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.
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