By Justin Pawl, CFA, CAIA
In this week’s edition:
- As volatility returns to markets, an investment plan is imperative.
- The coronavirus is spreading quickly – what should you do with your investments?
- The first Fed meeting of the year will include new voting members, but no change in rates is expected.
Last Week Today. The International Monetary Fund (IMF) reduced its world growth forecast by -0.1% to 3.3% for 2020 and -0.2% to 3.4% for 2021. | Both the European Central Bank (0% with a -0.5% deposit rate – yes, Europeans are paying banks to hold their money), and the Bank of Japan (-0.1%) kept interest rates at current levels. | Conflicting updates on the spread/containment/spread of the Wuhan coronavirus pushed markets down, up, and then down again to end the week. | If you’d like to listen to my colleague’s podcast covering last week’s events, please click here.
Risk-off. International and domestic equities fell in sympathy for the week, with China, ground zero for the Wuhan coronavirus, bearing the worst of it falling more than -2%. Safe-haven assets like investment grade credit (VWETX +2.0%), gold (IAU +0.9%), and US Treasuries (TLT +2.9%) rallied in response. Speaking of US Treasuries, the yield curve is flattening again (the yields on bonds with longer-dated maturities have moved lower at a faster pace than shorter-dated maturing bonds), which is worth watching as a forecasting tool for future economic growth and inflation.
For detailed weekly, MTD, and YTD financial market performance, click on the table below:
Game Plan. Domestic equities fell around 1% for the week, which many have pointed out as the worst week since August 2019. Rather than look at the glass half-empty, a 1% weekly decline in equities is extraordinarily ordinary; the persistent ramping of the market over the last five months is far less common. Hence, last week’s 1% decline highlights that fantastic equity market returns since the end of summer 2019 have been accompanied by exceptionally low volatility. Might stocks go lower from here? Absolutely. For weeks, technical signals have been suggesting the market is overbought. But that doesn’t mean there will be a crash. A pullback of 5% – 10% is much more likely, as 10% declines occur 1-2 times per year on average. Nevertheless, there are two universal maxims about equity market declines:
- Declines are normal, and the price investors pay for higher potential returns from investing in equities
- Declines alter investors’ perceptions of risk, which can lead to poor decisions.
These maxims are why establishing and following an investment plan is vital. A plan provides a reference so investors can navigate choppy waters, avoiding poor decisions (behavioral or panic-induced) that lead to significant opportunity costs, and reduced wealth accumulation.
Check. In poker, a “check” is when you elect not to bet, but remain in the game, and the action passes to the player on the left. Checking gives a player an opportunity to gather more information about the other players’ hands, while preserving the option to play later in the round.
In a relatively slow week for economic news globally, the outbreak of the Wuhan coronavirus and potential financial ramifications for China and global growth, caused investors to sell first and ask questions later. There is no doubt that the coronavirus is a serious matter. The number of infected people and fatalities continued to rise through the weekend. A tragic reminder that despite humanity’s best efforts, nature is a powerful and ever-changing force that can dramatically impact our lives. At the same time, it’s too early to tell if the virus will have a meaningful impact on the economy or corporate earnings.
The coronavirus is one of more than a dozen outbreaks since 1980, and a look at the historical market responses to these types of events can help provide perspective. The tables below illustrate twelve of these episodes over the last 40 years and their impact on the S&P 500 and MSCI World equity indexes.
Sources: Dow Jones Market Data, Charles Schwab, and MarketWatch.
The pattern is relatively consistent in that the early stages of an outbreak are met with fear, which compounds as the virus spreads. Fear leads to market selloffs. Historically, the outbreaks are contained, and life returns to normal. Domestic equities have been less sensitive than their global counterparts to these outbreaks for two reasons: 1) epidemics tend to originate outside of the U.S., and 2) the U.S. economy relies more on internal consumption that most international economies. The pattern is relatively consistent in that short-term losses are typically reversed within 3-6 months both at home and abroad.
The coronavirus may turn out to be an outlier disease, bringing the Chinese economy to its knees and engendering a worldwide recession. However, it’s way too early to tell if that will be the case. For perspective, in 2002/2003, the SARS virus (also a type of coronavirus) infected over 8,000 people and killed 774. In the U.S. alone, there have been 142,000 hospitalizations and 8,200 deaths from the flu this season (National Foundation of Infectious Diseases). By contrast, the coronavirus has sickened 2,800 people in China and caused 80 deaths thus far. The Chinese government admits the virus isn’t yet under control, and there have been more than 40 confirmed cases in 13 countries outside of China.
Sadly, these numbers will continue to rise, as will anxiety with each new report of more infections and deaths. Yet, as an investor, it is better to “check”. Selling stocks now because of the coronavirus is a speculative bet on a disaster scenario. Buying stocks at this point is a bet that the market is close to bottoming. In periods of great uncertainty, investors are generally better served to do nothing, rather than charging into the chaos to make a big bet in one direction or the other.
Changing of the Guard. The first Fed meeting of the year this week includes the annual rotation of voting Presidents. The change is not expected to alter the dove/hawk tilt of the Fed as the one exiting dove will be replaced by another dove, and the two hawks rotating out will be replaced by two other hawks. The rotation is by design, but the equal exchange of hawks and doves is happenstance. Sometimes rotations produce a more hawkish Fed, and other times a more dovish one. Not this time, as summarized below:
- Dovish – James Bullard (St. Louis Fed President), dissented in favor of rate cuts in June when the Fed held rates steady.
- Hawkish – Eric Rosengren (Boston) and Esther George (Kansas City), both of whom dissented against interest rate cuts in 2019
- Dovish – Neel Kashkari (Minneapolis), sometimes more Dovish than Bullard
- Hawkish – Lorretta Mester (Cleveland) and Patrick Harker (Philadelphia)
The Fed is expected to keep rates steady at this meeting, underscoring their message that rates are “on hold” unless there is significant weakness or growth in the economy. The fact that this is a Presidential election year raises the bar further for a change in interest rates as the Fed goes to great lengths to minimize the slightest perception of political bias.
One of the biggest struggles for many marriages revolves around finances. Karl Eggerss was on CBS discussing items to consider when it comes to marriage and money.
Speaker 1: A solid marriage takes work and that includes your own relationship with money. Sharon Ko spoke with an advisor on ways to get your financial happily ever after.
Sharon Ko: People who are going to get married or planning to get married, what are some of your top tips?
Karl Eggerss: Finances are one of the biggest struggles in marriages because you think back to how this particular couple may have grown up, one maybe have grown up in a household that spent a lot, one may have grown up in a household that was saving a lot, and when you kind of put that together you could have some issues. So I really think discussing that in advance… And I think, for new couples getting married, having maybe some type of limit that you set for each other and say, “Hey, you know what? Underneath this amount we don’t really need to talk about it because we have things to buy, whether it’s for groceries or for the car or whatever. But if it’s a higher limit than X, we need to kind of discuss it and make sure we’re on the same page.” And I think that really gets the marriage off to a good start.
Sharon Ko: So do you recommend joint accounts?
Karl Eggerss: I do. I think when you have separate accounts you tend to not have that accountability. And some people may say, “That’s great, I don’t want that accountability.” But again, it can lead to big issues. So for me, I always recommend full transparency. And if you do have an individual account for whatever reason, then there’s no reason why you can’t have an app that shows all the accounts, whether they’re a joint account or whether they’re an individual account. Transparency and access, to me, is a good way to go.
Sharon Ko: Now for couples who are already married, I mean money is one of the leading causes of divorce so what are some of the problems to avoid? What are some of the things you can do to make sure that that isn’t the end?
Karl Eggerss: Well, some people have… I’ve seen stories where one of the people in the couple has racked up some credit card debt and the other one didn’t know about it. And they’re saying, “I’m on the hook for it.” Lot of laws, but Texas is a community property state, so you get assets, you get liabilities together, and you’re kind of on the hook for it. If somebody is racking up credit card debt behind the other’s back, there’s probably some bigger issues going on. But that’s why I do think talking about this in advance before getting married is huge because, again, two different backgrounds where you came from. But also, it’s a good time to kind of do, especially being at the beginning of the year, sit down and do this, even if it’s not a real tight budget, a pretty loose budget in terms of what you’re going to spend money on and not during the year. And that can really solve a lot of problems.
On this week’s show, Karl discusses the Coronavirus and the effects on the stock market and the economy. Plus, tune in to hear what the smart guys on Wall Street think about the current stock market.
Welcome to Creating Richer Lives, where living a richer life goes beyond the balance in your bank account. In fact, it’s about what you do with your dollars, and how the choices you make with your money not only define your lifestyle now, but impact your legacy for years to come. Whether you’re working towards retirement or seeking ways to make philanthropy your goal, there is a road to get you there. It’s time to redefine what it means to have a richer life. Welcome to Creating Richer Lives. Here’s your host, Karl Eggerss.
