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
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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.
Karl Eggerss was interviewed on CBS discussing whether or not investing in real estate is really a good deal. And, items to consider before you do.
Sharon Ko: It’s one of the best ways to build wealth, but before you jump in to make a real estate investment, here’s how to do it money smart.
Karl Eggerss: I’ve never had a client come in that says, “I don’t like real estate. Everybody seems to love real estate and it is a good investment. That’s kind of the punchline. Over time, I think people like it because it’s tangible, they can see it, there’s television shows about it about flipping and renting and all of that, and it is a good investment. In my opinion, it needs to be part of a portfolio and not the only thing. I think real estate, a lot of times people don’t think about the expenses that come along with that. So you buy a house, you’re going to fix it up. So you have all those expenses. You’re paying interest because you’ve borrowed money to do this investment. So you’re probably paying interest each month. You’ve got water bills, insurance, you have pest control perhaps. You have all these expenses and if you really run the numbers, sometimes people aren’t making as much on real estate as they think they are. And so I would encourage everybody, if you’re going to do it, really build a spreadsheet and really figure out, “What are my expenses going to be ongoing?”
If it’s something like an Airbnb you’re going to rent out or a Vrbo, how many realistic nights per week or per month are you going to rent that property out and figure all that out. And then again, you have to pay taxes on that income as well.
Sharon Ko: Now, what about real estate crowdfunding?
Karl Eggerss: Obviously crowdfunding is something pretty new in the last few years. There are again, pros and cons of some of that, which is sometimes liquidity, the safety aspect of it. I would prefer folks really… I mean, It’s about location, location, location. That’s absolutely true. So I would prefer the viewers save their own money, go do their own investment deal. Now there are funds you can participate in, whether it’s crowdfunding, there’s mutual funds, there’s private real estate investment trusts that allow you to kind of pull your money with others. The nice thing about that is it does enable you to kind of diversify. So instead of investing in one property, you’re investing in 20 or 30 properties. So it is a good way to get started. When you get to a bigger amount, then you may be able to do some on your own.
On this week’s podcast, Karl discusses several items to consider when building the proper investment portfolio. Also, Karl warns investors that just because you have several different securities, that doesn’t guarantee you’re any safer.
Hey, hey. Good morning everybody. Welcome to the podcast. My name is Karl Eggerss. Thanks for joining me. We appreciate it. If you’re brand new to the show, welcome aboard, tons of ways to get the show. You can have it delivered to you.
You can go on our website creatingricherlives.com. You can go to a podcasting service like Spotify or Apple Podcast or Stitcher. It’s available on all of those platforms and or like I said, we can deliver it to you each and every week.
In addition, our telephone number 210-526-0057 if you ever need help with anything relating to your financial goals, your financial needs, portfolio reviews, when should I take social security, these questions that people ask themselves, should I take a pension or a lump sum?
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That’s what weed we do and we have tons of advisors at covenant to help you with that and we all have different specialties at Covenant to help you through those questions. All right, so let’s jump right into the show here and let’s do a quick recap of what happened this week.
It’s interesting when I talk to people, especially those that don’t necessarily watch the stock market every week or every minute as I do, you would think by talking to folks that the stock market is down and it’s down quite a bit.
I mean with all this impeachment in China and Iran, surely the stock market is down and yet, as late as Friday morning, we hit all time highs on the stock market, all time highs. So it isn’t even down, yet it feels that way to some and it’s kind of interesting and it’s again, because most people are focusing on the news and equate that negativity to the stock market.
The news flow in the stock market, two different animals. So on this show, we’re going to talk about a little bit about this week and then we’ll get into a couple of other things. So we saw with the tension between US, the US and Iran, we saw oil obviously jump up.
Brent went over $70 per barrel and WTI got into the mid ’60s and then by the end of the day Monday, oil actually reversed and then after being down 200 points, the Dow managed to actually end up 70 points.
So we started to see volatility pick up a little bit and then Tuesday was really the day after the bell, pretty quiet day, but after the bell, it was reported of course that Iran had launched missiles to Iraq targeting a base with US servicemen on it.
Immediately the Dow futures fell about 300 points and as we went into the evening, it was about 400. As soon as there was no casualties reported and President Trump tweeted out, “All is well.” The future’s regained every bit of the losses overnight and really, if you woke up the next morning, hadn’t watched any of that, you wouldn’t have known anything happened with the stock market.
