heard Jerome Powell, the new Fed president, come out on Friday and say, “We’ve got concerns of this, concerns of that.” He still seems like he wants to raise rates, but we know this Fed. The Fed’s going to look, and if the stock market’s going down and if the economy’s starting to peter out, the Fed won’t raise rates. To me, that’s not what is really moving markets today. It’s this tariffs, right?
The first thing we had was when the tariffs were first announced and the market went down. Then we had the recovery in February because certain countries were going to get exempted from this, and there was going to be some talk and negotiations. Then there was talk that now we’re going to go specifically after China, and that started another selloff, $50, $60 billion. And then, you started to hear, “That’s just negotiating. It’s fine.” And then China came back with a smaller amount of tariffs in retaliation. But then on Thursday night, after the market closed, we got a tweet. It wasn’t a tweet actually, I take that back. We’ve had several tweets, it wasn’t a tweet. It was just news broke that Trump would consider, underscore, underline, bold, italicize, whatever, the word consider, $100 billion of additional tariffs on China.
And so, the market was down 400 points overnight. You come in Friday, it’s down a couple hundred. It’s hanging around 150. Not that big a deal. And then we hear from Steve Mnuchin, who says, “It could be a trade war.” What? I thought this was negotiating. It could be a trade war. He said, “I don’t think it will but it could be. It could be the beginnings of one. We don’t have one now, but it could turn into one.” Here’s what’s interesting about that, and I didn’t hear a lot of people talk about this. This is just my opinion. If you’re going in to negotiate with somebody, do you tell them, “This is my first offer, we’re just negotiating, right?” No, because that lets them know that you have room to move on your price.
I was in a passenger seat one time, in a car, and we were about to turn in, and I looked in the rearview mirror, and it could see that somebody was going to slam into us. I tensed up and I felt it, and they slammed into the back of us. About a week later, the insurance company of the driver that hit us came to our office, it was a coworker, and said, “We’re going to give you guys a check for any injuries, any whatever.” I can’t remember the amount but I want to say it was $1,000. What was interesting was she said, “This is my initial offer, is $1,000.” What do you think I thought in my head? “There’s room to move? There’s room to negotiate here? How about $1,500?”
Had she said, “Here’s $1,000. We’re going to close this deal,” maybe I would have taken the check and walked away. The fact that she told me she was going to negotiate let me know that there was room to move on the price. Isn’t it interesting that Steve Mnuchin comes in and says, “We could be starting a trade war.” What tells me is that he’s sending a message that we will fight this to the death. Yes, we may be negotiating, but we’re not telling you we’re negotiating. We’re telling you that we’ll start a trade war if you want a trade war. He may still be negotiating, right? It’s kind of like in the car dealership. If you really want that car, and you want a better deal on it, what do you do? You start standing up and walking out the door, and then of course, “Whoa, whoa, whoa. Let me talk to my manager. Maybe we can get you a better deal.”
That’s to me what that message was, that, “Yeah, we could be starting a trade war.” Very bold. That sounds great in negotiating. Unfortunately investors hear that and go, “Oh my gosh. A trade war? This is not good because we thought this was just a little back and forth. Now it’s escalating.” China responded by saying, and this was the key I thought, they said, “We’re not negotiating right now. We’re not having talks behind the scenes.” Remember, that’s what we’ve been hearing out of the Trump administration, is we heard that from Wilbur Ross, I think we’re heard it from Larry Kudlow if I’m not mistaken, saying, “There’s talks going on behind the scenes that you guys don’t know about. Open dialog.” I don’t know if it’s true or not but the Chinese are saying, “Mm-mm (negative). It’s not happening, and we will retaliate.” Again, they’re doing what they should do for their citizens, we’re doing what we should do, and caught in the middle is the stock market going, “This uncertainty is not good.” When there’s uncertainty, we know that people sell stocks.
