On this episode, Karl discusses why things aren’t always as good or as bad as they seem. When doing your investment research, use multiple sources.
Also, evidence is mounting that China needs a trade deal more than the U.S.
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All right, speaking about the election, a week ago we, a half ago I was in San Diego for a conference. I was with a lot of the top advisors in the country and a lot of thought leaders there, a lot of professionals, people tied to Washington and I mentioned this in an interview earlier in the week and before we get into kind of what the market’s doing, the reason I’m talking about this now as we just talked about how estate taxes, a lot of things are contingent upon who gets in or stays in the white house. The general consensus is that the possible outcomes for president are so radically different from one another that we need to watch the poll numbers for Elizabeth Warren specifically, because of her ideas that are very, very different from President Trump’s and a lot of them are very different from Joe Biden’s.
The consensus again, from some of these folks I was talking to is that we probably will see a Biden, Trump ticket and there’s of course some people that could still enter the race, but if you watch Elizabeth Warren’s numbers as they go up, you might see the stock market get more turbulent because she probably won’t be very friendly to the stock market given some of her views. Now, if you’ve watched the polls, she slid a lot lately as she’s been attacking some of the billionaires and there’s been … If you haven’t followed this, Leon Cooperman has been in a war on TV, on Twitter, going back and forth with her talking about the amount of money he’s given away. So it’s very interesting to watch.
Of course you’ve heard Bill Gates did it a little more tactfully than Leon Cooperman, but there is a war going on and her … She believes her base is saying, “All of us. It’s kind of the … I feel your pain speech from President Clinton. I feel your pain. Look at all these billionaires are keeping all the money, they’re not giving it to you.” But that doesn’t seem to be resonating. And you’re seeing her pull numbers drop. But watch that because a lot of folks believe … We’ve been talking about recession potentially, that that was a risk for 2020. Well, watch the election because that is a big risk in terms of volatility for the stock market because the views are different. And remember if you’re a CEO, if you’re allocating the capital, you need to know what the rules of the game are going to be in order to plan. And it’s very difficult to know that a year from now what those rules may or may not be.
Now having said that, for those of you listening that say, “Elizabeth Warren is my gal, she’s the one I want to run for President.” Or if you’re somebody saying, “I can’t believe that she’s being considered for the presidency.” Even if she got in elected, the thought is that she can’t get some of these things through, they’re more radical than most would want. And so she will have to come more to the center. But watch that, that is a risk of volatility for the stock market in the future. Again, regardless of her views, the point is that the views of her are very different from what’s already in place. That’s what we’re talking about is a change in direction regardless of who the two people were, regardless of whether they were Democrat or Republican. The fact that they’re polar opposites is really what Wall Street might get in a tizzy about because again, there’s change, uncertainty, so watch that as we move along, especially as the market is starting to run here. Do we get a rally up until the end of the year?
Now, speaking of that rally, let’s talk about what happened this week and then we’re going to get into where are we currently. Monday we saw the Hong Kong protest really pick up, heated up again, ton of violence. We haven’t really seen that kind of violence in a few months and the stock market was really under pressure at the Open, I think partially because of that. You’ve got this trade war with China, that looks like it’s progressing in terms of a deal getting done, phase one. And we have the issue in Hong Kong and so there’s a lot of people believing that President Trump is ignoring some of that because he wants to get a trade deal done.
Kind of like the NBA, LeBron James got a lot of heat a few weeks ago. Most of the week was pretty flat. In fact, the Dow Jones finished exactly flat on the day on Tuesday. How often does that happen? But the market, even at that point seems to be a little overbought, continues to be. Wednesday CPI came out, so the consumer price index inflation came in a little bit hotter than expected. So inflation seems to be percolating … Or is it percolating? Percolating, percolating, and the market was pretty mixed that day. Jay Powell, of course, head of the Federal Open Market Committee spoke, and then we heard news late in the day that the trade deal had run into a snag and markets finished kind of mixed. I put on Twitter this literally a little animation of a ping pong match going back and forth because we saw the trade deal run into a snag and the future sold off a hundred points. And then of course Thursday you hear Larry Kudlow say, “They’re really, really close now to a trade deal,” and the market would go back up.
Again, don’t try to trade the trade deal, virtually impossible, but markets still kind of kind of choppy. A lot of weaker data came out Wednesday night from China and China needs a deal, this is getting more and more clear. If you look at the economics in the world, the Eurozone, you’re starting to see what we would call green shoots. There is some positive stuff happening in the Eurozone. The US of course, we saw on Friday retail sales were pretty weak. And so we’re still getting mixed signals here, and I’ll explain why I think the Dow was up 220 points and crossed over Dow 28,000 for the first time on Friday.