But when that happened, gold went above $1,600 an ounce. It’s the highest level for gold actually since 2013. Oil went up about 4%, but as the day went on Tuesday, both of those things reversed and if people are bearish on the market.
In other words, they believe it’s definitely going down because there’s so much bad stuff going on, they just can’t catch a break. The bears can’t catch a break because news flow comes out like that and then immediately, buyers are there to step up and buy the dip and we’ll touch on that 400 point move in just a minute.
Wednesday, the Dow did obviously recover those losses as I mentioned and finished up 150 points on the day on Wednesday and it was up almost 300 points at one point and oil reversed … Oil actually was down 5% and that was, it’s a reminder that if we don’t have geopolitical tension as bad as people think, oil is having a tough time because of the fact that we have a lot of it and it’s all due to the fact that we have been becoming energy dependent the last few years and we’re starting to see the benefits of that.
Now, obviously if these things get worse in terms of cutting off the passageways, you’re going to see oil spike quite a bit, but we haven’t seen that yet and I believed that at the time, it was interesting because I thought this is interesting.
If Iran sends these missiles and from what I understand there was about a 15-minute warning and there were no casualties, they can go back to their people and kind of puff their chest and say, “You know what? We did retaliate.” Knowing full well that they didn’t really do any damage to the US in terms of casualties or anything else and so it was kind of like, “Okay, we’re even now.”
And that seemed to be as the week went on, it got very quiet and that’s what we saw in the market just went up and in fact on Thursday jumped another 200 points, very quiet news day finally on Thursday and then Friday, we did get the jobs report that was released, 145,000 jobs were created in December.
The estimate was for 160, so a little lighter on that and then November’s was revised down by 10,000 unemployment rates, still about three and half percent. So still a lot of people working and with that, there wasn’t, that wasn’t a employment report that really we thought would move the markets and it really didn’t.
You saw the Dow kind of went above 29,000 on Friday and then it kind of reversed back and finished down about 130 points, but not related to the jobs report I don’t believe, just probably into the week profit taking because of the fact that it was a very news-driven week and it could have gotten a lot more volatile than it was. but look, this is still a strong market and this is not about when we see episodes like this where there’s some tension, geopolitical risk, whether it’s the North Korea, remember that a year ago with North Korea and nuclear discussions or lack thereof and then in threats or this with Iran, markets will have knee-jerk reactions to this.
But it’s a great lesson that again, over the longer term, this is about the liquidity coming in the market which the fed dropping interest rates as we’ve talked about and it’s also about earnings and it’s about the economy as a whole.
All of those things are okay, right? We know the jobs market is great, we know there’s plenty of liquidity in the market and we know that while the economy could be growing faster and is still vulnerable, it’s not reassessing and so that’s what’s led to this rally and so when we get situations like what we saw earlier in the week with with Iran and then the retaliation, you’re going to get knee-jerk reactions from the equity markets and the reason why, and this is probably going to continue to get worse and worse over time is that a lot of the trading going on Wall Street is algorithmic trading.
What that means is very sophisticated programmers are programming computers to do artificial intelligence in terms of trading, but also literally seeing newswires cross and if the term US and missile is somewhere in there, sell spy, sell spyers and that’s exactly what happened.
So these aren’t humans reacting necessarily. There are some humans trading for sure, but when you get these very quick moves, this is all because of algorithms and and programmed computer trading and that’s probably going to continue to get almost worse to a certain extent.
What does that do for you and me? Well, had the market opened down 400 or 600 or 800, it would have caused a little gut punch, right? A little pit in our stomach and we would have wondered is this going to continue, but it also gives us opportunity because that knee jerk reaction is news driven and as I just said, it’s not about us killing an Iranian terrorist, that’s going to get the market to move, but what’s going to make you money over the long-term is the profits of the companies going up in the stock market and then the stock market reacts to that and goes up. That hasn’t changed because we killed somebody.
So having said that, it is an opportunity to buy in those instances, and I’m not saying day one, but I’m saying sometimes, this program trading can also be our friend just like it can be our enemy. Now, the program trading can lead to more volatility than we normally see.
You could say it could have happened in the flash crash 1.0 in 2010. You could say it happened in flash crash 2.0 in 2015 when we saw stocks open up or down, I should say 15% some of them in August of 2015 and then early in January of ’18, we saw the member of the volatility issue where the VIX spiked up and it caused a bunch of funds to blow up and it caused even more volatility.