Hey, good morning everybody. Welcome to Creating Richer Lives, the podcast. We appreciate you joining us. As always, my name is Karl Eggerss, and the show is brought to you by Covenant. Lifestyle, legacy, philanthropy, Covenant is a registered investment advisor, and really the goal of Covenant is to unburden clients from the daily cares of financial management. That can come in lots of different shapes and sizes, and all kinds of things. Regardless of your situation, if there’s a question you have and you need to either know the answer or you’re really wanting some analysis done, it doesn’t hurt to reach out to covenant (210) 526-0057. The website, of course, is creatingricherlives.com. In fact, I had somebody earlier in the week call me and say, “You know, I’m trying to retire in August. I think I can do it, but I’m just not sure. I may need some answers to that.”
Then they proceeded to tell me that they had taken social security back at age 62, and she was regretting that decision and she said, “I didn’t even know I could claim my ex-spouses social security.” That’s one of those, that had she just sought out Covenant for some financial planning, we would have been able to help her through that and make a wise decision because she probably left literally tens of thousands of dollars on the table by not doing that, in deferring her own social security until a later date, which would have meant more money for her down the road. That’s a classic example of you don’t need financial planning just when you’re about to retire. You need financial planning at various stages of life way, way early on, whether they’re you’re accumulating wealth in the best way to do that or yes, you’re in retirement and figuring out how to distribute those assets to yourself, a family member, a charity, whatever that might be.
That’s really why Covenant does say lifestyle, legacy philanthropy, because those are the three options you have to do with your money. One of them is not, trying to reduce the amount week we give to the IRS, right? Tax strategy and tax planning is involved in there. So, if you need any help in the financial realm or if you know somebody that does (210) 526-0057 or creatingricherlives.com. By the way in terms of accumulating and saving, I ran into something very interesting this week, and I’m going to touch on it a little bit. And as the weeks go on, I’ll give you more information. I’ve found a little, let’s call it a little glitch in the way people save in their 401k, and why you could be leaving some money on the table, just by the way you are saving. There is a way to save in your 401k, and we’ll talk about that in a minute.
This week was a very interesting week because those very news heavy for two main reasons. Number one, we had all the big wigs in Davos, Switzerland, all the bank presidents, all the hedge fund managers, the thought leaders. The president was there and big economic forum. I’m going to talk about what was the theme that came out of that? Because it was one theme, it seemed that I heard when I listened to a lot of these interviews, heard one theme. Then, secondly the Coronavirus was a big theme on Wall Street this week. Now, we need to look and figure out how severe is this, and is it something that can really impact the stock market going forward? But it did have an impact on the market this week. I think the stock market was probably down somewhere around 1% or so.
Small Caps got hit a little worse. Of course, emerging markets got hit the worst this week primarily because this virus is out of China, so it got hurt the worst and really, I mean some of the outliers this week and it was a true risk off week and we’ve seen that trade before where pretty much everything across the board goes down except for things like utilities, treasury bonds, gold, real estate, investment trusts. We’ve seen that type of trade before, and it was no different this week. The biggest area hit this week were the energy stocks, the S&P 500 sector. The energy sector was down over 4% ,and now it’s down almost 6% this year. Oil and the energy sector getting off to a pretty rough start so far in 2020. This week, again the biggest mover, you saw things like oil down over 7%, natural gas down 6% gasoline, not a bad thing here, down 7.6%. We’ll see if that translates down to the gas pump near your house.
Copper down almost 6%. We saw, again, this risk on trade unwind a little bit and it didn’t really hit the equity markets that much. We saw some pressure, especially on Friday with the stock market, but it was not a dramatic reversal, but it did. You could tell it got people thinking, is now the time to lock in some profits after this very persistent run in the stock market. The last several months, seems like everyday we look up it’s a new high, it’s green, right? It’s because, primarily, it’s been my theory and I think a lot of us at Covenant, our investment committee met this week, and we’ll talk about that in a minute. The theory being that there’s, almost regardless what’s going on, as long as the federal reserve is there and has your back and has, is injecting money into the system every day through the repo market.
Some would consider it quantitative easing, keeping interest rates low, that trumps everything. The stock market continues to go up based on that liquidity, and really regardless of what happens, and you can almost see it because we know in 2019, profits of companies were flat. We didn’t have any earnings growth on the S&P 500 last year. The profits literally were flat, but yet the stock market went up considerably. What does that mean? That means stocks are more expensive now than they were. As we fast forward here, there are estimates showing that as we move through this earning season and the next one, and the next one, it’s four that we’ll have this year, these quarters that you’ll see it re-accelerate. If it doesn’t, that is something to watch, because stocks will continue to get more expensive or they will get cheaper because they will come down in price.
That’s something to watch. But really these two issues this week was Davos, Switzerland and the Coronavirus. Now, let’s talk about the Davos Switzerland first. You may say, boring economic forum. Who really cares about that,, and you’re pretty much right. But what’s interesting is some of the greatest investors of our time were there and they were all speaking and that was, I was trying to gather what was there, what was the theme? What was the thing we could grab from each of these folks? Ray Dalio, Bridgewater, his takeaway, his famous quote this week was “cash is trash”. Kind of scary when you hear people say that because also now the stock market goes down, it starts going down. But his point was as the Fed’s printing money, injecting capital, keeping interest rates low, you’re getting penalized to hold cash as you have for most of the last decade.
that’s what he meant, is cash is trash. Paul Tudor Jones, one of the best investors of all time said this is similar to 1999, and he said, we probably won’t see this end, this run, meaning this bull market, until the fed has to raise rates sooner rather than later. They don’t think they’re going to have to raise rates. If they do because a thing is going up and we start to get some inflation, all of a sudden they may have to raise rates sooner and that will choke perhaps the economy off, but it certainly will make investors run the other way. He’s saying, Hey, we’re in 1999. This thing’s running up and it will continue until maybe the fed does something different. Now remember, all these folks are saying there are issues to deal with.
It’s just the issues are different than the performance of the stock market. David Tepper, he’s now owner of the Carolina Panthers, just wrote a huge check to the ex-Baylor head coach. He’s got very deep pockets because he’s been an unbelievable investor. He was probably, he probably got famous. He was behind the scenes, and then he started doing some public comments, probably got very famous in 2013 when he said, essentially the Fed’s got your back, and as long as they’re there, it’s kind of a fed put, if you will, where every time something bad happens, they’re going to lower rates, inject money, and the market’s going to keep going up. Sure enough, it did. He has a tremendous track record. His takeaway was keep riding that horse. You just ride that horse until it doesn’t work anymore. His takeaway, Stanley Drunkenmiller, probably remember him from seventies and eighties excellent, excellent investor.
His takeaway was, hard not to be constructive with wild monetary stimulus globally. So again, it’s not just the US and our federal reserve. It is globally, what’s going on in terms of the amount of money being injected into the system. What did all these people say? They all said the same thing. They all said, they all pointed to, some were talking about climate change. Some were talking about our trade deficits. Some were talking about student loan debt. It mean, we have real issues, right? They all said that and they all acknowledged that. But these are guys that are paid to make money, which is different than solving the world problems. Some of them do
… Try to do that because a lot of them are philanthropic, but they all said, “Look, you have to participate in this because the FED is putting this in.” They’re not saying they agree with it, they’re just saying it is what it is. And I think that’s a valuable lesson that sometimes investors I talk to like to take a stand. I don’t like what China’s doing, so I’m not going to invest in Chinese stocks. Well, you’re probably buying their products. I’m not going to do this because I think… I don’t like how this restaurant’s doing something, so I’m not going to eat there, and you kind of have this… You take a stand on something. That’s all fine and good, but when it comes to investing, it’s a little more difficult to do that unless you’re buying really individual companies.
And even so, you still don’t know exactly what those companies are doing. But their theme was, look, the FED is loose, they’re putting money in the system and there’s really no other place but the financial markets, and as you do that cash depreciates, your dollars are worth less. That’s the takeaway. Those are some of the biggest money makers, some of the most successful investors of our lifetime saying that. Okay? So think about that, that that makes sense. Doesn’t mean you let your guard down. It doesn’t mean you go 100% stocks, any of that stuff. It just means that this market may keep going longer than you think because of that simple fact. That’s what came out of Davos, Switzerland.
Then of course, Tuesday we hear about this virus and this virus, the coronavirus has only been around just a couple of weeks. The good news as it’s spreading, the good news is that it was found early on. We have a lot more technology nowadays and apparently it’s not as severe as past viruses, it’s just it’s more aggressive in terms of its spreading. That’s just what I’m hearing. You may hear something different. I’m no expert on this. What does it mean for the stock market? Well, if you look back at the SARS, remember the SARS virus and this is maybe a distant cousin of SARS. The impact on the GDP of each country back in 2003 when this… When SARS came out, you really… Hong Kong, China, they got hit. The China’s GDP dropped by about 1%, Hong Kong is almost 2.5%. During that time the U.S. didn’t really… It hurt a little bit. It definitely hurt a little bit, but not that much.
What does that mean going forward? Well, here’s the thing. I mean, you really saw it specially as the news continued to trickle out Wednesday, Thursday and Friday, another case confirmed in the U.S., more deaths in China, two cases in Europe. The fear here is that it’s going to hurt the economy. So again, we go back and at SARS, how did it affect the economy? If it spreads and they can’t contain it, then yes, it would affect travel, it would affect hotels and the economy would slow down. People would hunker down. There was some theories even that Netflix rose on Friday simply because more Chinese people are going to stay home and watch Netflix. Okay?
