Monthly Archives: November 2019

By Justin Pawl, CFA, CAIA

Inside this week’s edition:

  • Special Note. To our military veterans and their families, we thank you for your service, your sacrifice, and your bravery. While our country is wrestling with many important issues internally, we are forever grateful to our men and women in uniform, who throughout our country’s history have united to selflessly confront enemies of the state seeking to constrain or purge the freedoms that Americans enjoy.  #Heroes.
  • Last Week Today. A summary of news impacting financial markets and the economy.
  • Financial Markets. A rundown of last week’s action.
  • Taxes Bite. The effect of repealing the 2017 corporate tax cuts.
  • Bulls on the Run. Surprising level of market enthusiasm at one financial powerhouse.


Last Week Today. Saudi Arabia began the process for its highly anticipated initial public offering (IPO) of Saudi Aramco, touted as the world’s most profitable company. The IPO will consist of only about 1% of the company’s shares, and they will initially be limited to trading on the Saudi stock exchange. Estimates of the valuation range from $1.2 trillion to $2.3 trillion, but what’s a trillion dollars between friends? For examples of why valuation matters, please see Uber, Lyft, and WeWork. | German Industrial Production fell by 0.6% in September, the 11th consecutive monthly decline. | U.S. Economic data releases last week were mixed, but the hand-off from Q3 to Q4 was not particularly strong. The Atlanta Fed’s GDPNow model is currently tracking U.S. growth of about 1.0% in Q4.

Financial Markets.  Global equities marched higher as news on the trade front tilted positively, and U.S. corporate earnings generally were not as weak as forecast. The Dow, S&P 500, and Nasdaq rose about 1% apiece, with all three benchmark indices ending the week at new highs. The emerging markets index posted a gain of 1.5% for the week, buoyed by China’s 3.1% rally. Developed international stocks joined the party but were a little late, posting a gain of 0.5% on the week. As good as the rally is in stocks, lately fixed income markets are getting more attention as rates on the 10-year Treasury bond climbed 0.23% last week, which doesn’t sound like a lot, but fixed income instruments are a different animal than equities. At the beginning of September, the yield on the 10-year was less than 1.5%, but it has since “backed-up” to 1.94%. Talk has shifted from “when will the 10-year bond yield break 1%” to “when will the 10-year rise above 2%.” The rise in interest rates has been uneven – short-term rates have risen less than longer-dated maturity bonds – as a result, the yield curve is no longer inverted as shown in the following graph.


Source: Bloomberg, L.P. and Covenant Investment Research

For a summary of weekly, month-to-date, and year-to-date financial market performance, click on the table below.



Taxes Bite. While the Presidential election remains a year away, Wall Street is already handicapping likely market impacts based on different outcomes. It’s far too early to accurately predict who might win the election as the Democratic Party has not even decided who will run. However, with several of the leading Democratic candidates making corporate tax reform a plank in their campaign platforms, it’s worth taking a look at market implications should the 2017 Tax Cuts and Jobs Act be reversed.

The best piece on this topic I’ve seen thus far is from Goldman Sachs Investment Research. To recap, the 2017 tax cuts reduced the headline corporate tax rate (including State, Federal, and local taxes) for the S&P 500 from approximately 39% to 26%. However, most corporations use tax incentives, tax credits, and other lawful means to reduce their effective tax rate, such that the effective tax rate following the cuts dropped from an estimated 26% In 2017 to 18% in 2018. The 8-percentage point decline in taxes translated into a 10% increase (i.e., $13) in earnings per share (EPS), according to the research (see chart).


Sources: FactSet, Goldman Sachs Global Investment Research

Goldman’s researchers estimate that if the 2017 Tax Cuts and Jobs Act is jettisoned, each 1% increase in taxes will reduce earnings by slightly more than 1%. Moreover, to the extent that higher corporate taxes negatively impact economic activity (as one would expect), every 1% change in real (inflation-adjusted) U.S. GDP growth results in a 3% change in EPS. So, assuming the effective tax rate increases from today’s 18% level back to the 26% level of 2017, forecasted earnings for the S&P 500 would decline by $21 from $185 to $164 (as illustrated in the chart below). Interestingly, $164 is the S&P 500’s earnings per share for the trailing twelve months ended June 30th of this year.


Sources: Goldman Sachs Global Investment Research

Suffice to say that if corporate taxes are revised to back up to 2017 levels, an 11.3% decline in expected earnings will not be viewed favorably by investors. Unless you can make a case that the Price-to-Earnings multiple will rise, stocks would re-rate lower (i.e., prices will fall) because future cash flows are a critical input in stock valuations. For those who like low corporate tax rates, the good news is that tax law changes require the consent of both the Senate and the House of Representatives. Thus, a sitting President with a new approach to taxes is not sufficient to alter existing tax law, he or she must also convince Congress.

Bulls on the Run. I spent the last couple of days at a major East Coast investment firm, meeting with some of their best and brightest. The overwhelming sentiment is one of optimism, if not outright bullishness, about the markets. One of their technicians shared that Q4 2018, when the S&P 500 experienced a peak-to-trough decline of about 20%, was the market “recession”, resetting the market for the next leg higher. Indeed, his view is that we are only about half-way through a secular bull market.  Secular bull markets typically last about 20 years, so he believes this market has a lot of room to run.

In a similar vein, one of the sector strategists who views markets through a purely statistical lens made the case that stocks resemble an “early business cycle market.” As such, traditional value-oriented and cyclical stocks (e.g., financial and industrial sectors of the market) are the places to invest as the U.S. and global growth improve in 2020. The same analyst shared a statistical model showing that it’s been very rare historically when both the European Central Bank and the Federal Reserve simultaneously cut interest rates (as they have done this year), but when they do the S&P 500 gains an average 22% over the next 12 months (vs. the 8% long-term average return). The last analyst suggested that international and emerging market stocks should outperform U.S. stocks over the next five years. Of the five meetings, only one of the team members expressed caution stating his team sees more downside risk than upside in financial markets. His conclusion, and recommendation, given the multiple levels of uncertainty, is to diversify portfolios as much as possible by taking numerous small bets.


So, what’s Covenant’s take on all this? We are not calling for a recession next year. Still, we are less enthusiastic about the growth prospects for the U.S. economy, and we believe the probability of recession is elevated (believe me, we would not be disappointed to be proven wrong on this forecast). We generally agree that value-oriented and international stocks look attractive because valuations of these groups are cheap, and their underperformance relative to their counterparts is at historic levels. International stocks would benefit disproportionately from improved global trade and given their low valuations compared to their U.S. cohorts, the set-up for sustained outsized returns vs. U.S. stocks look good. For example, even on the technician’s chart who believes we are only half-way through the bull market, the high-end of the expected return range for the S&P 500 is 7% per annum, which is well below the 11.5% annualized return over the last ten years.