Those are all things that are not humans saying, “I’d like to buy 100 shares of stock or sell 100 shares of stock.” This is computer programming jamming orders through and there’s a supply demand and balance and you see big, big moves and so we saw that Tuesday evening and again, a 400 point move on a Dow Jones that is approaching 29,000 is not a big move percentage wise.
A one or one and a half percent move isn’t that big of move historically, but in our minds, we still believe a 400 point move is big because 400 Dow points is 400 Dow points, that’s how our minds are programmed to think and so we don’t like to see that, but it wasn’t, still wasn’t a huge move.
It wasn’t a thousand point move in the Dow Jones which would have been maybe a 4% move or a 3% move, I should say. We didn’t see that, but we did see some volatility and it could have continued especially if there’s casualties and that’s the type of risk that’s always in the stock market which is why most of us have some balance of stocks to bonds, to real estate, to other assets, things that move differently from one another so that we can mitigate that risk over time.
But that, just keep in mind, the program trading and some of the wild swings we see are usually computer-driven and they may add to the volatility. So especially as we get into the election, you could see more of that.
We never know what’s going to be the news event that’s going to cause the Dow Jones or any of their market to to jump or sell off as much as it does. Now, we get all this bad news and I ran across an article this week and I thought, “You know what? This is a really good time to share some of this information.”
You’d think about your parents, your grandparents, maybe you telling your kids things have never been this bad, boy, back in my day things were so much better. There was an article that came out this week, Morgan Housel who’s written some good stuff.
He had some … Actually, the title of the article was it’s a … 2020, what a time to be alive and it caught my attention. Listen to some of these stats and I’ve actually mentioned some other things in past podcast that don’t get talked about enough, but we are living in a great time.
In 1981, the auto fatality rate was 21 and a half per 100,000 people. In 2018, it was 11.18 so half as many fatalities in 2018 as we saw in 1981 due to the safety of cars, seat belts became a requirement, airbags, all of that, right? Very important.
How about inflation? You hear about inflation. Do you know the five years prior to 1981? So 1975 to 1980, inflation, the cumulative number, say it’s 5% a year, that’d be 25%, that number, the cumulative inflation was more in those five years than the cumulative inflation in the 25 years before 2020.
Think about that. We’ve had very low inflation. Now we’ve had pockets of inflation, obviously medical costs and things like that, but pound for pound, inflation is much lower than it was in the ’70s great for us.
The homicide rate was just over 10 per 100,000 Americans in 1981. Five in 2018 so that means 16,000 fewer Americans were murdered last year than would have been had the rate not improved during most of our lifetimes.
This is a big one too, infant mortality rate. It’s fallen by 54% since 1981. Average miles per gallon for cars, about 15 in 1981, about 22 in 2017 and that’s going to continue to go up. We know that as well. Adjusted for inflation, the median personal income, this isn’t talked about enough.
The median personal income has increased from 22,682 in 1981 to 33,706 in ’18. Now remember, you’re going to, you may say, “Oh yeah, over time, doesn’t stuff go up?” This is adjusted for inflation, so Americans have become almost 50% richer, pound for pound in 2018 than they were in 1981.
In the 10 years prior to 1981, almost 26,000 people died in commercial aviation accidents. In the 10 years from ’09 to 2019, only 9,000. Amazing. The number of cigarettes smoked in the US peaked in 1981 at 640 billion cigarettes.
By 2017, it was 249 billion and falling. Now, I would like to see how many of those people are vaping now, but that’s a whole another story. Heart disease deaths have declined from over 400 per hundred thousand Americans in 1981 to just 168 per 100,000 by 2015.
Had there not been any improvements, that means there’s 754,000 more people living that would have died from heart disease if we were back in 1981. How about this? IBM sold its first PC, 1981 it’s 5150 PC for $1,550, but adjusted for inflation, it was $4,400.
Imagine paying $4,400 for a computer today and by the way, it was Morgan Housel says it was pretty much useless. Pretty much useless. Now, that same amount of money can buy a Chromebook for every student in an average middle school class.
It’s just amazing and the last one is dementia rates have fallen 44% since the early 1980s and that’s just some things, I mean there’s a ton of these types of statistics out there.