There was a chart put out… This is actually… Charles Schwab and FactSet, I guess teamed up to put out a chart of all the various viruses since 1980 and kind of plotted them on top of the stock market. And the point of this really is that there is no correlation, SARS came out at the end of a horrible dotcom bear market, so it almost looks like SARS sparked the subsequent rally from ’03 to ’07. Of course that wasn’t the case. Same thing, April of ’09, the swine flu. Remember that? H1N1, that was April of ’09. So are you telling me that the swine flu was your trigger signal to go buy stocks for the next decade? No. It just points out that at various times these have come out, markets have done different things, but I would say completely unrelated.
We’ve had HIV and AIDS in June of ’81, the pneumonic plague in the early 90s, Asian flu, SARS, swine flu. We’ve had MERS, remember? M-E-R-S. Measles in December of 2014 and in 2019. Ebola, Zika, I mean the Cholera outbreak in 2010, we’ve had all these different things along the way and what Schwab and FactSet were attempting to do is say, “Plot all these when this happened, and then let’s see how the stock market did.” And they were like, “Hey, look, the stock market actually has risen a month after these came out.” Well, here’s the hard part. They use a dot. SARS, April of ’03, well, it didn’t really come out in April of ’03. So these things last a while, and so you’d almost have to do a timeline, but it’s a futile exercise, it doesn’t matter in terms of the longterm prospects for the stock market.
Now again, if it snowballed and turned into some massive thing that the world’s never seen before, of course it would affect it. And is it going to affect GDP? Yes, it might, depending on what happens with it. But there again, as I just said what these other investors were pointing out, there are bigger issues in terms of what’s moving the stock market, but you could clearly see that when the news got worse this week, you started to see the risk off trade. Go buy bonds, go buy gold, go buy utility stocks and get out of stocks that’s what happened this week.
Here’s the real issue that we see at Covenant and I had a conversation with our chief investment officer, Justin Pawl yesterday as we do every Friday kind of wrap up and just discuss the week at hand. By the way, he has a weekly blog, so if you like some in written form, of course we transcribe the podcast, but if you want a different format, a quick five minute synopsis on Mondays mornings, that is the place to go. Go to creatingricherlives.com and you’ll see his blog he posts up there and it’s some of the same thoughts that I have here. A little more condensed version and a little different way because he writes it differently than I speak. But we get together on Fridays and we were discussing the fact that the plane right now, we’ll call it the global economy, the plane is cruising along at not a real high altitude, so you don’t have as much room as you might have in the past for stuff like this.
What do I mean by that? Well, if this turns into something that really does affect the economy, you don’t have as much room for air. It could tip you into recession versus if our economy has grown at 4% per year, you would have a little more buffer. The planes flying a little lower is what we kind of discussed. And it’s interesting because we had our investment committee meeting this week, our quarterly, and we get together and discuss themes, what we’re changing in our portfolios, et cetera. And you’re seeing some mixed signals for sure. I don’t think there’s anything dramatic now versus a quarter ago in terms of the economy. There are some good things and some bad things. We are going through a manufacturing recession in the United States, probably globally as well. That’s nothing new. Some would say, “Well yeah, we’re switching to a service economy,” but there’s more to it than that.
Really what we’re watching… Some of the big things we’re watching… Probably the main things watching the wages and the hours worked, because what happens when people work less? They make less money, hence they have less to spend hence… You could say the economy’s slow, so that’s something we’re watching. You go back to 2015 and ’16 which was a… Could have been a little mild recession. I think it was at that point and certainly an earnings recession and during that time you saw industrial production fall, you saw oil fall and we’re seeing industrial production fall. We’re seeing some of these things start to look like they may be rolling over a bit. Now again, you balance that with look at housing, housing’s been doing fantastic. That’s a great indicator, people buy houses, guess what they’re going to do? They’re going to go fill them up with stuff. They’re going to buy stuff. Let’s watch that.
We also discussed student loan debt, how it’s continuing to be a bigger and bigger problem that needs to be addressed in some form or fashion. We will have our economic quarterly update written sometime later in the week and we’ll put that out and I’ll remind you next week how to get that. And again where, where are we right now? BEcause there’s a lot of mixed signals and, but that’s why you may be seeing rates at least for the short term, kind of have a cap on them and you saw interest rates go down this week. We never know about sentiment though, right? In other words, there may be valid reasons for interest rates to stay down, but sometimes they just go up, so that’s something we need to monitor.
This is all fluid as it always is. But that’s why what we’re talking about is once you know, based on you and your financial advisor helping you through kind of what the big picture looks like in terms of allocation, how much safer income oriented money do I need and have? Versus how much growth oriented, capital gains oriented money do I have or need or should have? Once you determine that, you still got to drill down within there and figure out how to do that. Where’d I get the income with rates at a 10 year treasury in the United States at 1.7%? Lots of places to get income outside of the liquid treasury markets. There’s lots of ways to do that and to me, it’s a combination of those things to try to boost your yield. And the same thing on the equity markets.
Do you go U.S.? Do you go international? Do you go large companies, small companies, growth companies, value companies? The answer is yes, yes and yes. It’s just you need to have a combination of those and they need to be weighted towards where you see the best pound for pound value. And as the market continues to mature and move along here, it is getting, I don’t want to say harder, but there are certainly, in my opinion, a bifurcated market that continues to happen, which is the shiny object companies, the story stocks are getting a higher valuation,
And those would involve technology companies, the names you’ve heard of. Those would involve some really good consumer brands. Great companies, it’s just you’re paying a lot for them. There’s no doubt about that. On the flip-side, the companies that are boring, the companies that seem to be left for dead. I call them the garage sale companies, the things you find at a garage sale that … They got little nicks and bruises on them, but boy, what a great deal. There are a lot of those companies still. So if you own mutual funds, or you own ETFs, or you own individual stocks, you need to know what you own. You need to look under the hood and make sure. I keep telling you that. And as the markets move along here, and especially as we go through corrections, which we will at some point, you need to understand kind of how much bumpiness in the road are you willing to take and what does that look like?
Again, I think investors are being lulled to sleep the last few years because things have been so good. And yes, we’ve had some sharp corrections December, or the fourth quarter of 2018, but we had such a rapid recovery that most people didn’t even notice what happened. And so, the corrections that may last a little longer, not to say in ’08, but just a 15% drop, but it stays down there for a longer time, like maybe a year. What do you do during that environment? Do you have enough income? Can you withstand that volatility? And we are likely to see volatility as we move along in the year because of the election. We can’t wait until the election to kind of deal with it. We need to be thinking about it now. So this is where you do the stress test. This is where you look back at the fourth quarter of ’18 and say, “How did my portfolio do during that time?”
Assuming it’s the same, “How did I do and am I comfortable if something like that happened again?” What you can’t do is, “Well, I think it’s going to go down, so I’m going to shift everything to this side of the ledger and just sit and wait and then when it goes down, I’ll go by back in.” Easier said than done because when it starts going down, most people don’t buy back in. They tend to think there’s more coming and it’s very challenging. So putting a portfolio together, especially now where we’re near all time highs, and interest rates are near all time lows, and you have things like commodities that haven’t done very well the last few years. It’s challenging. Do you get off the train, so to speak, lightly from the things that have done extremely well and start reallocating the things that haven’t? And I would say partially, yes. That’s what rebalancing is all about.
That’s what asset allocation is all about. So I’ll give you more details along the way here in terms of next week. Again, we’ll have our economic summary put out and I’ll give you more details on kind of … If you’re not going to read it, I will summarize it for you, but just know that we still have an economy that is, we’re calling it good but not great still. It’s still there. It’s still good. It’s just there … It’s vulnerable and that hasn’t changed. There’s going to be some people on one side of the fence that are usually the politics influence, but they say this is the greatest economy of our lifetime. There’s others that are like, “This is the worst economy of our lifetime. Look at all the debt, look at all this, look at all that.” It’s always something in between, isn’t it?
I mean, we have an economy that is … It’s cruising along. We’re doing okay. I mean, look, the jobs market has been great and is it going to start curling up? Meaning, the unemployment rate. We need to watch that. Some on our committee think the fed should be cutting right now, again, another rate cut. So again, let’s watch that as it moves along here. But bottom line is this Coronavirus is something that shouldn’t and hasn’t had a history. These types of viruses had a longterm effect on the stock market, but any news event, and I’ve said this multiple times on this podcast, the market can correct anytime for any reason and it sometimes gives you a great opportunity and sometimes it’s legit reasons. And this week was a classic example of that type of news-driven sell off and it may continue.
The market is stretched here, there’s no doubt about it. I was pointing out in our investment committee meeting, looking at some indicators that I’ve looked at over the years that I created that the market’s stretched, there’s no doubt about it. It’s stretched in the short-term. Stretched doesn’t mean we have a bear market because I still don’t believe there’s any signs of a bear market approaching. A correction looks very likely. But again, why aren’t we doing massive changes? Because we don’t know the magnitude, nor do we know the exact timing. But even if we knew the exact timing, even if it starts today, is it 2%? is it five, 10, or 20? We don’t know. And so therefore, you have to plan for all of those in advance. In other words, can I go through a 10% or a 20% with the portfolio that I have right now?