While we’ve been overweight U.S. stocks for several years, we’re looking to increase our allocation to international stocks once we see some sustained positive signs out of Europe. For example, the new European Central Bank President, Christine LaGarde, convincing Germany to consent to fiscal stimulus in the Eurozone would represent an excellent start. Over the last ten years, favoring international stocks (even as valuations were compelling) over U.S. stocks, has been a “widowmaker trade.” We’re not looking to call the bottom, or even catch the first 10-20% of the move. There have been several false breakouts amidst misplaced optimism about international stocks over the last decade resulting in subdued performance for those that chased it. As such, we would be content to catch the last 80% of the move.

Be well,


Karl Eggerss​ joined Sharon Ko on CBS this morning to discuss properly diversified investment portfolios.

Sharon Ko: This morning, let’s talk about how to get your investments going. Diversifying your portfolio is key to a financially secure future. Here’s more on why it’s important and how to start.

Would you have to have maybe a little bit extra cash, have some money in your savings account to be able to maybe start investing in stocks, bonds, precious metals? There’s so many different options.

Karl Eggerss: Yeah, that’s a good question, because I think at the beginning, the first thing you’ve got to do is build up your emergency fund. You know, if something happens to your job or you need a new set of tires or the air conditioner in your house went out, those are big ticket items that maybe you didn’t budget for. So that’s where your rainy day fund or your emergency savings comes into play. Once you’re past that, the next thing you’ve got to do is yes, start investing. One of the things people have to realize when you’re building a portfolio, small or big, is that not everything has a lot of liquidity. Not everything has a lot of safety, and not everything has a lot of growth. If you have more time, five years, 10 years, or 20 years, more than that, investing in stocks is a great vehicle and through mutual funds, through exchange traded funds, which are just baskets of stocks, so it spreads the risk. That’s something that’s going to probably earn the most over the longterm.

So if you’re not going to touch the money for a while, that’s your best return on investment a lot of the time. Adding in things like real estate over time, adding in bonds, which are a little more safe and a little more secure over time, especially as you come closer to retirement, because the closer you come to needing that money, that’s when you have to get a little more conservative. And again, all these things move differently. That’s really the key. When stocks are going down, sometimes bonds go up. When gold’s going up, maybe real estate is going down. And so again, the idea is to have a diversified portfolio that is fairly stable over time and can grow and really beat inflation. Because as we’ve talked about over the last several weeks, people’s costs today are not going to be the same as they are 20 or 30 years from now. The costs are going to keep going up, and it’s important, the whole reason you’re investing is to beat inflation. It’s to keep up and keep your purchasing power up so that when you do retire, you can go do the things you want to do.

Sharon Ko: So that’s key, right? You do it before you need to.

Karl Eggerss: Absolutely. Because what you’re relying on is compounding. The power of compounding is huge. You know, you take a dollar and double it, then that new dollar is doubled and doubled and doubled, and it really starts to snowball and becomes a pretty large sum of money.

On this episode, Karl discusses whether or not this rally can continue and the big change in interest rates.  Plus, cyber security is on the rise and Karl shares some valuable tips on ways to protect yourself.

Hey. Hey. Good morning, everybody. Welcome to the show. This is Creating Richer Lives. This show is brought to you by Covenant Lifestyle. Legacy. Philanthropy, and of course at covenant we are always trying to unburden folks from the daily tasks of financial management, and our goal is to really help you figure out what to do with the money you have accumulated. Some of you are in the process of accumulating. Where do those dollars go the most effective? From a growth standpoint, obviously trying to reduce taxes as much as possible, but the Lifestyle. Legacy. Philanthropy, very important, because, again, you can spend it, you can give it away to kids or grandkids, or you can give it to charity. Our job is to help you figure out which of those you want to do or all of them. Right? To talk through that and then to effectively position yourself to accomplish that, and that’s what we do each and every day at Covenant.

All right. Our telephone number, (210) 526-0057, if you need help in that arena. Of course, our website I’ve Been traveling all week. I don’t know why I did this, but I flew … Get this. I flew from San Diego to Atlanta, then from Atlanta to San Antonio. Don’t ask me why I booked it that way, but needless to say, I arrived a very, very, I’ll say early in the morning and then turned around and had to go out the next day again somewhere else. So, it’s been a busy week, and because of that flying and touching dirty armrests and all of that, my throat’s a little scratchy this morning, but bear with me. We will get through this. Look, we’ve got a really busy week going on or a busy week we had. I’m going to spend some time talking about that, because we have some big developments this week. I’m also going to spend some time talking about cybersecurity.

One of the trips I was just recently on, I was at a Schwab IMPACT Conference out in San Diego, which all the top advisors around the country are there and a lot of thought leaders. We’re getting information from cybersecurity experts, from Charles Schwab. You know, some of these folks used to work for the FBI, and so they know what’s going on. I’m going to share some of the tips. I’ve kind of consolidated some of the the tips and thoughts and put my own spin on it, and I’m going to share those with you today, because there’s a lot of stuff going on, and you have to be aware of it, because a lot of it is just prevent defense on your part. All right.

But first of all, let’s get to the markets. We saw positive trade news, right? We know that we saw some positive economic news, but we’re seeing some really interesting things. For example, we’re seeing international stocks have really been outperforming since August, and they continue to do so on probably easier … a deescalation of the trade tensions, tariffs being rolled back, things of that nature. But we also saw interest rates move up this week. Now, interest rates crossed a pretty important threshold. You know, we’ve been in a downtrend really since the fall of ’18, and here we are in the fall of 19, approaching the winter, and we’ve been making lower, and lower, and lower highs, from around 3.2% all the way down. But we broke out this week, technically speaking, and we’re now above 1.9% on a 10 year, so everybody’s watching will we break 2% on the upside, and it’s quite possible.

That’s going to happen in pretty short order. But it’s interesting, because the yield curve is no longer inverted, and it’s also, on top of that, what’s interesting is that not only is it not inverted. It’s normal again. You don’t have some of these kinks in it, and it’s quite different than even a month ago. So, the market is telling us that perhaps we should look forward to perhaps some improvement in the economy coming up. We know manufacturing’s been weaker. We’ve talked about the last few weeks watching the consumer, watching how many hours they’re working, all of those things, but the stock and bond markets may be telling us a little bit of a different story, that we’re looking maybe in the rear view mirror. Maybe it’s the things we don’t know, and things may be improving. So, interest rates went up, so bonds obviously got got hit this week. They have clearly broken trend. So, let’s see if this continues or not.