If the US has mixed, the Eurozone already had it’s kind of rough batch in is maybe seen some green shoots. China though, is continuing to get weaker and weaker. I mean, almost every economic piece of data that came out on Wednesday night from China was much weaker than expected. So watch that. And of course we also had more impeachment talk and I was asked earlier in the week did I think that had a impact on the stock market? And I would say the answer is no. Because again, you’ve got the House, you’ve got the Senate. So could President Trump be impeached? Yes. Could it lead to anything? Probably not. Again, and Wall Street’s telling you that, look at the evidence, look at the stock market going to record highs.
Now as I mentioned, weaker retail sales on Friday, but the Dow was up 220 points, closed above 28,000 why is this? Because the Fed may be back in play again. Remember that it seemed like they may be done with this Fed rate cutting cycle, but when we get weaker data like retail sales, all of a sudden investors go, we want more. Of course President Trump is out there saying, Keep cutting, keep cutting, keep cutting,” because he knows a Fed cutting is a good thing for the stock market. Investors love the Fed cutting interest rates.
So that’s probably why you saw this. But I will say over the past week you have seen really the rally has been fairly weak underneath the surface. I mean despite records we still … When I say weak underneath the surface, what I mean is if you look at the internals, if you look at the number of stocks going up, if you look at the sectors participating, the … Really just the intensity behind the rally, it has been getting weaker and weaker. And if you look at the market from a technical perspective, we may be starting to roll over a bit. And again, that’s based on a lot of different things that are hard to describe in a podcast, easier to show somebody.
But if you just go back and look at the market from even this year, we’ve kind of made higher lows, okay picture that and higher highs. So it looks like this kind of zigzag pattern that’s going from the lower left of your screen to the upper right. And we seem to be at the upper edge where we’re due for a pullback here. Now, I don’t believe this pullback is the pullback. I think that it could be a time to actually look at reallocation if you’re over allocated stocks. Remember, we’ve had a good bond sell off recently as far as bonds go. If you’ve been watching that, it’s not a bad time to probably buy some bonds and shave some of the profits from your equities, if you’re over allocated. So this isn’t a time to change allocation, there’s no easy trade here, but it seems like over the next few weeks we could see a pause at the very least, in the stock market and a minor pullback at best.
And again, nothing too dramatic. I’m not seeing long-term indicators negative, but things aren’t always as good as they seem, they’re not always as bad as they seem. And in fact, Casey Keller in our office, our chartered financial analyst that we’ve had on several times over the years, he likes to keep some of these gloom and doom and kind of exuberant type of articles and check back with them a year later, two years later. Really interesting. For example, if you go back to … Oh, December of 2018, if you go back to January, 2016, if you go back to 2011, these times where the markets were really under some turmoil or they’re just racing up, what’s being said at the time? What indicators are being looked at? One he brought to my attention today, that was exactly a year ago. It was the Goldman Sachs bull bear market risk indicator.
A proprietary basket of indicators, I suppose that Goldman Sachs puts together. And this was literally November 13th of 2018 it says, “According to Goldman Sachs, it’s indicators at 73% marks the highest readings since the 1960s and early 1970s which, with few exceptions is consistent with returns of zero over the following 12 months. A reading above 60 signals that returns will be lower.” This was published in 2018 remember, their reading was 73% and a reading over 60 has led to returns that were subpar and zero at best and usually worse. The Standard and Poor’s 500 since that came out is up approximately 17% in the past year.
So it’s not to pick on that particular indicator, there’s probably several of these, but it’s interesting to look at because when something like this comes out, there was probably 10 more, but we saved some of these because really to be an effective money investor or money manager or advisor is you’re looking for easy trades or low hanging fruit or things that are fat pitches if you will, and that’s rare that they’re there, but usually they’re there at extremes where you see pessimism rising, you see or you see confidence really high.
The peak of 99, when you have the 90 year old calling you saying, “Get me more IPOs, get me more tech stocks,” that’s a warning sign. Just like get me out of the market, go to cash. And we’ve seen both scenarios over our careers and this was one that we saw a year ago and it felt like … I mean it’s a clear picture when you look at it, you go, “Yeah, this is a time we should … There’s no way the market’s going higher.” And yet it’s up approximately 17% since that time. Now again, it works both ways. It’s not just about the doom and gloom and the fear out there. There’s plenty of folks who make a career of putting stuff out on Twitter and there’s also the opposite. Don’t worry about it, markets never fall, just buy and Hold. Neither one of those is correct.