And again, I’m not suggesting you don’t make modifications, I’m just suggesting you have to have some sort of a core portfolio that is kind of in your eyes all weather to a certain extent. So we will see more information coming out on this Coronavirus, there’s no doubt about it. As the weekend goes along and it’s … Again, hopefully we’ll be contained but you’re seeing tons of cities kind of in lock-down in China. But we’ve seen it in the US. We’ve seen it in Europe. And it’s always, always scary. These are scary events. Anytime there’s a virus or anything like that, it is scary and how fast it can spread and so forth. But we are living in 2020 with excellent technology. These countries are for the most part I think on the same page in terms of helping each other and trying to stem this off on I have no doubt they will.
But we could see a little dent in economic growth and that’s why the market really has struggled a little bit this week. But as I said, look, the stock market again for the year, still up. A pretty good January so far, but a little sucker punch in the gut from this week. But primarily, it was in some of those really effected areas. All right. Hey, don’t forget to 210-526-0057 and our website, creatingricherlives.com. Thanks for joining us and joining me. Appreciate it. As always, share the podcast, share the love, send it to your friends and tell them there’s lots of ways to get our information. So we love educating folks. That’s what we do and we want to educate more. All right, folks. Have a great weekend. We’ll see you back here next week on the podcast, Creating Richer Lives.
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 proved 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 creatingricherlives.com.
Karl Eggerss joined The Ride with Mac & Chad to discuss the impact of the coronavirus on the stock market and the economy.
Mac: Hi. Welcome back to the show: 4-0-5-4-7-8-1-5-2-0, if you want to chime in and contribute to the conversation. We’ve got Karl Eggerss, Karl Eggerss from CreatingRicherLives.com. Are you still on the beach, man?
Karl Eggerss: I am not on the beach. I’m looking at dreary weather outside, back in the grind, back in the grind.
Chad: Then I will talk to you today because you were on my naughty list last week. Check it out. Yeah, but now my wife’s in Miami.
Karl Eggerss: There you go.
Mac: So what’s new? How’s it going man? What’s new with the economy? What are we looking at as far as the country, man and China and all these different tariffs? Are we really in a bad spot or we moving forward?
Karl Eggerss: No. You know what’s really grabbed the headlines the last two days is this virus in China. We saw not much activity here in the States. Once we saw the confirmed case in Seattle come out yesterday, probably midday, the stock market took a leg down as people started being concerned. The reason why you would think, “Well, what does the stock markets have to do with this virus that’s similar to SARS back in 2003?”
Karl Eggerss: What it has to do with this, people are worried, investors are worried. Wall Street’s worried that what happens if you and I are scared to go on a plane and go travel? Well, then all of a sudden the airlines aren’t as profitable and oil prices go down, which isn’t the worst thing in the world, but maybe travel gets hurt, maybe lodging gets hurt and the hotels don’t do as well. The economy actually slows down. Could it cause the economy to slow down?
Karl Eggerss: I actually looked back in 2003, when the SARS epidemic hit and it definitely affected the GDP, the growth of China during that time, but it barely budged the United States. It really didn’t have a huge impact on the United States then and I don’t think it will now. It did help today. Early this morning, the Chinese came out of course and said, “We’re on top of this,” right?
Karl Eggerss: … Which we don’t know if that’s accurate or not, but we’re on top of this. The stock market jumped 100 points and it gave up some of those gains throughout the day. It seems to be a little bit of a non-event, but it definitely got Wall Street looking going, “Hmm, could this affect our economy?” That’s really what that has to do with Wall Street.
Mac: That’s pretty interesting. Karl Eggerss with the Creating Richer Lives joins the ride with Mac, Chad, and producer Ryan. It’s funny. Well, it’s not funny. It’s not a funny thing. It’s that disease, but you wouldn’t even … You’re right. You wouldn’t even think about the stock market.
Chad: Yeah. And Karl, what do you think with this impeachment bill, 24 hours of opening arguments on each side? Like I say, I’m a political junkie and I’m the kind of guy that watches C-SPAN and if I get bored and the senators start falling asleep, but it isn’t affecting our market.
Karl Eggerss: It’s not. In fact, a couple of weeks ago, or maybe actually last week, I think I mentioned to you guys that you can see when there’s two news events in one day and the market goes one direction or another, you can see what Wall Street’s valuing more than the other thing. Last week was a classic example of the market was going up on the China trade deal more than it was going down on impeachment because again, from an economic standpoint and from a profitability standpoint, the trade deal makes a heck of a lot more of an impact than even a full impeachment would.
Karl Eggerss: The impeachment has not affected the market at all. How do I know that? Because we were at all time highs just in the last couple of days. It’s not really affecting it. I don’t know if you guys have seen, but in Davos, Switzerland, they have this big economic forum. The President is over there right now, all the big leaders of JP Morgan and Morgan Stanley and all these big powerhouse hedge fund managers, everybody’s over there right now.
Karl Eggerss: It’s interesting. If you listen to some of the best investors, literally of our lifetime, some of the biggest and best, they all have a very similar theme, which is they all say the reason the market’s going up the way it is, it doesn’t have to even do with the trade at this point. It doesn’t have to do with … The market’s not even caring about impeachment. What it has to do with is the fact that the Federal Reserve is pumping money into the system.
Karl Eggerss: If you go back a year ago, they weren’t. They were raising interest rates and they were actually trying to slow things down and then they reversed course really quickly. What did they do all through 2019? They lowered interest rates, they expanded the size of their balance sheet and they’ve really done what many on Wall Street believe is another round of what’s called quantitative ease, which is something we haven’t heard in a few years.
Karl Eggerss: That liquidity, when you have that much liquidity in there, what happens is your cash, the dollars you hold in your wallet, as we’ve talked about weeks ago, it becomes worthless. People say, “I’ve got to get rid of this cash and go buy something, whether it’s real estate or stocks or bonds.” That’s really what’s happening. Everybody that has money is putting it to work somewhere. I say everybody has money, I mean on Wall Street, people that have money to invest. The best place for it is not sitting in in their pockets.
Karl Eggerss: So that’s what’s really driving this market higher. That was a common theme this week and that to me, there’s no sign of that stopping. What would stop it is if we fast forward, let’s say six months from now and we start to see inflation pick up. If we start to see inflation pick up and prices start rising faster than everybody’s comfortable with, the Federal Reserve would change their tune and they would start raising interest rates. That’s what would cause the market to start to stumble because Wall Street loves when the Federal Reserve is being very accommodative, they call it.
Karl Eggerss: There’s an old adage on Wall Street that says, “Don’t fight the Fed.” That means if the Fed’s lowering rates and being easy with monetary policy, markets do very well. When they’re tightening and they’re choking things off. The market struggles. It’s been that way for as long as I can remember.
Chad: Sure. Karl, let me ask you a question. I don’t know if you know the answer to this or don’t know the answer to this or I have a theory on it, but obviously we’re a big natural gas state-
Mac: Of course I do, he says.
Chad: … And for years we could not export natural gas, but I saw that we’re working on a deal with some European countries to start exporting natural gas, but prices for natural gas are really low.
Karl Eggerss: Yes.
Chad: How long do you think it may be before we see a turnaround where natural gas prices start rising?
Karl Eggerss: That is a tough one. It’s interesting.
Mac: I’m trying to throw you a hard ball.
Chad: Yeah, check them out.
Karl Eggerss: Yeah, that’s a tough one. Well, if you look at it during all the fracking and everything that was going off, they were burning off natural gas just trying to get rid of it. Right? Because it just wasn’t worth it. I don’t know what will … The typical supply and demand is what’s going to turn it around. It’s really to where people that are in the natural gas business, they can be in the uranium business. They can be in anything that is like that. When the economic gets so bad in that business, guess what happens? People quit doing it.
Karl Eggerss: Companies literally say, “You know what? Instead of natural gas, why don’t we focus on who knows what else? Uranium or gold mining or something different?” And so guess what happens? There’s less competition and less supply, hence, you tend to get the prices starting to rise. It may not be that the demand has to pick up. It may just be that the supply just starts going down. But all of this stuff, whether it’s oil or natural gas, we are so good at getting it nowadays. That’s why these prices are a little depressed. When that Iran, when World War Three happens … Remember that a couple of weeks ago?
Chad: Yeah. I’m still waiting for Y2K.
Mac: It was the world war that lasted an hour. Yeah.
Karl Eggerss: That’s right. Well, when that happened … Maybe we should call it World War 30 minutes. Anyway, when that happened, did you notice that oil went up 4% that night and when they quote unquote “retaliated”. I guarantee if we were to go back 10 or 15, 20 years ago and that would’ve happened, oil would probably spiked 10%. Even that type of incident didn’t cause oil to just go bonkers. It went up and it was a good day for it, but it didn’t go up to the levels you would have thought. It’s because we have so much of it and it’s the same thing with natural gas.
Karl Eggerss: Yeah, natural gas, it’s been a very, very tough business and there’s plenty of people that are looking at it going, “Is it now? Is it now? Is it now?” And it hasn’t turned around. I do think if we did see inflation, you would see all commodities go up, not just natural gas.
Karl Eggerss: You will see spikes along the way because this stuff does ebb and flow, but it’s been pretty amazing to watch how depressed it has been the last few years.