We have the positive trade stuff going on and then some positive economic news. Look, stocks have done very well this week, and we’re at new highs, close to new highs or at new highs really, but some of my term indicators are showing that we may be getting a little tired on the upside. If you look at some of the rallies in the last few days, you look under the hood, it’s been a lot of of churning, not a lot of overall leadership. So, it would not surprise me here to see us pause, if not pull back a little bit. Now, these aren’t warning signs like last fall. These are simply if you have new dollars to put to work, maybe you defer, depending on your situation, just to see if you get some better entry points. But the bears have been proven wrong. Everybody thought that we have to go down. We have impeachment, right? That’s there. Lot of geopolitical risk, but yet, as we’ve broken out to new highs, it’s caused a little bit of a panicky buying for those folks that are under invested.

Again, we have the calendar on our side. The markets typically do well for the rest of the year, so it’s quite possible we continue to run, but there’s a lot of positive things going on. You know, look at transports making a new highs. You look at international stocks participating once again. You look at financials doing really well, primarily because of the yield curve steepening. These are all really good things. I’m just saying in the short term we could be getting a little exhausted, especially if you look at some of the sentiment indicators that are still negative in terms of flows, but if you look at some of the put/call ratios, things of that nature, they’re a little stretched the other direction. We actually have kind of the extremes, and again, that may sound a little confusing, like wait a second. I thought that we were seeing negative flows.

We are still, so to me we still don’t have the people participating by buying calls and puts are positioning themselves for higher prices, and that can be a worrisome thing, because they’ve already bought. But the sentiment overall has been fairly negative, as we’ve been saying, and that’s a good thing. We need more people being converted from doubters and not believing the rally to come over to the side of believing it. I still think that can happen over time, but there’s no question in the last few days we’ve seen a little bit of a a pause, saw a little … nothing major. Again, take this with a grain of salt, but things are a little stretched to the upside here, so it would not surprise me to see a little bit of a pause, but again, take a look at interest rates. Interest rates are really important. Breaking above 1.9, and then 2% may be coming up in short order.

Now, when I was at the Schwab Conference, I got to listen to some of the best speakers out there in terms of being insiders in Washington DC, insiders into cybersecurity, all of that. The general consensus is that the House may move forward with impeachment, but the Senate probably can’t do. It doesn’t have enough people to flip. So, that’s why I don’t think you’re seeing the market really react to that. The biggest concern from some of these Washington insiders, and this isn’t a political statement, this is just truth, is Elizabeth Warren, because she has such radical beliefs against things that are going on right now, that that could cause some turbulence. So, if you see her poll numbers rise, and you see President Trump’s fall, and you see Joe Biden’s fall, that could lead to some 2020 volatility, and that would not surprise me in one bit.

Now, this particular gentleman did believe that we probably will see a Biden versus Trump, and you’ll probably see Biden go after a minority female on his ticket, which kind of reminds me of what John McCain did with Sarah Palin. If you recall, it’s kind of like I’m an old dude. I’m going to go get a young dudette. And that’s Biden. People believe you he looks like a grandpa. Therefore, he’ll balance it out by going to get a minority woman. We’ll see if that’s the case.

That may not affect anything, but this gentleman still believes that Biden will get the Democratic nomination, but if Warren spikes up in the polls, that could cause some turbulence. Now, if she did get into the White House, he believes she’d have to move to the center. So, a lot of the stuff people are worried about would never really happen, but that fear could cause some turbulence, and especially if we do get some type of blow off top, inn other words, if the market just keeps running through the end of the year, it’s quite possible it sets us up for a potential, you know, more volatile period in 2020.

Let’s move over to the cybersecurity. A couple of things going on with this, and this is extremely important you understand some of this. Some of the top things we’re seeing are fake financial websites and emails coming in. So, for example, Schwab said they do something like 100 fake Schwab accounts. They thwart them, like a hundred a week or some kind of crazy number. So, what’s happening is you get an email from a financial institution, doesn’t have to be a Charles Schwab. It could be a fidelity. It could be a Wells Fargo, any place. You get it. It looks legit, and it’s a sense of urgency. You must do something now because your account’s been compromised. So, you are going, “Oh my gosh. This is scary.”

So, it has a link, and you click on it, and it asks you to fill things out. Now, the things it’s asking you to put in there are things like your name, your social security number, but then they ask things like your phone password. Well, who …? Institutions don’t do that. Who would want your phone password? Again, I just looked at the number. It is. It’s 100 a week that … fake Schwab websites. So, all these institutions are dealing with the same thing. It’s not just Charles Schwab. Every financial institution is subject to this. So, you get an email. Here’s the key to these institutional emails that are from financial institutions. There’s usually a misspelling. If you hover over the link, it will tell you the actual URL, and a lot of them will end with RA, .RA, which is Russia. So, if you simply saw that, you would know it’s fake.

But even if you click on it, asking you to put all that information in is generally not what these companies do. So, that’s one area is in the the financial aspect, that’s one big area that they’re seeing a lot of fraud. Also IRS, government agencies emailing you, telling you to do stuff or calling you. The IRS doesn’t call people, that I know of, and they usually send letters. So, you’re seeing a lot of government … Again, when you hear these things, you’re scared, so you tend to act. That is the flaw. So, they’re seeing it with IRS. They’re seeing it with romance, so online dating sites. Of course, many of these profiles are fake. They actually showed some pictures, which was fascinating, of fake people that are being used in profile pictures. They’re computer generated, and they look real.

What happens is you get in an online relationship with somebody, and it goes literally months, if not years, building trust. Then after the trust is gained, there is an emergency, a medical emergency, and they ask for gift cards. What’s crazy about this is the numbers that are reported of these are artificially low, because a lot of people that get caught up in a romance scam, once they realize they’re scammed, they don’t report it, so these are only the ones we know about. There’s a tremendous number out there of ones that are not reported, because people are too embarrassed.

Then the third one that they’re seeing is the technical support. So, victims get a pop-up on their computer, your computer has been compromised. Click on here to essentially fix it. There’s a phone number. You get on the phone. They say, “Yes. There’s a serious problem.” They give you a link, and guess what? They have gained access into the computer. “We’ll fix it for you. Pay us some money. We’ll fix it,” and now they’re in your computer. That happens a lot. So, financial institutions and government agencies, romance, and technical support, those are the three big ones.

There’s also things like phishing emails, not fishing with an F, phishing with a PH. They’re, again, these emails that can be coming from the institution. So, we talked about the Schwab ones or any other financial institute. Look at all your emails and always be suspicious first, right? Be suspicious first. Don’t open attachments. That’s kind of obvious. If you do have an attachment, call the person that emailed you and say, “Did you send me an attachment?” That’s good practice. But these always have a sense of urgency. There’s something wrong, you know, with with your account, what have you, and they’re there getting you to do something. They’re creating that sense of urgency.

Then, again, hover over the link, as I mentioned. Now, remember some of the from names can always be changed to whatever, so it may say from Wells Fargo, from fidelity, from TD Ameritrade, from Fifth Third Bank. The name is irrelevant. Anybody can put any name in there. It’s the URL address. Again, that tells you, when you hover over it, where it’s from. Then, again, look for unusual words, bad grammar, et cetera, and use spam filters. A lot of those won’t even make it into your inbox if you have proper spam filters set up.