When you hear the news and you watch news, I actually temper my news watching because it’s all negative. Every bit of it is negative and so stand back for a minute and think when you can tell your lights to turn on in another room and they do it and you can have a heated steering wheel or heated seats or air-conditioning seats in your car, if you can just have air conditioner in your car or in your house, I mean we’re living in some pretty good times.
So just wanted to cheer you up a bit after all the negative news we saw this week. Now, I want to move onto one more topic and it is I met with a gentleman this week and had a good amount for save for retirement and really wasn’t the question of, “Can this money last?” But what’s the best way? What’s the optimal way to manage the money?
And as I was looking over the statements from another broker child that will remain nameless, the gentleman had at least, at least 50 different mutual funds, if not, 75. Multiple accounts, multiple mutual funds and I said, “Well, tell me about your experience in terms of, of risk.”
He said, “I have no idea. I have no idea what we own. I don’t get … I get the statements but I don’t get any explanation. I don’t know why we own certain things. There’s always movement going on.”
Well you guys know that, I don’t know what the average mutual fund owns in terms of the number of holdings, but it could be 300, 400 different stocks. You multiply that times the number of mutual funds over diversification and the lesson is just because you own more does not mean you’re safer and I explained that to him and then looked at it and said, “By the way, this is almost all stocks. It’s not a balanced portfolio even.”
When you have that many positions and you don’t have some type of software to analyze it, to figure out where your holes are, where you’re exposed too much or too little, it’s a problem.
So we’re running through that analysis right now, but I could look at it in five minutes and tell him kind of where some of those holes were, but we’re going to do some in depth analysis to figure out, “Is he exposed too much to the stock market? Number two, does he have enough international for example? How much large cap growth versus small cap value does he have? Is he going to get hit if the dollar falls? Is he going to be hurt if interest rates rise too much?”
Even if I didn’t change his risk, I could simplify his life tremendously because he can accomplish the same thing that he’s getting right now with probably 10% of the securities. So if you own a lot of different things, don’t believe just because you have all those different things that you’re safer.
I think 2008 was a fantastic lesson for that that what’s real diversification versus fake diversification. Fake diversification is simply I own a lot of things, therefore I’m diversified.
Well, in 2008, when the correlation goes to one meaning, stock market falls and everything else goes with it, you’re exposed to see what is … Well, how are you really diversified?
And nowadays, because we had 2008 as a reference point, I can put in my computer, in our software, do our analysis. I can look back and stress test the portfolio to see what would have done in 2008 and then where are some of the holes and that’s what we do.
We do stress tests on portfolios to get an optimal portfolio because again, people that had just a simple portfolio of stocks and bonds in 2008 had a very, very tough time. Owning just a large cap value and small cap growth and those types of things and that’s it, they’re all going to move together when there’s panic in the streets and there is a real sell off.
We’ve had sharp sell-offs in the last couple of years, but they’ve recovered very quickly. We haven’t seen a sell-off that stays down there for a while and maybe gets worse and lasts even longer.
It will happen at some point for some reason. So really diversifying is making sure you own things that do have the ability to move differently from something else in the portfolio and that you have enough income and so forth.
That’s where we need to get that gentleman and it does also really start with what does he need to earn to accomplish what he wants. What’s really fascinating, kind of the second part of meeting him, what was really fascinating was when I said, “Based on what’s your spending and if this portfolio is balanced and continues to grow, you’re going to end up with more money than what’s sitting here right now. What do you plan on doing with that? Are you going to give that to your kids?”
“No, my kids are … They make a lot more money than than I ever did. I don’t want to leave it to them.” “Well, do you want to leave it to charity?” “I don’t think so.” “Well, what are you going to do with it? Because if you don’t do anything, your kids are probably going to get it.”
So we had that discussion and that’s something we’re talking through and we’re going to help him with those legacy goals, maybe philanthropic goals and develop those goals and then help him execute that the best way, in the most tax efficient way possible.
So hope that’s helpful to you. Hey, have a wonderful weekend everybody. Don’t forget, creatingricherlives.com and the telephone number 210-526-0057. Hey, have a great weekend. Be careful out there and I’ll see you back here next week.
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On The Ride with Mac & Chad, Karl Eggerss discussed the stock market volatility due to the Iran retaliation. News events like that shouldn’t cause investors to change their allocation. Karl explains.