Mac: Karl Eggers, you’ve got knowledge bombs like America dropped bombs on Baghdad. I just had to say it, because we-
Chad: Absolutely. I want to close this with a bit of humor. I know watching what’s going on in DeVos that you were really glad that with Ivanka Trump there, that Acosta was there to ask her how she felt about her dad’s impeachment. “My dad’s in Switzerland.”
Karl Eggerss: I know they all flew over there in their private jets too.
Mac: Hey brother, the website, CreatingRicherLives.com. We appreciate you, man. Every Wednesday, 3:50. You’re a good man. Thank you, brother.
Karl Eggerss: Thanks you guys.
Chad: Have a great one, man.
Mac: All Right? It’s the right. Oh. I just turned my mic off. Yeah. Okay. It’s the right on KOKC. We’re going to take a quick break. We’re back after this.
By Justin Pawl, CFA, CAIA
In this week’s blog from Justin Pawl, CFA, CAIA:
- Last Week Today. A quick rundown of market-moving news.
- The Fed is operating in a new era, requiring a new approach to monetary policy.
- Details of the Phase 1 trade deal.
Last Week Today. The U.S. removed China’s designation as a currency manipulator, a significant concession in advance of the Phase 1 trade deal signed on Wednesday. | Alphabet’s (aka, Google) became the fourth U.S. company with a market capitalization greater than $1 Trillion, joining joined Apple, Microsoft, and Amazon. | The Senate passed the US-Mexico-Canada trade deal (USMCA). | U.S. Retail Sales for December increased as expected by 0.3% month-over-month. Still, October and November were revised lower, reducing the Atlanta Fed’s GDPNow forecast from 2.3% to only 1.8% for the fourth quarter.
Despite mixed economic news, stocks continued higher. Some of the stock appreciation is due to the Fed’s expanding balance sheet, but the first week of earnings also brought good results for the Financial sector as banking/investment behemoths like Goldman Sachs, JP Morgan, and Morgan Stanley soundly beat consensus earnings expectations. When the bell rang on Friday afternoon, the S&P 500 was higher by +2.0%, the Dow Jones +1.8%, and the Nasdaq +2.3% for the week. International stocks rose as well, but are failing to keep pace with domestic equities as the Euro Stoxx Index gained +1.3%, and the MSCI Emerging Markets Index rose only +0.6%. Markets have been rising at a furious pace since the end of 2018, and with retail investors growing increasingly bullish, a pullback would not be surprising, even if the overall outlook for equities in 2020 is generally favorable.
The Fed’s Fizzling Power. Last week the Wall Street Journal’s Greg Ip published a relevant article on the waning power of central banks in general and the Fed in particular. It’s worth reading in its entirety to understand the history of the Fed and how today is different, but for those jammed for time, below is a summary.
- In today’s world, the Federal Reserve’s influence on the business cycle is lower due to the composition of the economy and the new normal in developed countries of low interest rates, low inflation, and low growth.
- The dramatic growth of the service industries (e.g., professional, education, and health care) has reduced the economic contribution of the most interest-rate sensitive sectors (e.g., durable goods manufacturing and construction). In a new research paper, Larry Summers and Anna Stansbury estimate the response to interest rate cuts has declined by a third, removing a good portion of one of the Fed’s most powerful levers to stimulate the economy.
Source: The Wall Street Journal
- Since WWII, every recession was preceded by the Fed raising rates to control inflation, and every recovery began when the Fed cut interest rates (by an average of five percentage points) to stimulate growth. With the Fed Funds rate below 2% today, there is no room to cut interest rates by that much without diving into negative interest rates. However, the Fed has, for all intents and purposes, stated it would not take rates negative. Negative rates have not helped Europe or Japan, where economic growth remains muted and inflation well below 2%. Thus, the Fed is limited to cutting interest rates to the zero boundary and reinstituting Quantitative Easing. The latter proved excellent at inflating asset prices but has not produced enough economic growth to generate higher interest rates.
- Fiscal policy is likely the only game in town. With clear examples of the ineffectiveness of negative rates abroad, many economists have concluded that fiscal policy (i.e., government spending) will be required to pull the economy out of the next recession. History is on the side of economists on this one, as the efforts to fight World War II were primarily financed with debt and helped propel the country out of the Great Depression. Advocates of Modern Monetary Theory (MMT) takes this a step further, suggesting that in the next recession, the Fed should create unlimited money to finance government deficits to stimulate the economy. Like Quantitative Easing and negative interest rates, MMT is uncharted territory, and the long-term impacts are not well understood.
Ip’s article on the increasing irrelevance of the Fed is not fiction, and the Fed is well aware of their waning influence. In fact, the Fed initiated an extensive policy review in 2018 and is expected to share its findings by the middle of this year. The goal of the review is to update its monetary policy to avoid the negative interest rate trap by changing the way the Fed approaches inflation. As we’ve discussed on multiple occasions, the Fed has historically treated the 2% inflation target as a ceiling that should not be exceeded. Modifying the interpretation to 2% as an average target, or setting the target to a higher level, would allow the Fed leniency in letting the economy run “hot” for a period of time. Higher inflation would allow for higher interest rates, giving the Fed more ammunition to combat downturns through traditional monetary policy. The key is to get interest rates higher from where they are now without pushing the economy into a recession. This is one reason we, along with others, asserted that raising interest rates in 2018 was a mistake – let’s hope the Fed still has time to correct it during this economic expansion.
One Down, ? To Go. As expected, President Trump and Vice Premier Liu He signed the U.S./China Phase 1 trade deal on Wednesday. While President Trump suggested Phase 2 negotiations would begin immediately, further progress is unlikely before the Presidential election. So, for now, the new normal is static tariffs and China’s commitment to purchase $200 billion of additional goods and services over the next two years, as follows:
- Manufactured Goods: $77.7 billion, including aircraft, vehicles, medical instruments, pharmaceutical products, and iron and steel products.
- Agricultural Products: At least $32.0 billion.
- Energy Products: $52.4 billion in purchases of liquefied natural gas, crude oil, refined products, and coal.
- Services: $37.9 billion consisting of charges for intellectual property use, business travel, and tourism, as well as cloud-related services.
While not a panacea for either country, the good news (assuming China holds up their end of the bargain) from the ceasefire is that uncertainty on global trade has been reduced. Greater predictability should give corporate management teams more confidence in their investment plans, improving the prospects for global growth.
Karl Eggerss was interviewed on CBS to discuss recent geopolitical events involving Iran and their impact on gold and oil.
Sharon Ko: The US and Iran conflict drove oil and gold prices up. In Your Money Smart this morning we’re talking about how the fluctuations affect you and your investments.
Sharon Ko: Can you explain how international events affect the two?
Karl Eggerss: Yeah, historically whenever there’s an issue we’ll call it like that, any kind of geopolitical risk, especially something that happens very quickly overnight, you typically do see oil and gold go up. Oil primarily because of where it’s taking place. There’s a lot of supply over there, and if that gets choked off, oil prices could rise. And so we saw an initial spike of oil prices, which obviously leads to gasoline prices going up. And that’s really how most of our viewers are affected is by gasoline prices going up.
Karl Eggerss: But when things calm down, it reversed, and the reason it reversed so quickly is because of the fact that the United States is pretty energy independent compared to where it was even 10 years ago. And so there’s a lot of oil in the world. With technology we obviously know about fracking right here in our backyard, and so because of that, oil prices don’t spike as much as they used to on these kind of events. In the past we may have seen an 8 or 10% jump in oil price or gasoline prices. We didn’t really see that this time and it’s because we have a lot of oil, which is a good thing.
Karl Eggerss: In terms of gold, basically when the US dollar is weak, gold goes up. And we’ve seen that at times, when other assets around the world are going up, sometimes people tend to flock to gold as kind of a safe haven. But historically gold has actually been one of the worst asset classes compared to stocks, bonds, real estate. It’s been much, much worse. So while temporarily it sometimes can go up, and it can go up for a few years even, over the real long term, it hasn’t performed as well as stocks and bonds.
Sharon Ko: So, when would be a good time to jump in and invest in gold?
Karl Eggerss: You know, I don’t think it’s a bad time to ever have gold as part of a portfolio, because it does move differently. And really the reason people buy different things in their portfolio is to have something going up while something’s going down. It kind of mitigates some of the risk. And that’s what gold tends to do, it tends to move differently than stocks and bonds, and when you put it together, it gives you a little smoother ride. So, a small portion is fine. Some people like to buy physical gold, but then you have the problem of storing it and you have to go sell it and try to find somebody to buy it from you. But nowadays you can trade on the New York Stock Exchange. A particular [inaudible 00:02:30] that actually tracks the price of gold pretty easily just like a stock would.
Sharon Ko: Thank you to Karl Eggerss with Covenant for that interview.
On this week’s podcast, Karl Eggerss discussed the tough decision when the stock market’s at an all-time high. Buy now or wait?
Hey, good morning everybody. Welcome to the podcast. Thanks for joining me. We appreciate it. As always, our telephone number (210) 526-0057, our website creatingricherlives.com. And this show is brought to you by Covenant, lifestyle, legacy, philanthropy. And speaking of Covenant, I am broadcasting from Florida this week down at our leadership annual meeting. Of course we meet constantly, but this is our annual meeting, kind of a getaway from the office and really focus on how to create even more richer lives, improve what Covenant does, bring you more information. Go over the tools that we currently use for our clients, the technology and really just to make everything a better experience for our clients.