Now, I’ve kind of compiled five steps for safeguarding your accounts. This is a different subject. We were talking about phishing. There’s also vishing which is voice phishing, so where institutions call you, blah blah, blah. Some folks use a combination of this. “Hey, we’ve been trying to get ahold of you. We’ll email you.” But think about this. This is five steps that I’ve come up with for safeguarding your financial accounts.

Number one is pretty obvious. Change your login credentials pretty frequently, especially your password. I would probably do that at least once a quarter. Yeah. Don’t use password123. In fact, get a password manager. I’ve mentioned this in the past. I use one. Highly, highly effective to use a password manager, because it’s going to generate long, complicated passwords that nobody would be able to guess, but they may guess your dog’s name. They may guess your birthdate. So, a password manager, you have one password. It can sync on your computer, your phone, and it generates these passwords that are very complicated. Great thing to have. Great investment.

Two factor authentication. Most of you probably know what this is. You can enable it on almost any financial website. Two factor authentication is where once you put your password in, it doesn’t just let you in your account. It sends you a text. You may have a key fob, which generates a random number that lasts for 30 seconds. You have to punch in something else, in addition to your password, two factors, the password and the number it’s going to text you, or the phrase, or what have you. That solves a lot of issues, a lot of issues, and you can turn it on. If you go into the settings on your financial institution for your mortgage, auto loans, brokerage accounts, usually it’ll say, “Do you want us to enable this?” It’s a little bit of a pain, but say yes. Again, say yes. It’s very important to do that.

Another thing is add activity alerts. I know on my credit card, they send me a text every time. It’s not a text. It’s really at the app sending it to me every time my credit cards you used, where it’s used and how much, every single time. There’s been occasion where I go, “What is that?”, and I have to question it. Then the fifth thing I would say is freeze your credit. This is a really interesting one. Especially if you’re retired and you’re not going out and borrowing more money, you can call the credit agencies and freeze your credit, because that’s one of the ways that people obviously take your identity is using credit, and you can freeze it. If you ever need to get a loan in the future, you can unfreeze it. So, that’s something you definitely should do.

The other thing I want to mention with emails, I talked about emails a few minutes ago, one of the things that this gentleman that used to work for the FBI recommended was, “How many of you,” and he asked us this, “are changing or, excuse me, deleting your emails right from your inbox?” Most of you would say, “I do that.” “How many of you are deleting the deleted? Do you go into your trash and delete those as well?” Probably half of you. Here’s where he got most of the audience. “How many of you are going into your sent box and deleting that?” Why is that important? Your sent box is where you’re doing your documents for your closing on your property, right, for when you bought your house or an investment property. You may have emailed documents, your travel plans, account information, personal information, stored passwords, work documents, pay stubs, calendar events, your 1099s nines, your copies of your IDs. I mean, all this stuff is in our emails. If somebody gets into your email, man, they can really put a lot of puzzle pieces together and steal your identity. So, it’s important to do that.

Also, if you are sending information, usually if you’re doing a mortgage or something like that, they’re going to require you to do a secure site. That’s something we do at Covenant. If we send documents, we will always send them securely, and we always send a link out to people when we know we’re receiving documents. Now, we don’t always get them securely, because folks send them to us. We can’t control. We try to do that. We send them a link. Use it., You basically deposit your documents into this secure vault, and then we have a link to go get it. Many CPAs do that, kind of standard practice, and I would suggest you do the same, but emails where a lot of rich information is stored that bad guys and gals can get.

Those are some of the big things going on. Those are some of the safeguards in terms of accounts, and I kind of jumped around a little bit, but I wanted you to know what things are out there right now. Some of this you may know, but it’s always a good reminder, because, I mean, just the two factor authentication, changing your passwords regularly, not clicking on links, and then be very cautious and curious when you get an email from an institution. If you have a question, just go straight to their site, right? Go to their site. More than likely, what you got emailed about, if it was valid, it would be on there somewhere/ You can call them. You can dig into it without clicking on the link.

So, I hope that was helpful. I know it’s not something fun to talk about, but very, very important, because I tell you what, if you’re dealing with all of that, you’re not listening to the podcast, right? You’re having to get your identity back and all that. A lot of this is just preventable. In fact, they said something that was really fascinating. You may be on a list. If you’ve been scammed before, you may be on a list where they know you are a vulnerable person, and they sell your name and information to somebody else that can use it again and again in different forms and fashions. With technology changing as fast as it is and people being trustworthy, there’s a lot of elderly abuse, but it’s across the board. There’s no age discrimination on this.

So, I hope that was helpful. Hey. Just a reminder. If you need our help, (210) 526-0057 is our telephone number. We would love to help you out. Feel free to share the show. I’m going to go get me another cup of coffee. All right. Have a good weekend, everybody. Take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content, will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at

By Justin Pawl, CFA, CAIA

  • Last Week Today – A summary of news impacting financial markets and the economy.
  • History Rhymes – Parallels between the 1990 and 2010 decades.
  • Pregnant Pause – The Fed signaled it’s on hold.
  • Employment Report – Big headline, but weak under the hood.
  • Bulls – A couple of indicators show the stock market has room to go.

Last Week Today. The European Union extended the Brexit deadline from October 31st to January 31st. | Economic data out of China showed continued slowing with the manufacturing PMI falling for the sixth consecutive month to 49.3 (near the 2015 low) and the service PMI falling -0.9 to 52.8 (2016 low). | The Federal Reserve cut interest rates but signaled it’s done for now (more on this below).

Financial Markets. Stocks pushed higher last week on positive U.S./China trade sentiment and corporate earnings coming in above already low expectations. The S&P 500 and Nasdaq closed at new highs, gaining 1.5% and 1.7%, respectively, and the Dow closed within a whisker (0.04%) of a new record. International stocks generally paced their U.S. counterparts. However, the major indices such as MSCI All Country World Index (ACWI) and MSCI Europe, Asia, and Far East (EAFE) indices remain well below new record levels. Through last week, 75% of S&P 500 companies had reported Q3 earnings, with 55% of firms beating consensus estimates and only 11% missing. Thus far, S&P 500 earnings per share are on pace to decline by approximately 1% year-over-year, which is better than the 3% decline that was expected coming into the Q3 earnings season. Interest rates rose on the week and, following the Fed’s rate cut, the yield curve shifted flatter as much of the inverted portion of the curve un-inverted. For a summary of weekly, month-to-date, and year-to-date financial market performance, click on the table below.