Again, I remind you from 1964 to 1982 the Dow Jones did nothing and with a lot of inflation, Great Depression, Dow Jones went down over 90% how about from the peak of the dot-com bubble all the way until I think, maybe 2012 returns were flat, so markets don’t always go up. Yes, they go up over the long-term, but there are periods to adjust, there’s periods to get more conservative. There’s things to do, but when you start to see some of these articles or indicators, that’s why we consume of lot of data. We do a lot of research on sentiment, on what’s going on and make our own decisions because if you follow one person, if you follow one indicator, you’re bound to be wrong.
Take a lot of things into consideration when you’re thinking about changing your allocation, and remember your allocation goes back to really the financial plan. What are you trying to do? Because what you’re trying to accomplish, what you’re spending your money on, whether it’s giving it away or your lifestyle, as we’ve talked about, that’s very different than your neighbors. Your allocation probably should be different as well. What I’m talking about as generalities of if the stock market is way undervalued or way overvalued or people are ultra-bullish or ultra-bearish and those types of articles were probably very prevalent in November of ’18 because the market was kind of in a free fall, especially in December. So for a month it looked like that indicator was spot on and then you fast forward 12 months later and it wasn’t.
And again, I could cherry pick a lot of different ones. I’m not picking on that indicator. What I look for is a lot of these things together and then also look at what else is going on. At the time in December of ’18 while scary, if you go back, we were talking about adding to equity positions as it was falling because the fear was so great. And now not to say we have the opposite at all because we still have people doubting this rally, but we are starting to kind of go up, but the quality of the rally in the short term is kind of slowing down. Again, if you notice here too, what’s interesting is you heard this week about Trump tax cuts 2.0 and we know the 1.0 tax cuts did more for corporations and and had a bigger impact and we’re still feeling the impact then individuals.
But, it’s no secret that Trump wants a trade deal done. It wouldn’t surprise me if he stalling a bit because he’d rather get one done in probably April, May, June, then to get one done today because the elections around the corner at that point, why does he want lower interest rates? He wants the Fed to keep cutting, more stimulus. And he also wants tax cuts. So now you’ve heard tax cuts 2.0 there was hint this week, Larry Kudlow mentioned it. He kept talking about the Reagan tax cuts and the two brackets, the 15 and the 28 so look for something like that to be proposed that hey, we’re going to make the tax code simpler, we’re going to have a couple of brackets, maybe three brackets. And so all those things, they want to be lining up just in time for the election, so you’re hearing a lot of that type of chatter now.
And look, if I was running for president, I’d probably be doing that stuff too. But that’s what we’re dealing with right now, so the stock market’s anticipating, investors are anticipating some of that. And you’re seeing this run up and seasonally, which you know, I loosely pay attention to from mid-October until the end of the year is typically good and we’re getting that run and every time it makes a new high and every time people see on the news, the Dow Jones is over 28,000, if they’re sitting in cash, it makes people say, “Maybe I should put more money in.”
And so let’s watch to see, do people let their guards down? Is there overconfidence? And that could happen as we enter the new year. And especially as I said, look, the quality of the rally this week was not very good and I’ve been very bullish. But the quality of the rally this week was not good. And so let’s watch over the next few days to see, and again, we’re not trying to time the next few days. This is about being tactical in terms of do you take some off the table because you need to buy more bonds or if you had cash to put to work, do you do it today? Or do you wait for better prices? That’s what this is about and that’s what I try to help you with each and every week to really optimize those dollars from an investment standpoint.
We saw a big run in bonds back in … Oh, I think it was late August, early September, bonds just went parabolic in August, meaning interest rates went straight down, you remember that? That was a time to take some profits on bonds or if you were … Again, if you looking to buy bonds to wait. Now is probably not a bad time. Stocks are kind of in that period right now where I think deferring new buys is probably more optimal than not.
Now, if you’re somebody that’s averaging in or you’ve got 100% cash and you want to just average in over the next several weeks and months, fine. You may not want to get too cute with it, but just telling you what I see, which are things are stretched in the short term, and remember, even if a trade deal gets done or buy, keeps waiting for that, the market’s pricing some of that in as we speak, and so if we get one, don’t be surprised if we see a buy the rumor, sell the news where we’ve already priced that in and we actually get a sell off once something is announced, who knows?
All right, that is going to be today’s show. Don’t forget creatingricherlives.com, our telephone number (210) 526-0057. If you have a friend or colleague or spouse, somebody you want to share this information with, feel free to do that. We are on all the podcasting platforms, we’re on iTunes, we’re on Stitcher, we’re on Spotify. A lot of people listen on Spotify, now Overcast, there’s not an excuse. Or you can just go on the website and go to creatingricherlives.com you click on it, you can listen to it right on the website and you can read it, as I’ve mentioned. You can read it while you’re at work and then nobody knows you’re actually reading the podcast and getting some good information and you can multitask, I’m not saying to not do your work. I’m just saying to multitask. That’s what we teach here. All right, have a good weekend everybody. Take care.
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