And if you’re not a client then hopefully someday you will be. And we know some of you will, some of you listen to this for informational purposes only and that’s fine too. Our goal is really just to bring you information on this show. If we can help you in any way, shape or form, of course we are here to do that. We have tons of advisors, different specialties, we have a tax team, and so anything in the financial realm we can help with. And the goal again is to Create Richer Lives. That’s why we named the podcast what we do.
But I will say the view down in the Rosemary Beach area, the Destin area, the white, white sand, beautiful, beautiful. I’ve never actually been to this particular area and kind of hard to leave, but I am battling through and going to bring you the podcast as I normally do on the weekends. So grab your cup of coffee, sit back. We have brand new all time highs on a lot of different markets and indices. And as we continue to go up, if you’re not invested to the fullest extent in the equity markets, this is where mistakes can happen.
So let’s first talk about the lay of the land, what we expect, where we are. Then we can go into, if you’re not where you want to be, how do you get there? And then I got a question this week. Somebody asked me that called in from a radio interview I had done and said, “Do you use stocks? Do you recommend individuals use stocks?” So we’re going to answer that as well. I’ll just give you my general take on them.
So where we are is obviously we continue to make new highs. This week we saw a lot of activity, and for the most part the headlines were the trade deal phase one got signed. The same time, the same day, probably not by accident, the impeachment articles sent to the Senate, that kind of signing as well. Very strategic perhaps. But regardless, it did tell you as the markets were continuing to go up, what Wall Street focuses on. And this isn’t a political statement, this is fact that the profits of companies, we have earning starting coming out this week, those profits, what they’re doing, what the Federal Reserve is doing, that’s more important than the political headlines that you see.
Talked about that on an interview earlier this week in Oklahoma City with those guys about the headlines are going to continue to come. Every single day our phones are buzzing, television is going, the internet. It’s going to continue to try to grab your attention and it’s easy for you to get distracted with those headlines, but don’t get distracted from your longterm plan of what you should do with your portfolio. But it does tell you what the markets are weighing towards and what they are given the biggest weight to, which is we are starting earnings and we started to see that and let’s see how those shape up. Because remember over the past quarter or two we’ve seen earnings flatten out. Meanwhile the stock market continues to go higher.
So what does that mean? That means stocks are getting more expensive in comparison to their profits. So is it time for those profits to catch up? And the answer is yes, because we don’t want to end up in a 1999, this is an extreme, but a dot com bubble where we see stocks go up parabolically. And at the same time their earnings aren’t supporting that, because what happens is it can come crashing back down. So we don’t want to see that continue, so at some point we need these earnings to re accelerate.
Now the good news that as these are coming out is that we saw things like weekly mortgage applications up 30% in the past week. And this was the highest reading in 11 years, and we know the inventory is very low. So we’re starting to see housing pickup. In fact, Friday we saw the housing starts up 17% month over month blowing away the estimates. That was a 13 year high. Now, some of these, and I’ve warned you in the past, some of these economic indicators that come out can be adjusted a month later, higher, lower, and so you’ve got look at the trend. But housing is something that needs to improve and continue to improve because as it does, we know that has a big domino effect. Right? Not only do you have all those workers working on the house, you have a bank that probably financed it, helps them. You also have the house that needs to be filled up with all types of refrigerator, appliances, everything else, lawn mower, you name it.
So that has this trickle down effect. And so that is good. We need housing. And as we’ve talked about with our resident economist, our in house economist Sean Foley. The past 12 months, we’ve really been waiting for housing to kind of really pick up and it may be doing that. We’re just about to have our investment committee meeting, which we do quarterly and I’ll bring you what information comes from that as we share our thoughts and we kind of get a consensus view on what we see here at Covenant for the next quarter. But I have a feeling he will say that, “Yes, this is good. This is housing starting to pick up.”
And again, there’s other things like, oh, industrial production, we know manufacturer’s been struggling, those things aren’t great. So when you put it all in a blender, what does this mean? It means that probably the Fed’s not anxious to raise interest rates. That’s a big reason why the markets are going up. And at the same time, remember all that talk we had months ago about the repo market and injecting money in the banks? That’s continuing and that liquidity is a big theme here, that’s going into the market and that’s what’s lifting stocks up. That’s why you’re seeing this real just persistence. Right? It’s just every day you turn on the TV, it’s the market’s up 50, 75, 100, 200 points and a lot of it has to do with the Fed’s balance sheet and the liquidity that they are adding.
So it’s not quantitative tightening anymore, it’s almost quantitative easing, again, and that’s lifting us up to new highs. So as we go up to new highs, are we in the middle of what could be perceived to be a blow off top? Are we in the eighth or ninth inning of this run? Possibly. But remember we really didn’t move from January of ’18 until you could almost argue really the fall of ’19, so almost two years we went sideways and now we’ve just broken out technically to the upside. So we could continue this going on a run, and for those that have been betting against the market, they’re getting crushed right now because this market continues to go up.
So I can’t answer when it’s going to peak. I can just answer that you have to be a little more careful the higher we go and just make sure that you’re not capitulating to owning too many equities. And as you do that, again, it boils back down to what do you need? What’s your allocation need to be and make adjustments. And then within those allocations, bond, stocks, other things, making some tweaks and finding good deals as you move along.
If you’re somebody that’s under allocated, and you know it, you’re saying, “I expected a pullback, I have not gotten it.” What do you do? You should have a lot more stocks per se. Let’s say for your longterm plan, you have two choices. You can wait. Well, you have three really. You can wait, you can put it all in today or you can average in. Averaging in is the safest way to do it, but also what are you averaging into? We’ve seen a big move in growth stocks this year, already up almost 5% year to date based on the Russell 1000 Growth Index. That’s a big move, especially when you compare it to value, which has not done that. So we’re still seeing the same theme from last year continue in to 2020.
So as your averaging into the market to get where you’re supposed to be, really understand where you’re putting those dollars in. And I think as we move along it’s going to become more and more important that the rising tide is not going to lift all boats and that some boats are going to rise and some boats are not. So that’s going to be really important. But we are starting to go parabolic here, especially in some of these areas like growth. And then you look at areas like energy, for example, that are at 17 year lows relative to the S&P 500.
So watch for rotation as we move along to 2020, but right now really the key is spread out. Do not make big bets in one place or another because if you’re wrong, you’re really wrong. Now if you’re right, you can be doing really well. But here’s the thing, if you’re spread on diversified, you’re still doing pretty well. You did well in 2019 and you’re doing well in 2020. All right, so that’s how I would handle it. Once you know where your allocation should be, then I think you average in and use time stops, if you will. So if we get a pullback, you add a little more. If we don’t get a pullback, you’re averaging over some timeframe.
Now the question I got this week, do I recommend individual stocks? I will say that we have a strategy at Covenant that does contain individual stocks. And generally speaking, if you can avoid individual stocks, sure. For most people, I don’t think they need individual stocks. I am also not one to say that you shouldn’t have them because they do serve a purpose for different reasons. Right? Obviously Bill Gates did very well not diversifying. He owned Microsoft and became one of the wealthiest people to ever walk the planet. So that works for some people. And probably some of you that own your own company, you have most of your net worth, if not all of it, in your own company. You’re already doing that. But generally speaking, I don’t think most people need individual stocks.
When do you add individual stocks if you have a very particular thesis, right? A very specific reason that company that you have a strong belief it’s going to do very well for some reason, and if you buy a mutual fund or an exchange traded fund, you’re just going to dilute that. You may own some shares in there, but it’s not enough to make a difference so you buy the individual stock. That’s one reason.
The other reason may be as you grow in your net worth, you may want to add some stocks for diversification. Because the thing with individual stocks is there’s no cost to hold them unlike an ETF or mutual fund. Number two, you can get very surgical in what you’re trying to do. If you want to buy these particular baskets of stocks based on certain fundamentals or technicals, you can do that. Whereas you can’t do that with a fund or an ETF.
But again, I go back to do you need to add individual stocks? And if the answer’s no to live the lifestyle you want and you don’t need that extra risk and it makes you nervous, then don’t do it. There’s no mandate to have to own individual stocks. But I’m also not one to say absolutely not. There are some people that say do not add individual stocks. I’m not one of those people. There is a time and place, but for most people they probably don’t need it. But there are times, I think especially … one thing we haven’t seen guys in the last several years is a flat market. We’ve seen flat for maybe 12 to 18 months at a time. What if we went flat for 10 years?
If we had that environment, that’s where individual stocks may play a part because … or very concentrated ETFs, because of the fact that the whole market’s not going up and individual areas are. That’s where individual stocks may play a part. Some of you have worked for a publicly traded company. You get a discount on their shares, you get stock grants, you get options given to you. Again, you’re going to own individual stocks to some degree. You need to have a plan for that. So I would say it’s case by case scenario and if you tell me the reason why you own them, it may be valid. You may tell me some reasons why you own them, I may say it’s not valid. Reading magazines, watching TV, going and listening to a cousin at a party about a stock tip. Those are not valid reasons, in my opinion, to own individual stocks. So there you go. That’s my 2 cents on individual stocks.