History Rhymes. In the mid-1990s, the stock market set record after record during a decade-long bull market propelled by a strong economy. The Fed and Alan Greenspan made a couple of mid-cycle interest rate cuts when the economic data showed some cracks in the labor market. It was during that decade that President Bill Clinton was impeached by the House of Representatives on the grounds of perjury and obstruction of justice. Fast forward to this decade. Last week the Fed cut interest rates for the third time (something Fed Chairman Powell once referred to as a “mid-cycle adjustment”), and the House of Representatives voted for a formal impeachment inquiry of President Donald Trump. While the economy is not growing at the vigorous rate of the 1990s, we are in the midst of the longest U.S. economic expansion in history. Why do I point this out? Because clients have asked if financial markets will suffer if President Trump is impeached. My response is that there may be some short-term volatility around the hearings, or if there is an actual impeachment, but investors care more about future corporate earnings than anything else.

Pregnant Pause. The Fed cut rates for the third time on Wednesday to the surprise of…. well, no one. Yet, the Fed’s associated statement and Chair Powell’s press conference afterward implied that the Fed’s on hiatus for a while. Specifically, the Fed’s policy statement removed the phrase “…will act as appropriate to sustain the expansion.” The absence of that phrase was interpreted as hawkish by the market, which sold off modestly shortly after the Fed’s announcement.

During his post-announcement press conference, Fed Chair Powell confirmed the Fed’s reluctance to move further, setting a high bar for another cut. In response to a question asking what it would take for the Fed to cut rates again, Powell responded “So, you ask what it would take – you know – to move, and as I mentioned, we’re going to be watching all factors, and if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. But that what it would take. A material reassessment of our outlook.”

The Fed Funds rate now stands at 1.75%, and as I related last week, with the neutral interest rate (the rate that is neither restrictive nor accommodative) at about 1%, the Fed’s action is not accommodative, just less restrictive. Please don’t take my word for it; the market is clearly expressing that monetary policy is too tight based on inflation-linked instruments. The blue line (representing medium-term inflation expectations) in the chart below shows inflation expectations for the next five years have not touched the Fed’s 2% target this year. These medium-term inflation expectations rose early in the year when the Fed indicated they would cut interest rates. But have fallen since, as the Fed has not acted aggressively enough to kick-start economic activity to a level where inflation is expected to rise to the Fed’s target. Longer-term inflation expectations (shown by the red line) are slightly higher, but following a similar downward trend characterized by lower highs and lower lows.


I also related last week that during our quarterly Investment Committee meeting, we discussed that crucial leading indicators of an economic slowdown are beginning to flash increasingly yellow. This week brought more squishy economic data, with the possible exception of the employment report, which we’ll discuss below. Given this backdrop, our view is that the Big Brains at the Fed are taking an awfully big risk by stepping back now as the effects of their ill-fated December 2018 rate hike haven’t even worked their way through the economy yet.

Employment Report. The employment report was met with a giant sigh of relief as economic data leading up to this report was relatively weak. The Bureau of Labor Statistics reported total nonfarm payrolls increased by 128,000, well above expectations of around 80,000 new jobs. Interestingly, interest rates didn’t move much higher in anticipation of growing inflationary pressures despite the booming jobs number, as would be expected. Our sharp-eyed resident economist, Sean Foley, pointed out the following:

  • The outsized “birth/death” fudge factor used by the Department of Labor (DOL) to “estimate” jobs created by new business formations.  The DOL assumed that 274K jobs were created by new small business births in October.  Prior to this October, the 10-year average adjustment for October was 167K. So, the difference added 107K “jobs.”
  • The job mix was poor, with about 61K jobs added in leisure/bars of the 128K total.
  • Weak wage growth (as expected with a weak job mix).
  • A report that is not consistent with other fairly reliable data (both hard and soft).
  • Even with possibly inflated numbers, the employment growth trend is still slowing both on a 6MA basis and YOY.

So…. a great headline jobs number that is a lot weaker when you look under the hood.


Bulls. The economy and the stock market are different animals. Yes, recessions generally cause equity markets to fall, but not all recessions look like the Financial Crisis, where nearly every asset declined simultaneously. For what it’s worth, while we are concerned about the health of the economy, based on the economic data we are seeing, we don’t expect that the next recession will be anything more than a garden-variety contraction. What’s interesting is that even as interest rates have risen over the last couple of weeks and stocks have hit new highs, stocks don’t appear overvalued relative to interest rates. Indeed, the difference between the earnings yield on the S&P 500 (the inverse of the price/earnings multiple) and the 10-year U.S. Treasury yield is 3.8%. Compared to a long-term average of 3.5%, equity prices could move higher and remain fairly valued if interest rates stay at these levels or move lower. It’s also worth noting that the dividend yield on the S&P 500 (1.87%) is higher than the 1.73% yield on the 10-year Treasury bond, typically a bullish indicator for future equity returns.



Sources: Computstat, I/B/E/S, Goldman Sachs Investment Research, and Covenant Investment Research.


Be well,


Karl Eggerss joined Sharon Ko on CBS to discuss 5 common mistakes that he sees surviving spouses make after a death.

Sharon Ko:                         This topic isn’t necessarily what we want to think about but should plan for and that’s the death of a spouse, Here are the top biggest money mistakes to avoid.

Karl Eggerss:                      When a spouse passes away, it’s very obviously very emotional. They’re not necessarily thinking about practical things in terms of money. They’re thinking about the immediate stuff and the emotions behind it. I had to deal with this when I was seven years old. My father passed away, so my mother had to deal with a spouse dying at that point with three young children.

Karl Eggerss:                      I remember there was a lot of stuff coming at her and I would say the first thing that somebody should not do is acting too quickly. They should pause. You’re going to have people saying, you should do this, you should move out of your house, you should invest in this. You should. Here’s what to do with the life insurance proceeds. All those different things. You need to step back. You need to give yourself a few months to just freeze and deal with the emotional part, because there’s a lot of that. Then you can work on the financial aspects.

Karl Eggerss:                      They may, let’s say for example, a spouse had an IRA. Most people don’t know that a spouse can take that IRA and move it into theirs. But what we see sometimes is the surviving spouse will take the money out of the deceased spouse’s IRA and they’re taxed on it, and they didn’t have to do that. They could’ve moved it into their IRA and let it continue to grow tax deferred. They don’t have to take it out.

Karl Eggerss:                      If a person’s over 70 and a half, they’re required each year to take out a portion of their IRA and pay taxes on it. Sometimes their surviving spouse won’t do that because they’ll think, I don’t need to do that. But they still have to do that in the year of the death.  Let’s say somebody passed away in January, they have not taken that distribution, they need to do that, even though the spouse is passed away. That’s very important because the taxes on that and the penalty for that is extremely high if you don’t do that. And that only applies to people over 70 and a half.

Sharon Ko:                         This next one seems obvious, but maybe something people really don’t think about is creating a budget.

Karl Eggerss:                      Yeah. You know a lot of people don’t have a budget, but if they did have a budget it’s going to be very different with one person in the household than two. So recreating that budget and doing it in a different way based on a new lifestyle is something you have to do.  Your travel expenses may change, your gasoline expenses may change, your how often did you eat out, how often did you take vacations? All that’s going to change up or down. And so creating a new budget based on your new situation is really important.