I do think this is one big negotiation. I think that there will be other countries, as soon as somebody acquiesces here, other countries may pile on and put tariffs against China. We’ll see about that. If that’s the case, again the market will make it through that. We’re going to get really good earnings coming up. Earning are going to be growing really fast, but they’re last quarter’s earnings. Revenue won’t be growing as fast, but it’s going to be all about what do these companies say going forward? I still think things are very good right now, despite the fact that maybe we’re starting to see the economy peak on its acceleration, but things are still very good. But there’s no question the rhetoric, the trade war potential, is elevated, and it’s a great reason to sell stocks, for some people.
Let’s talk about that. And by the way, I read a little stat, looked at my Bloomberg, did some calculations, and I basically looked at every trading day this year. There’s been 66 trading days, 66. 34, more than half of those days now have had a move of 0.75% or more. Not intra-day, closing. The market either closed higher 0.75% or lower 0.75%. Why did I pick 0.75%? I was just curious because Wednesday and Thursday of this week, we had the markets move 0.98, 0.95, so I thought, “Let’s just see 0.75.” That is a lot of volatility, but it’s also a lot of volatility especially relative to 2017. That’s the really interesting thing about it. We have a lot of volatility right now.
Here’s the good news interesting part about this. The markets are down a little for the year. Again, not much because we had a big run in January. We’re kind of moving sideways here, especially in the last couple of weeks. Around the 200 day moving average, which a lot of people look at and go, “If it breaks that, watch out below.” The stats would suggest that that’s not necessarily the case, but we have definitely been making lower highs since January peak. We made a lower high, the peak was on January 26. We made a second lower peak on the 27th of February. We made another one on March 12th, and maybe we made another one on Thursday of this week.
Here’s the thing that we need to watch. We need to look underneath the hood, and for those of you who have been listening to me for over 10 years, which there are a lot of you that have, you know that we don’t just look at the Dow Jones, the S&P, what we do is we look underneath the surface and say, “How many of these companies are going up? How many are going down? What’s the volume look like?” In other words, what’s the quality of a selloff, the quality of a rally? What does all of that look like? I can tell you that even though we’ve kind of maybe are testing the lows, we’re kind of near the February lows, there’s a lot better what you would say I guess internals now then there were back in February. That’s a positive.
Can we break below and it feels like the bottom’s falling off? Usually that’s how these end, and I will say that Wednesday of last week, the market had that big reversal, right? Remember it was down 500 pre-market, opened down, reversed, finished up 250 or so. Big reversal. That did feel like we’re done with this and we’re going to move higher. But every time it tries to get going, we have another round of tweets, of breaking news reports, whatever, about tariffs. It’s funny because the Fed, even though the Fed may have contributed to some of the selloff on Friday, to me it was definitely not squashing the trade war talk. It was almost enhancing it by minutia and saying, “We may be at the beginning of a trade war.” But again, that’s a great tactic in negotiation.
What’s moving and what’s not? We know that technology stocks and big blue chip stocks have been hurt the worst. That kind of makes sense because those are the international companies, those are the ones who do business in China mainly. Those are the companies that have been getting hit, but it’s kind of interesting. I just told you a minute ago, biotech leading the way down. Again, you’ve got this mixed bag of things. You don’t have a theme. For example on some down days you will see rates fall, and you’ll see things like utility stocks go up. We haven’t really seen that the last few days. We’ve had this indiscriminate selling, which we’ve talked about lately, which is where it’s just everything goes down. I think it has to do with the fact that there’s so much money in index funds and index ETFs. If somebody sells, and it could be not your neighbor but a hedge fund manager who just goes and sells SPY. To do that, all those heavy weighted stocks in there are going down, and so it pushes all of these other stocks down with it. You’re getting some indiscriminate selling.