All right, I’m going to wrap it up and you guys have a great weekend. And hey, don’t forget, creatingricherlives.com, you can tell your friends all about it. You can get us on Apple podcasts. You can get us on a Stitcher, Spotify, lots of ways to go to your podcast store on your phone, get the podcast, or you can just go to the website or we send out something each week on Covenant You, which are our educational piece we send out and you can sign up for that.
If you need our help directly, always feel free to call us, (210) 526-0057. Don’t think, “Well, it’s a dumb question.” No, call me. I’ll answer it, or email me. I’m fine doing that too. All right. Have a great weekend everybody. We’ll see you back here next week on Creating Richer Lives the podcast
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 creatingricherlives.com.
On The Ride with Mac & Chad, Karl Eggerss was interviewed discussing all-time highs for the stock market and what’s driving it.
Mac: Oh man, I feel you. I like that, dude. That’s nice. 95.3 FM 1520 AM. It is The Ride on KOKC with Mac, Chad, producer Ryan. Bringing in Karl Eggerss. Karl is with CreatingRicherLives.com. What’s up, brother? You still traveling?
Karl Eggerss: I am traveling. I’m actually in Florida looking at the ocean so it’s not bad. But I said, “You know what, I’ve got to get away from that and go talk to these guys about what’s going on because…
Mac: I’m glad. I’m glad that you took the time.
Karl Eggerss: I did. I did. I help a brother out so-
Mac: Because right now-
Karl Eggerss: We have all-time highs in the stock market right now as we speak. And things are pretty good right now, especially for those that are invested. And we obviously know a lot of this is with the trade deal going through. I think this week kind of encapsulates what the markets are focused on. Which is they’re focused on profits of companies which are starting to come out. They come out once a quarter, all the companies, the big companies report their earnings. And so everybody’s watching that this week. And they’re also watching the trade deal getting inked and that’s superseding the impeachment.
Karl Eggerss: And again, I think investors really do look at this and say, “What really is driving markets up or down?” And for the common Joe that’s out there working, maybe driving, listening to us right now they’re going, “Yeah, I see news come across. Everything seems to be breaking news nowadays. What really impacts my 401(k), my portfolio and what doesn’t?”
Karl Eggerss: And you can see some of the political stuff, it’ll make the headlines more than anything, but does it really impact the portfolio? And the answer is a lot of it does not. And the stuff everybody needs to focus on is the trade deal, economics, interest rates and the profits of companies. That’s what is driving this.
Mac: Karl Eggerss, CreatingRicherLives.com. Go ahead, Chad.
Chad: Yeah, I was telling Mac right before we came back from break, I just saw the Dow was at 29,297. I said, “I think that’s the highest the Dow has ever been, ever.”
Mac: Ever been.
Chad: But we also had the US-Mexico-Canada trade agreement passed the Senate today. So it’s on the way to the president’s desk after a year. And phase one of the China deal he signed yesterday. That tells you a lot that the markets aren’t worried about the president’s stability right now.
Mac: Yeah. Not too concerned. Yeah. Hey, I’m glad you’re-
Karl Eggerss: No, they’re not.
Karl Eggerss: I was just going to say they’re not and it does seem to be this kind of cascade of good news. We seem to have avoided what people feared as a recession last year. We thought we were getting close, but we still didn’t think we were going to have one and we didn’t. But we’ve gotten through that.
Karl Eggerss: We’ve got the couple of trade deals going through and the most important thing right now seems to be the Federal Reserve is not fighting against this and raising rates and choke off the economy. They’re actually very accommodative. And so rates are still very low so folks can still refinance. They can go borrow money for cars, houses, to fund their business. Those are huge things.
Karl Eggerss: And let’s not forget, and I think we’ve talked about it recently, is the tax cuts that went through. It was marginal for the average individual what it did. But for businesses it was even a bigger deal. And there are some rumblings of tax cuts 2.0 coming that would be more targeted towards individuals. And it wouldn’t surprise me if President Trump times that later this year. Right? Coming into the election.
Chad: Oh, I’ll bet money on it right now. That’s an August, September announcement.
Mac: Hey, Karl.
Karl Eggerss: Why wouldn’t you, right?
Mac: Our executive producer Ryan has a question, brother. He wants to talk to you for a sec.
Ryan: Hey, by no means I’m not an expert, but I’ve always been under the impression that December and January is usually a slow time in the stock market with the holidays and stuff. Is that true? And if so, what does that speak to the strength of the economy that we’ve just kept surging through as the calendars flipped?
Mac: I think you’re asking better questions than I am. Dude, what the…?
Karl Eggerss: That’s not bad. Yeah, why don’t y’all swap microphones there? That’s awesome.
Karl Eggerss: It’s a good question. People think that there is some seasonality to the stock market and the economy and both are true. But having said that, December’s usually a good month for the stock market and it was no different this year. Eighteen, December of ’18, was very different. It was a horrible month. It was one of the worst ever for the stock market in the month of December. And it was primarily because, as I just alluded to, the Federal Reserve at that point was raising interest rates and everybody was worried about the economy. You need the Fed cutting rates if we’re worried about the economy. And so I wouldn’t base my decisions on the calendar per se, but there is some truth to when traders go on big holidays, there is some truth to September and October being kind of rough for the markets. But December it’s been actually better than worse for the markets.
Karl Eggerss: And of course now we look and say, “Well retail sales, what are they doing?” And there’s a huge transformation going on from obviously going into stores and clicks. And the clicks are still doing very well. So the Walmarts of the world are doing extremely well. Obviously Amazon is doing well and they’re taking that market share from these brick and mortar stores. And that continues. That’s not a surprise. But when you look at the overall number, it’s still a very good.
Karl Eggerss: And one thing that came up this week that is still very quiet, the housing market is improving and the inventory of homes is very, very low right now and you’re seeing building permits go up, you’re seeing some really good stuff in housing. And housing is huge because when people buy a house, what do they do? They got to fill it up with stuff.
Karl Eggerss: And so they buy a house that means that they’re borrowing money from a bank, typically maybe 80% so the banks doing better. They’re going to Home Depot and they’re buying appliances and they’re just doing all this stuff that goes along with owning a home, buying lawnmowers and that has this massive trickle down effect. So what we look at is building permits and the construction of that because, it’s kind of a leading indicator to say, well people are getting permits. That means they’re going to start constructing the home a few months later and it’s going to be sold and occupied even a few months later after that. So those are the types of things we look at on a daily basis, and that stuff’s improving right now. It’s a very healthy thing. I would say to balance this out the area we need to see improvement in is manufacturing.
Karl Eggerss: Now we know we’re moving to a service economy. There’s no doubt about that. But we still need to see global manufacturing pick up. And it may be bottoming here, but that’s one kind of eyesore for the global economy has been the overall manufacturing sector. So again, it’s a piece of a puzzle. The bears will sit there and say, “Oh, it’s horrible, and therefore we’re going to have a horrible stock market in an economy.” It’s one piece of the puzzle and we need to look at the whole puzzle. And overall, the whole puzzle is pretty good. It could be growing faster, but we’re going at a pretty nice cruising speed here.
Mac: That’s Karl Eggerss with CreatingRicherLives.com. You’re in Florida. It’s 39 degrees where we’re at and where you’re going to freeze in about an hour and a half. Just so you know, Karl. Chad, go ahead.
Chad: Yeah, I mean I almost hung up on him when he said he’s in Florida. Just 37 degrees here. I mean we didn’t want to talk to you. Right? We’re mad at you right now.
Karl Eggerss: It’s only 73 degrees. A gentle breeze on the beach. It’s not bad. I am working down here by the way.
Mac: Right? Yeah. Well you know what, shame on me. You are working. I’m sorry Karl. I didn’t mean to offend.
Karl Eggerss: You didn’t get to see but I used air quotes when I said working.
Chad: That’s awesome. That’s awesome. Well, if people want to know what’s happening with their 401(k)s, I promise you the Dow be at 29.297. It went up.
Mac: See, I don’t know. I was talking to somebody and they were like, “The only people that actually follow that is the ones that have money to invest in it.” And so like John Doe with four kids and he does drywall for a living, trying to make sure they can get food on the table. How could he start to get involved? Obviously going to your website CreatingRicherLives.com but what’s some advice you got for him?
Karl Eggerss: Well, number one, you start with education and number two, if you can save $50 a month there are places to be able to do that. You can save something. There’s people all over the map listening to this right now and at very different income levels and experience levels, but you have to get started doing something and it’s got to be a part of your budget. I mean, I guarantee you there’s $50 a month that’s probably being used somewhere else that can be substituted to go into something.
Karl Eggerss: And again, a lot of these mutual fund companies, if you commit to a monthly withdrawal out of your checking account, they will waive all the minimums. It’s extremely cheap nowadays. Ten Best. And you don’t need an advisor to do that. I mean, these mutual fund companies will help you out and say, “Look, this was the right fund for what you’re telling me, and it’s $50 a month.” And then as it grows over time, then it becomes something. And you say, “Okay, now it’s big enough to where maybe I need to start diversifying. Maybe work with an advisor.” But remember, an advisor is not just helping you invest. An advisor’s helping you put that plan together to even know, “Can I afford $50 a month and where would it come from?” You got to get started.