Mac: We’re playing Rush because Karl Eggers, with creatingricherlives.com, I texted him and said, “Hey dude, you got a favorite band?” He said, ‘Rush’. A couple of things out of Canada that they can have Justin Bieber back. We’ll keep Rush and we’ll call it even from there. Karl, how you doing man?
Karl Eggerss: I am good. How are you guys doing?
Mac: Doing great, bro. Just cruising through on a hump day, man.
Chad: We’re glad you survived World War III.
Karl Eggerss: I guess nobody was alive in 1990, ’91, ’92, right?
Chad: Right. I guess so,yeah.
Mac: You’ve declared yourself safe from World War III, right?
Karl Eggerss: I have a 18 year old son and I was showing him Y2K the other night on YouTube. All the funny stuff going on around Y2K.
Mac: Oh, dude…yes!
Chad: Every computer was going to shut down, yeah.
Mac: I had started in…I had been in radio for like two years by then. But you would go to the store. It’s completely empty; bread, milk, eggs, all that stuff. People fighting over a man…
Mac: An old lady, Chad, would hit you on the top of the head with a thing of onion buns because it was the last one, dude. No kidding.
Mac: Hey Karl, what are the sanctions? President Trump spoke earlier today and he talked about sanctions on Iran and all that.
Karl Eggerss: Right.
Mac: What does all that mean for a guy like me and am I going to see again, I’ll ask you the question cause it matters, oil and..but what is it…oil and gas and all the other things, man.
Chad: Right, natural gas and all that.
Mac: Yeah. So what are we looking at? How the state of all this?
Karl Eggerss: Well, it’s really interesting. When we talked a few days ago, I said probably the biggest impact to our listeners is going to be oil prices going up and gasoline prices, outside of that, I don’t think we’ll see a big anything with the stock market or anything else.
Karl Eggerss: Well lo and behold, we saw last night after the retaliation, in air quotes, we saw that oil prices initially jumped like 4%. And then when the President’s tweet came out and we didn’t have any casualties, it was interesting because oil kind of subside a little bit. It was still up this morning, but what’s was fascinating was oil finished the day down, almost 5%.
Karl Eggerss: So a big, big drop in oil and again, to me it points to the fact that we still have an abundance of oil and it’s because of all the, the work, so to speak, we’ve put in in the last few years as far as getting energy independence.
Chad: And Karl I saw..[Crosstalk 00:03:20].
Karl Eggerss: We have plenty of oil.
Chad: And Karl I saw with the Dow too, I think the Dow was up at about 198 points at that point in time. I’m not sure where its finishing at, but the Dow was up on the day at the time.
Karl Eggerss: Yeah. And the interesting thing is, probably you guys don’t do this, but I’m watching the markets other than when I’m sleeping pretty much 24/7.
Karl Eggerss: And so last night when this all came out, the Dow Jones after market; they trade the futures in the aftermarket and the pre market, but we get an indication of where things are, they were down 400 points. And then, here we finished up almost 200 points today and it was up almost 300 at one point. So, we had about a 600 point swing, about 2%, which isn’t monumental or anything, but it’s a good decent move.
Karl Eggerss: But it shows you that, remember nowadays your 401ks, your portfolios, a lot of them, it is controlled and the trading’s controlled by computers and algorithms. And so what happens is, when the headlines cross, regardless of what it is, if it’s negative, all of a sudden these computers start selling large shares of stock.
Karl Eggerss: And so you see a really quick knee jerk reaction and then sometimes cooler heads prevail and go, okay, wait a second. That was a little too much. And you see some bind. So it’s interesting to watch over the last 24 hours. But my thought on it, initially was this is interesting. It’s a way for them to puff their chest…
Karl Eggerss: …and say we’re not going to let this happen. But at the same time knowing they probably weren’t going to kill anybody. We probably knew it was coming to a certain extent. And that seems to be what’s happened. And again, y’all handle that side of the conversation …
Karl Eggerss: ..on the financial side. But really, when I saw that, I thought about that because I thought, I can’t imagine this market, stock market continued to cascade down if that’s the case. And that’s how it ended up being. And so again, we saw the stock market going up and it’s interesting because if you look at oil prices, that’s probably something that we really do need to watch because all prices have been around $60 a barrel. And if they go up too much, that’s what does hurt our economy to a certain extent. Because we have obviously gasoline prices. We have trucking companies using that. We have airlines…
Karl Eggerss: plastics …”Go buy plastics, son.”