The good news is if you buy individual companies, you are buying companies that are businesses, and those businesses may or may not be affected by tariffs, they may or may not be affected by China. And yet, because they’re a stock, they’re going down. That’s where the opportunity is. Yes, it’s longer term. Could you be trading this right now? You could, but you have a high, high risk of getting whipsawed. When you have half the trading days that are moving almost 1%, you have a high degree of whipsaw risk. Whipsaw is essentially when you see a trend develop and you go buy, and the trend actually has reversed right then and it’s going the other direction. You say, “Okay, now that trend’s going that way, I’m going to sell, maybe even go short,” and then as soon as you do it, it reverses, it goes the other way, instead of being on the right side of the trade, you’re on the complete wrong side of the trade.
Either A, you can choose to be out, B, you can choose to be in, C, you can try to trade it, maybe with the risk of getting whipsawed, D, diversify. I would suggest in this environment, D. I don’t think this is a market to necessarily be out. Again, I think we are still in a bull market. I don’t think this is a market you necessarily don’t want to diversify in. Again, if you’re diversifying through risk managed funds or income producing securities, or real estate whether commercial or residential, if you’re lending your money, if you’re buying stocks. All of these different things are ways to diversify. There is no silver bullet in investing. There is no silver bullet.
In order to achieve what you want to achieve, you have to reverse engineer it and say, “What am I trying to do?” If you’re trying to protect against inflation, generally you’re going to do that with growth assets, which are stocks, as a portion of your portfolio. To get that return to outpace inflation, you have to put up with some volatility. The volatility we’re seeing again is not abnormal. Remember, we are essentially flat to down a little bit on the year, but if you look at where the peak was, we’ve had about a 10% correction in stocks. As I’ve said for numerous years, a correction of 15% is average, so we’re still below average. If you own stocks you don’t want to get to the average, but this is still not a market where people should be drastically changing their asset allocation because there’s opportunities everywhere. That’s not the case but I do think there are still some very good deals out there in the stock market.
Again, we’re kind of in this negative feedback loop if you will. The market seems like it wants to maybe try to go higher, and then a negative news event will come and push it down. It doesn’t push it down, investors do, but it causes selling because of uncertainty. Uncertainty is really what’s driving this. Some of the things kind of holding their own, gold is holding its own right now in this environment. I think energy is holding its own in this environment as well. Energy has been doing well. There’s really not a whole bunch of things holding up well. Bitcoin, any cryptocurrency right now, getting hit really hard. Bitcoin’s down 75% from its high. You don’t hear as much talk about that as a diversifier. In fact some people believe that it is an indicator of where risk is. We had risk taking and now we don’t have risk taking. I don’t hear those types of conversations near as much as I used to, that’s for sure.
I think the main thing right now is these tariffs. That is what is really driving the stock market. It’s not so much just tariffs specifically, I think it has to do with the uncertainty. The worst possible scenario for investors in my opinion is an overly aggressive Federal Reserve at the same time the economy starts to slow. That’s what would be really bad for investors. If the Fed keeps raising rates, bonds get hit, and if the economy’s getting weaker and the Fed’s doing that, stocks get hit. That’s a bad scenario. We still have that as a possible negative to the market. The Federal Reserve hasn’t come out and said, “Guess what? We raised once this year, we’re done.” That would probably cause the market to skyrocket. They haven’t said that, they are still on the pattern of raising two more times if not three more times. Investors are starting to question whether or not the Federal Reserve isn’t watching what’s going on.
Many of you listening always believe that the Federal Reserve doesn’t know what’s going on, but I’m just saying they are reactionary. If the economy really starts to slow down, I don’t think they’re going to continue to raise rates as aggressively. That’s something that’s still in investor’s minds. And then you pile on the tariffs, which could undermine the growth that we saw. Remember, we saw this spark of growth. All these companies coming out, “You get a $1,000 bonus, you get a $1,000 bonus,” or, “We’re doing this, we’re doing that. We’re increasing our matching on our 401k.” All these companies were doing that because of the tax cuts, and yet the tariffs could undo that.