Mac: You’re talking about $50 a month? That’s a latte and a cake pop at Starbucks.
Chad: Oh man.
Karl Eggerss: Precisely. Yeah, yeah, yeah. Maybe one latte. That’s all it is really.
Mac: Hey, enjoy the rest of your work, brother. We appreciate you, man.
Karl Eggerss: Hey, thanks guys. Appreciate it. Take care.
Mac: Really though. Travel save, man. We’ll talk to you soon. All right. That’s Karl Eggerss, the website CreatingRicherLives.com. This is The Ride on 95.3 FM or 1520 AM. We’re going to take a break. We’re back after this. Hang tight.
Now that the China trade deal is getting inked, what’s next? Karl Eggerss discussed this on the Trey Ware Show.
Trey Ware: 6:50 now, Trey Ware, KTSA money, money, money, money, money. We go to the money man, Karl Eggers, creatingricherlives.com joining me every Monday at this time to talk about what we can expect with our money. And Karl, in the last segment I was talking to how Wall Street Journal doing a little bit of a mea culpa. I guess eating a little bit of crow, putting out a piece over the weekend about how the trade war with China, since China is going to be in DC today to sign the new first phase of the trade pact turned out to be an okay thing. All the people who were saying the sky is going to fall, we’re all going to die. The economy’s going to go into a recession. It’s not going to work out. The President is dead wrong to get into a trade war. Now they’re having to walk all of that back and say, you know what, it worked out.
Karl Eggers: Yeah. How many times over the last few months have you and I talked, and we were saying that China needed this deal more than the US.
Trey Ware: Absolutely.
Karl Eggers: And every time President Trump would say something that deterred or deferred this trade deal back. It was Negotiating 101. And we knew when he came into office, this is how he operated. We knew he did that with Mexico, China. And so that wasn’t a big surprise. It was a relief that it got done and it’s being signed. And that’s why, partially why the market is rising is because of that.
And it’s, look again, I watched the show last night just about some of China’s ghost cities. They build all these cities, they’re sitting there empty. They kind of build it to get their economy going, but they don’t have anybody occupying these stores, these malls, these hospitals. It’s amazing. So a lot of this, is they kind of front end loaded, if you will. And so they really need this trade deal.
Trey Ware: You know the other side, too is him being a businessman. The President that is, he understands negotiation and he understands getting people to the table. Which was what the China thing was all about. Getting them to the table and they’re going to be there today to sign phase one.
I believe he’s doing the same thing with Iran right now. Iran is the number one cause of Middle Eastern chaos. They have been sowing that. Solemani was the chaos maker. He’s out of the picture now. The regime is teetering on collapse and and a pro democracy movement, a pro-world type of economy coming back into place in Iran. And actually having Iran as a trade partner down the road, whether that happens in the next two years or the next five or seven years is really an important thing. And President Donald Trump has been setting this whole thing up to isolate them, to bring down that regime that’s there, to bring them into the economy of nations and have another trade partner there. I think a lot of this has to do with that as well.
Karl Eggers: Well, he used tariffs with China. He’s using sanctions with Iran.
Trey Ware: Right.
Karl Eggers: And you know, it’s almost as if some of these countries would rather kind of lob missiles back and forth then to deal with sanctions. And the sanctions are very, very powerful. And they’re going to have to fall in line because again, all these other countries are moving along with their economies. And Iran is going to suffer greatly if they don’t.
So the next thing to watch Trey, over the next few weeks here is going to be these corporate profits coming up. The stock market’s been rising. Corporate profits have been pretty flat the last couple of quarters, and the market’s telling you they expect them to rise to justify these prices. So let’s see what these companies say, especially given the real strong Christmas holiday with all the online shopping and everything going on. So let’s watch those profits over the next few weeks. That’s going to be real critical.
Trey Ware: Sound like a great idea. Thank you Karl. I appreciate it. As always, every Monday at this time, Karl Eggers creatingricherlives.com joining me here on KTSA.
By Justin Pawl, CFA, CAIA
In this week’s edition:
- Last Week Today. A quick rundown of market-moving news.
- Jobs. Employment growth is slowing, but it doesn’t mean the economic expansion is over.
- Rising Tide. Liquidity trumps macroeconomic, geopolitical, and valuation concerns.
Last Week Today. In a week fraught with potentially adverse outcomes, markets proved resilient. The S&P 500 gained +1%, but technology and growth stocks kicked it into another gear, notching a nearly +2% gain for the week. On the international front, Japanese equities led the way advancing by +2.3%, and China jumped +1.6%. European stocks were laggards for the week but still rose +0.2%. Tepid economic data in the U.S. resulted in a flatter yield curve (short-term interest rates rose more than long-term rates), as investors’ muted concerns about inflation are putting downward pressure on long-term interest rates. Precious metals continue to benefit from heightened geopolitical risk. Still, the previous week’s Iran-engendered jump in oil prices reversed as tempers cooled, pushing WTI Crude down by 6.4% to under $60 a barrel.
For detailed weekly, MTD, and YTD financial market performance, please click on the table below.
Jobs. With a nod to AT&T’s current marketing campaign, the jobs report released on Friday was “Just OK.” In December, nonfarm payrolls increased by 145,000, reflecting a modest miss vs. the upbeat consensus estimate of 160,000. Average hourly earnings also fell short of expectations, rising 2.9% year-over-year (vs. estimates of 3.1%). Although fewer jobs were added than expected, the unemployment rate held steady at cycle lows of 3.5% (if you carry out the decimal places, the unemployment rate actually fell from 3.536% to 3.496%). Also, the U-6 unemployment rate – a broader measure of unemployment, which includes discouraged and underutilized workers – declined by 0.1% to an all-time low of 6.7%.
Still healthy overall, it’s becoming increasingly clear that the pace of hiring is beginning to sync with the 2.0%’ ish “Good, but not great” sustainable growth potential of the U.S. economy. It’s worth remembering that the 2010 decade began on the heels of the Great Recession and the unemployment rate near 10%. The high starting point for unemployment combined with a decade of economic expansion, devoid of a recessionary setback, generated a historically strong job market, and a consistently declining unemployment rate.
Source: LPL Research
However, as the table above hints at, and the chart below details, job growth peaked mid-decade and has been slowing since.
Source: Bloomberg L.P. and Covenant Investment Research
A deceleration in the pace of hiring should be expected more than ten years into this economic expansion, but it doesn’t necessarily portend an impending recession. Part of the slowdown is related to a lack of available workers. Due to declining fertility rates, reduced international migration, and retiring Baby Boomers, the labor force is growing more slowly than in previous decades. Indeed, today there are more than 7 million job openings, but only 5.8 million officially unemployed people. Moreover, for those that think the December report of 145,000 jobs was disappointing, they may want to recalibrate their expectations going forward. The Congressional Budget Office forecasts a sharp decline in employment growth in the coming years, as modestly slower economic growth and an increasing number of retirees depress average monthly job gains to 39,000 from 2020 – 2023.
Bottom Line: Unlike the AT&T commercials, in this case “Just OK”, is in fact “OK”. The best employment growth is behind us, but a slowing pace of hiring is a natural outcome for an economy operating slightly above its long-term sustainable growth rate. So long as hiring doesn’t fall off a cliff and aggregate wages continue to rise, consumers should remain in a constructive position to help keep the expansion intact.
Rising Tide. Over the last several months, major central banks fell into line again, simultaneously pumping liquidity into the markets, reducing market volatility and supporting the prices of risk assets. The episode with Iran over the last couple of weeks is an excellent example of the volatility dampening effect of liquidity. Despite the potential for a major military conflict in the Middle East, equity markets barely blinked as investors raced to “buy the dip” when stock prices fell modestly overnight after Iran “completed” its retaliation against the U.S. for killing their lead terrorist.
In the U.S., the Fed abruptly halted its balance sheet reduction program last September when overnight repurchase lending rates between banks spiked (aka, “repo madness”). Since then, the Fed has purchased $400+ billion in U.S. Treasuries, reversing more than half of the previous balance sheet reduction measures. In Europe, the ECB resumed its Quantitative Easing program in November, committing to €20 billion in monthly asset purchases for “as long as necessary” to bring inflation up to their 2% annual target. Meanwhile, China’s central bank (the PBOC) is taking a multi-pronged approach to liquidity enhancement. On January 1st, the PBOC reduced the Reserve Requirement Ratio for the 8th time since 2018, releasing about $115 billion of additional lending capacity in their economy. The PBOC also instructed lenders to use the Loan Prime Rate as the interest rate benchmark, resulting in a 0.2% reduction in the cost of borrowing as compared to the old benchmark. In addition to the above measures, China’s crackdown on shadow lending has subsided, which should generate additional credit growth this year.
The band is back together. The Fed’s balance sheet growth is the most pronounced (the red line in the chart below), but the size of the ECB (blue) and PBOC’s (yellow) balance sheets have hooked up as well. The net result is that central bank liquidity is trumping macroeconomic, geopolitical, and valuation concerns. Synchronized loose monetary policies won’t completely eliminate market volatility. But so long as the central banks flood markets with cash and credit, the rising tide of liquidity will create a favorable backdrop for risky assets.