Karl Eggerss: People are too young to know what that quote means.
Speaker 4: What does it mean? Go buy plastics?
Karl Eggerss: It’s from The Graduate.
Mac: Oh see I got… Chad is looking at me like I’m an idiot. I’m sorry man. I got…now we’re going to watch The Graduate. All right. Hey Karl Eggers with creatingricherlives.com. We’re talking about the economic side and things that are happening at war and as you’re talking bro, I can’t help but think about in the forties man, the greatest generation where they’re talking about how you had to turn in all your, basically they needed to melt down any metal, anything you had to help out the servicemen and make ammo with all these different things.
Mac: The economy, you don’t really think about, I mean, Ryan, you’re a young dude, our producer Ryan, how old are you?
Speaker 4: Twenty-three.
Mac: And then we got the intern, Chad sitting here, he’s 24. You guys, do you think about how the war impacts the economy at all?
Speaker 5: I mean, I do, but I’m also, Chad’s [crosstalk 00:00:06:23].
Mac: You’re a political nerd, I know.
Karl Eggerss: Well, you know what’s interesting, if you go back and look at the Gulf war and you go back and look at World War II, certain periods, the stock market actually was doing better. You think about the tanks that were made though the ammo that was made, it actually juices the economy. And we mentioned that a few days ago when we were talking and it’s kind of counterintuitive, but sometimes it actually sparks. This is too small to do that. But defense spending will increase the economy in a big way. And we saw that; we actually saw the stock market do pretty well during some of those periods as well.
Karl Eggerss: So you don’t always look at the headlines and say, Oh, we’re doing this [crosstalk 00:07:00] therefore I’ve got to go sell my stocks. And it’s a good lesson for folks. You have to have a portfolio that you can sleep at night with that you’re not going to have knee jerk reactions and make wild moves with your portfolio because you could’ve woke up this morning, panicked, sold a bunch of stuff, and then totally regretted it by the end of the day.
Karl Eggerss: There’s just no way to invest.
Chad: And Karl before we wrap up the segment, early in 2020; we’re now into 2020, any early advice for investing this year as we go through this year, that’s coming up?
Karl Eggerss: I would say, whenever we see the clock change in the calendar change, nothing new really happens, right? But at the end of the day we do say, okay, it’s a new year. I’m going to go lose some weight. I’m going to do these things.
Karl Eggerss: I would sit on a little game plan. If you have a job, you kind of know what’s what money’s going to be coming in on a pretty regular basis. You pretty much know what your bills are going to be, Figure out what that savings should be and where it’s going to go. And there’s going to be some hiccups along the way, like a emergency room visit or things like that. But kind of name those dollars because if you know where they’re going to go, you’ll stick to it and automate as much as possible in your life. You have to automate. If you’ve got that money going away in a savings, whether it’s a 401k or a mutual fund or brokerage account, then you’re free. When you do go spend, you don’t feel so bad because you already know you got your savings, is taken care of. So yeah, I would say it’s a good time to do that. For sure.
Mac: You know we talked about when we first had the conversation with you man, I actually made the comment of play in the stocks and it was funny cause he’s like, Oh that’s a lot of people don’t like well if you are well versed in the area, you don’t like the play the stocks. But so I don’t say that anymore brother. Thank you.
Chad: I’ve got actually already… Look at the market in the ’90s, look at the market in the 2000’s, look at the market now. Over time, don’t panic, just invest. Just yeah, just hang on for the ride. Yeah.
Karl Eggerss: we’re at all-time highs all time. So that means anybody that ever sold anything has been wrong because by definition, we’re at all-time highs through Wars, through recession, through all of that. So it’s all about timeframe. I can’t tell you over the next couple of hours what’s going to happen. I can’t tell you the next couple of days or even a couple of months. It’s pretty confident over the next five years, in 10 years, what’s going to happen because I’ve got hundreds of years on my side.
Mac: Right? Every, Hey Karl Eggers, creatingricherlives.com, brother thank you very much. We appreciate it, man. That website there, creatingricherlives.com. You get a lot of traffic there as you should, bro. You’re a professional man. I appreciate you.
Karl Eggerss: Hey, thanks guys. Appreciate it.
Mac: You got it. We’ll talk to you soon.