And then there’s another bugaboo, which is something maybe we don’t have to deal with, maybe it’s our kids, maybe it’s our grandkids, which is this deficit. Remember, the President in a strange press conference said, “I’m going to sign this, even though nobody’s read it, but I’m not going to do this ever again.” Something strange happens when people become politicians. It’s not their money and they just sign away. I think that is starting to worry people, that this deficit is not only out of control but getting more out of control.
What could save the day? Not just earnings, the stock market. This is really important for you to understand. The stock market has priced in everything you and I know as of right now. If you say, “Amazon’s a great company,” we know that. That’s why the stock’s where it is. Is it going to become a better company? Are there earnings going to grow faster than you and I expect? If we know that earnings are growing at 10%, everybody else knows it too, it’s priced in. But if it grows 12%, it’s that incremental change that allows the stock to go up even higher. That’s what we need to see, is are these companies going to say, “Not only is our revenue this much growth and our earnings this much growth, but next quarter we’re going to see it much higher than we had even anticipated.” That’s what would drive the stock market higher.
And, a dovish Fed, a Federal Reserve that says, “We’re going to keep watching and we’re going to take each meeting, meeting by meeting,” and we just get the tariff talk to go away. That’s what’s interesting, even if the tariffs start to happen, I think the rhetoric is causing a lot of this. Remember, what’s really fascinating to me is that when I talk to a lot of investors, clients, friends, I do not hear the type of fear, negativity that would normally be surrounded with a falling crazy market. The media’s hyping this up big time. You go on Twitter, you watch the news, it’s breaking news, it’s plummeting, it’s this, that.
Remember, I think, and I’ve been thinking about this a lot lately, I believe that our minds are not used to point moves like this. Remember, a 500 point move on the Dow Jones is 2%. In 2011, we were at 4% days, up or down, were commonplace in the summertime. Twice, that would be 1,000 point moves four days in a row. Yes, we’ve had over a 1,000 point move recently, but mainly what we’ve been getting is 200 and 300 point moves. We’ve been getting some 500, and those are bad days, I don’t want to diminish it, but plummeting? When a stock’s down 3% on the day it’s not plummeting. These words affect people’s emotions and they then affect their actions.
I think fortunately I’m not seeing people, at least people I talk to, act irrationally. I do think people are sour on the market. I think that’s actually a good thing longterm, but I don’t see people saying, “Get me out, put me in the money market.” I don’t see any of that. I think it’s because again if you have an advisor walking alongside of you saying, “Let’s look at the numbers. Let’s look at what’s really going on here. This particular chunk of stocks may be volatile right now, but don’t forget you have this, this, this, and this that don’t have anything to do with the market. They just provide income over and over every month.” That lets you focus on longterm. Don’t get caught up in the short term news cycle.
Remember, these algorithms that are running nowadays, they feed and feast on the headlines. They’re programmed to say, “If you see the word tariff, sell,” and the computer sells. It doesn’t matter what, you could say, “No tariffs.” Just be cognizant of that, that that’s what’s going on, is that a lot of this is programmed trading. It’s your job to see if you need to take advantage of it or not. Remember, corrections can happen and corrections can turn into bear markets, but usually what happens is there’s a building up process of months and months and months, and we simply have not seen that yet.
Again, if you’re owning 100% stocks, the reason that you do is hopefully because you either have an advisor that says you can certainly afford to do this and you need to do this. If you just own a bunch of stocks and your whole portfolio, your whole net worth is in stocks, and it’s not appropriate for you, and nobody’s guiding you, then yes, you’re going to act irrationally, and move money around, and sell and buy when you shouldn’t be. But that is why we believe the value of an advisor is not picking the next Amazon, although that would be nice, the value of an advisor is keeping people in the game when they could be, keeping a proper allocation, taking advantage of things when maybe other people would be running for the exits. That is the value of an advisor.
Speaker 2: This show is for entertainment only, and information provided by the host, guests, and this station, should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.