Sharon Ko:                         And the last one, not taking advantage of Social Security rules.

Karl Eggerss:                      When a spouse passes away, obviously each person may have had their own Social Security, there’s some techniques people can use where you get survivor benefits for a while and then you can switch over to your own Social Security for a higher amount at a later age. When you combine that combination, it’s a lot of extra money over the next several decades.  I recently talked to somebody that had a spouse pass away in their early 60s and they’re going to be able to defer their Social Security for a few years, take the deceased spouse’s and then switch to their own, and it’s going to add literally tens of thousands of dollars over their lifetime as opposed to just taking their own.

Sharon Ko:                         And the rules are different if you’ve been married multiple times.

Karl Eggerss:                      They are. Exactly. If somebody is divorced, they can even claim their ex-spouses, believe it or not, if they were married more than 10 years and did not remarry, that’s a whole other issue. But yeah, Social Security can get pretty complicated. So talking to somebody that can help you through, that’s really important.

Sharon Ko:                         Thank you very much to Karl Eggerss.

Revisions, Revisions

November 2, 2019

On this week’s podcast, Karl discusses the good jobs report and how investors bought the news.  But, should we believe the numbers?

Hey, good morning everybody. Welcome to the podcast. This is Creating Richer Lives. Our telephone number is (210) 526-0057, our website and this podcast is brought to you by Covenant Lifestyle. Legacy. Philanthropy.

All right. Busy week in the markets, wasn’t it? Well, let’s jump right in and tell you a little bit about what was going on because it was really ultimately about the federal reserve and are they doing the right thing or not the right thing? And the economy, and those two things should be tied together, and they kind of are.

So Monday we came in, stocks opened at a record high for the S&P 500. And we’re seeing, we’re in the middle of earning season, which we talked about. So companies are reporting their profits and earnings beats are at a very, very high level. So we’re seeing the expectations were lowered, companies are coming in beating those expectations. That’s a good thing. But the growth of the earnings is the slowest since 2016, so not a good thing

So again, we know the growth is slowing, but the beats are high. So we know the expectations were low. And apparently investors care more about the expectations and the beat because the stock market continues to push to a new all time high.

Now we’re also watching interest rates very, very closely, and we’ll get to that in just a minute. Another little bullish deal I noticed on Monday was the fact that new lows, when you look at the stocks that are making new highs, you look at the number of stocks making new lows. The new lows are very microscopic, and that’s a good thing. There’s not many companies making new lows.

Now on Tuesday, pretty flat talk but we started to hear more about impeachment and people are asking me, “Is the impeachment going to affect the markets and the process of that?”

You know that we have obviously ISIS killings and we have geopolitical risk and uncertainty all over the world. Those things matter to our lives. Sometimes they don’t matter to the market. Ultimately the market is going up based on profits of companies in the long term. You’re buying earnings, that’s what you buy when you buy stocks. But it’s also looking at, investors are looking at interest rates in the economy.

So the impeachment or somebody being killed, whether they’re an ISIS leader or not, again, positives and negatives, yes, but those are on the back burner in terms of what moves the market on a daily basis.

Now, Wednesday we had a pretty heavy economic report day. We had ADP came in and the growth rate of employment fell to one and a half percent. That was the weakest growth rate since March of ’11.

So remember on last week’s podcast, we spent a lot of time talking about our biggest concern here at Covenant from an economic standpoint is will the consumer keep us in this game? Will the consumer keep spending? And they will keep spending probably if they’re employed, if their wages are going up in they’re employed. And so we saw ADP, which is a private payroll number, private company, and the growth of the employment is what we’re watching. It’s slowing down a little bit, so that was a negative. We did see GDP though come out 1.9%, which was much better than the expected 1.6% estimate, so that was a positive thing.

We also heard on Wednesday, and I talked about this months ago, the US, I think will issue something longer than a 30 year treasury. And we saw it again, the treasury department came out and said, “The US may begin issuing 50 year ultra-long government bonds for the first time.” And when I originally talked about that, I said, “Why not?” Right? Interest rates are low, why not? If there’s that big of an appetite for our bonds, why not issue 50 year bonds, hundred year bonds? And it looks like that may happen.

That was on Wednesday and they said, “They’re exploring potential additions to the current suite of treasury securities.” The suite like it’s this gourmet menu at a fancy restaurant; they’re treasury securities. And so they’re looking at a 20 year nominal coupon bond, a 50 year nominal coupon bond and a one year floating rate bond linked to the secured overnight financing rate. So some of this is addressing, remember we talked about in the last several weeks and a couple of months ago, some of this overnight repo. Remember that? Some of this is to address that.

And then of course to cap off Wednesday, we had the Fed cutting rates by a quarter of a percent. That was not the surprise. Little bit of a surprise when the Fed’s signaled that they may be, may be finished in this cycle cutting rates. We’ll see on that. So it’s a bit more what they would call hawkish. And interest rates actually went down that day and people were questioning why would that be if they’re signaling that they may be done cutting rates, why would long term interest rates actually go down? The thought process is if the Fed’s more hawkish, and they don’t cut rates, the economy could slow, hints, people go buy bonds when that happens. So it’s like you have to think ahead a few steps here, and that’s why people are a little confused at the market reaction.

And then Thursday, we started to see the stock market sell off. The Dow is down almost 300 at one point. And it finished down about 140 points. There were some negative headlines about the trade deal, and I tweeted out, “Look, if you’re trying to trade your account based on trade headlines, good luck with that.” Because China talks about, “We may not want a long term deal.” And then of course president Trump, Larry Kudlow get on TV and they say, “Things are progressing very well.” And it’s the ping pong match that we’ve continued to see.

So it got the markets off to a weak start on Thursday with that negative trade headline. And really, I think it was a little bit of a leftover from perhaps the Federal Reserve and that they may be done cutting in this particular cycle.

But there was really, what was interesting about Thursday and Wednesday, was on the up day Wednesday and on up down day Thursday, you really didn’t get any intensity in terms of a real violent move one way or the other. Up days and down days, there’s not… It’s just like everybody’s kind of watching just a few participants in the market. But Thursday, excuse me, Friday, we got the all-important jobs number. This was the biggie. It’s like the Superbowl. Nonfarm payrolls came out, 128,000, now that was the number of jobs added nonfarm payrolls in October. The estimate was for at 85,000, so a huge beat. But more importantly was that September’s was revised up by 44,000. This caught a lot of people by surprise because there was a GM strike. So many believed, “Hey, this number is going to come in kind of weak.” And in it didn’t, it was strong and then last months was revised up as well.

But the revision as good as it was, therein lies the problem. These numbers get revised by such a big amount. I mean the beat was a beat of 43,000, and the revision was a change of 44,000. Who’s to say that when next month’s job report comes out that we don’t look in the rear view mirror and say, “Oh wait, that one was revised down by 50,000 or something like that.” We don’t know. And so take some of these with a grain of salt and look at the trend over a few months is the idea.

Unemployment was steady, it ticked up a little bit to 3.6%. There’s an important figure, I don’t have it in front of me, but it’s something like over 300,000 new participants came into the workforce last month. That’s a bullish thing. Those are spenders. Again people, first time jobs being plopped in there, and so because you have more people getting jobs. That’s why the number got bigger with unemployment rate. And of course we always look at are people getting raises? And the average hourly earnings rose a little less than expected.

So when we take all this into consideration, the Bulls would say this is Goldilocks. We have the economy still growing, slowing as we’ve been saying for weeks, if not months, it’s been slowing but still going forward and we have a Federal Reserve that up until now has continued to cut interest rates. That’s a great combination. And I’m probably in that camp as well, but we do need to continue to watch what happens with this employment. Because, again, I just told you some of these employment numbers start to slow a little bit and we’ve kind of peaked and then the hours worked. Remember I talked about that last week? The hours work starts to go down as well. People have less money in their pockets, they’re going to spend less, hence the economy starts to slow down.

So that is something to watch. But a really busy week regarding the economy, regarding the Fed, but the market certainly liked it. On Fridays the Dow Jones went up over 300 points. Now for the week, markets were up about a percent and a half if you look at the major averages, pretty strong week. International markets were up in the same ballpark as well. But speaking of international, and this is interesting. If you look at the number of countries that are at 52 week highs. So again, we look at an index of a particular country, whether it’s Mexico, the United States. If you look at 70 different countries, this comes from Topdown Charts, 70 different countries. We have 15 countries are at a new 52 week high.

You wouldn’t probably think that. If you think, “Well, 15 out of 70 I’d done sound like a big deal.” This is the highest level it’s been at in two years. So we could be starting now where all these other countries are starting to push to new highs. And that’s something interesting because we know stocks can be a leading indicator. So perhaps they’re telling us that the economy in these countries will soon get better as well. Because remember some of this reason that the market’s going up is because things aren’t as bad as people perceived. It’s all about perception versus reality. Things don’t have to be good, they just have to be less bad. But the fact that we’re seeing these countries hit new highs is something very interesting to watch, including the US obviously.

The other thing I want to point out is sentiment. This is huge sentiment, again, how people feel about the market. There was a study done recently, and it’s an indicator that’s out there called the Bob Farrell Sentiment Indicator. And what’s fascinating about this to me is that earlier this week, and it’s a concoction to kind of get the panic and the fear and the confidence barometer, where does that lie? Investors were more fearful earlier this week than they were in January of 2019. Remember January of 2019, we’d just come off of a 20% stock market decline in the fourth quarter of ’18, and so in January 19 people were scared. They’re more fearful now.

Now you may be thinking, “Well, is that a good thing? Is it a bad thing?” It’s a good thing. The reason why is if somebody is scared, they’re probably not going to have all their money in the stock market. They have some dry powder, they have some cash. We’ve been hearing about that the last few months, people kind of holding back thinking about the election, thinking about the recession, pending recession. The fear of a recession, I should say. Worried about tariffs, all of that. And so when you take that into consideration, those people are on the sidelines and when you break out to new highs as we have recently, sometimes you get some capitulation, you get some chasing, you get money coming in. So rarely do you see a market at a high, and yet people as fearful as they are right now. In fact, they’re almost as fearful right now as they were in late ’15, early 2016.

Well remember at that point, if my memory serves me correctly, we had an earnings recession, two quarters in a row of negative growth. We probably had a mini recession, we had oil cratering. So it’s fascinating to me that we’re sitting at all-time highs and people hate this rally. So that’s a good thing from a contrarian standpoint. And not to project out what might happen, because we don’t really do it that way, right. We look at the tea leaves and what’s happened in right now and we make our… We put all our brains together and we come up with our allocations.

But if we were to fast forward a bit, we could be setting ourselves up for a nice rally. We continue to rally and then we come into mid next year, and guess what? The fear of the recession starts, or excuse me, the fear of the presidential election I should say, really comes into focus. And maybe a recession too, but comes into focus. And hypothetically if we have President Trump versus Elizabeth Warren. You have very polar opposite views. And remember the stock market’s kind of a discounting mechanism. So how do you go buy a stock when you don’t know what the rules of the game might be or might not be?

So that’s something to watch for. But again that speculation. We don’t know, we don’t do anything today based on that, but it’s something to watch.

I did get an email from a gentleman who basically said, “It’s so obvious how corrupt and slanted quote unquote the system is, and it makes me fear the worst. Hence, I ask you this because I feel that given all available information you speak, truth in reality, I’m not a party pooper, only concerned about being as well prepared as possible when the dollar is a worthless currency. Peace with you, brother.”

But there was an article attached and the article was from market watch and it essentially said, “Why would the,” it’s titled, “Why would the Fed cut interest rates a third time in a row even at stocks near record highs?” And so I wrote back and I said, I won’t give you his name, “Hey. The problem with this article is that it starts with the title, ‘Why would the Fed cut interest rates a third time in a row even as stocks near records?'” And I said, “The Fed doesn’t raise and lower rates based on what stocks are doing.” At least they shouldn’t, right? And so those two things are different. Why would they cut rates? Because they see the economy slowing, that’s why they’re cutting rates.

So regardless of where the stock market is, that’s the way it should happen. They say it, you can decide if they really do that or not, but the fact of the matter is the economy is slowing. The Fed shouldn’t have raised rates in late 2018, and they did, and they’re now behind the curve. And I wrote this earlier in the week, they’re behind the curve. So they should lower them now.

Now why are stocks continuing to go up? Because the Fed is cutting rates. Profits are still high. Taxes are lower. A trade deal’s likely. Brexit’s likely. Those are all positive things. Hence, the stock market’s going up. And I said, “I study the data and monitor the economy as well, but most important, I study investors in the flows in and out of the market.” Investors are speaking with their dollars. We can argue why are stocks at highs, we could argue all of that, but people are buying stocks. Now, we talked about the sentiment being sour. So there’s a lot of people who are fearful the market, but the ones that are in there trading, there’s more buyers and sellers. Hence, new record highs.

Now, I told them, “Look, we’re likely to have a recession at some point, it could be in 2020, but the stock market may have already priced that in.” And I’ve been telling you guys the same thing that, look, over the past two years, the stock market really didn’t make any meaningful appreciation. It’s just now starting to get going. A lot of volatility, but it peaked in January of 18 because of tariffs, fear of recession, all that. So how do we know that the market investors weren’t priced in that in already?

“People have feared the worst,” and I’m reading again from my reply to him. “People have feared the worst since 2008 because that was a horrible recession and crash. The doubt and fear is what’s been causing the market to go up. Sounds weird, but there’s an old adage on Wall Street, that Wall Street climbs the wall of worry. Investors are stills fearful now as they were several years ago. That means there’s plenty of money on the sideline.”

So I’m answering that question in terms of the dollar being worthless. Again, it’s a relative game. The dollar may be the best house in a bad neighborhood, and hence why some people want to do cryptocurrencies and want to see that succeed. But the dollar has been very strong and I think it will weaken, but I think it will weaken against other currencies. So we don’t have an alternative right now, nor does the rest of the world. And no, it’s not gold. This is not a commentary on whether I like gold now or not, it’s just it’s not gold. So the dollar is still the place to be in terms of a currency, and I don’t think it will be worthless.

What is true, and this is something really important, why we do this, is that the dollar does lose value over time. You lose purchasing power by holding more dollars. That’s why you invest your money in stocks, bonds, real estate, private equity, whatever it might be. Because those things keep up with inflation and beat inflation over time. Whereas the dollar, you’re falling behind. You hold dollars, the cost of goods goes up. So yes, the dollar is going to lose value, but does it lose value relative to other things, other currencies? And so far it has not, at least in the last couple of years here.

Now lastly, I got another question. Is the market looking toppy? Is it stretched? And what’s fascinating about it is if you look at the stock market, and we’ll talk technicals for a minute here, the stock market broke out. Remember it peaked in July, fell, went up again in September, fell. And remember I kept saying, “Can’t break out, can’t break out.” It broke out this week. The stock market is at an all-time high. It broke out.

And furthermore, on Thursday when the Dow was down at 300, guess what? It bounced. It bounced on that old breakout level. And so Wednesday and Thursday, the stock market did not close on its highs. In fact, it bounced off. If you draw a horizontal line at the peak in July and the peak in September and what would have looked like the peak in October. It broke out above that, came down, tested it, we bounced on Thursday and we bounced significantly on Friday.

So do I think it stretched? Maybe a little in the short term, but remember when we break out to new highs, especially after consolidating for a while, you’re going to get people chasing it a little bit. And again, we could have a correction at any time for any reason based on a tweet, based on a comment, you name it. None of us can ever predict that, see that. But in terms of bull markets and bear markets, I still don’t see any evidence of a bull market becoming a bear market. And I really, the fact that we have those sentiment indicators that are so sour, that is is a lot of fuel, I think for further gains.

Now again, we’re going to continue to get headlines. But has the market stretched here? I don’t really see it stretched. Again, zoom out a little bit, and I think you’ll see what I’m talking about, which is we were really struggling for a year and a half and we’re just now breaking out. I mean, we were around 2,900 on the S&P 500 and we were at a lot of volatility, all of that. And then just recently have we broken up above and now we’re at 3066 as of Friday’s close.

So we’re getting some momentum going here and again, some of the stuff could be lining up. If we hear more about prey Brexit, if we get a trade deal done and that’s announced, earnings continue to come in better than expected. Still negative for the growth, but better than expected. And we get some economic data that we got on Friday that at least has people saying, “Shoo, I’m I’m glad it wasn’t a horrible employment number, a good employment number.” It’s a relief rally, and so I don’t see it stretched. As always, asset allocation. What’s your situation versus somebody else? Totally different how much stocks and bonds you should have. But again, we’re not making any drastic moves because I don’t think it’s warranted.

So a solid week in the markets and overall a nice finish to the week. If you’re long stocks, if you’re short stocks and you’re a permabear, pretty tough week, but overall, pretty good week.

Have a great weekend, enjoy the… It’s been cold but beautiful weather back and forth here the last couple of weeks. So we are officially in the cold season as we approach Thanksgiving and Christmas and so forth.

All right, have a wonderful weekend. And don’t forget (210) 526-0057 is our phone number and our website is And you can get the podcast on all the podcast services, or I should say most of them. So make sure you do that. Feel free to give us some feedback, questions, we love it. Keep them coming. Have a wonderful weekend. Take care everybody.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy or product, including the investments and or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation. He/she is encouraged to consult with a professional advisor of his/her choosing.

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Dow 100,000?

November 1, 2019

Recently, the Dow Jones crossed 27,000 and investors marveled on how this was possible.  Is it conceivable that we would see Dow 100,000 in our lifetimes?

The Dow has been jumping in 1000-point increments in short order and the media is having a field day claiming its going up faster than ever.  But, on a percentage basis, the Dow’s rise isn’t doing anything completely out of the ordinary.  After all, a move from 26,000 to 27,000 is not the same as a move from 10,000 to 11,000.  One is a 3.8% move and one is a 10% move.  I’ll let you figure out which one is which.

The Dow Jones Industrial was first calculated in 1896 by Charles Dow and stood at 36.  It’s comprised of 30 industrial companies meant to capture the U.S. economy and how the general stock market is doing.  Since its inception, there have been many changes to the components of the Dow Jones.  In fact, the last original member of the Dow Jones Industrial Average, General Electric, was removed as a member in 2018.  The Dow Jones does have some flaws in its calculation compared to other indices such as the S&P 500.  It’s a point weighted system rewarding more points of the Dow if a stock has a higher price.  The S&P 500 on the other hand is a market cap weighted system.  It ignores price and looks at the overall market capitalization of the company to determine weight of the index.

Over the years, the Dow has seen some wild moves, but it’s still served as the most popular mainstream indicator of the health of the stock market.  During the Great Depression, just a few years after the Dow Jones was created, it fell 90%, but eventually recovered many years later.  It went on to finally surpass 1,000 in 1972 for the first time.  Through the 1960s and 1970s, the Dow was essentially flat with a tremendous amount of inflation.  Falling interest rates and a good economy in the 1980s and 1990s propelled the index above 10,000 in March 1999.  What seemed inconceivable a few years before finally happened.  In 2016, the Dow Jones reached 20,000, doubling in 17 years.

Sitting around 27,000 recently, it’s possible we see the Dow rise to 30,000 soon.  What about 50,000?  Does that seem impossible?  Based on history, many of you reading this article will see the Dow Jones cross 100,000 in your lifetimes.

Since its inception, the Dow Jones has annualized a price increase (without dividends) of approximately 5.5% since 1896.  If it simply continued that pace, the Dow would cross 100,000 in approximately 23 years!

Dow 100000

-At an approximate pace of 15.3%, the Dow Jones would cross 100,000 in 8.5 years.
-At an approximate pace of 6.96%, the Dow Jones would cross 100,000 in 18.5 years.
-At an approximate pace of 4.50%, the Dow Jones would cross 100,000 in 28.5 years.

(These returns are from 9/30/2019 and are using quarterly compounding and does not include dividends)

The Dow Jones does pay dividends and the total return that investors have realized is much higher than the 5.5% increase per year.  But, just on a price basis, Dow 100,000 is closer than you think.