Could The Coronavirus Eventually Help The Economy? (Audio Podcast)

February 1, 2020

The selloff this week on more coronavirus fears has many thinking it’s going to negatively affect the economy.  But, there are a few big moves this week from some key areas that could actually help the economy.  Karl explains on this week’s podcast.

Hey, good morning everybody. Welcome to Creating Richer Lives, the podcast. My name is Karl Eggerss, I am your host. Thanks for joining me, we appreciate it. The show is brought to you by Covenant Lifestyle Legacy Philanthropy. If you need our help, (210) 526-0057, our website creatingricherlives.com. A lot of information on there, and we try to put everything in one package on Monday afternoons and one distribution so if you want to sign up for Covenant you, please do so because you’re going to get not only this podcast, but you’re going to get a lot of information, articles we put on there. You’re going to get our weekly blog, which is really a quick five minute read, a synopsis of the week prior that’s written by our chief investment officer, Justin Pawl, so you can get all of that information. But again, the easiest way to get ahold of us if you need something very specific for your particular situation. (210) 526-0057 is our telephone number.

Well what a week, huh? The, the stock market really had a tough time on, especially Friday as this coronavirus continues on and usually if you go back and look at some of these viruses, they do linger a while in terms of their effect on the market. Before we get into it, let’s talk about what happened this week. We saw some volatility finally, and I say that because it does create some longer term opportunities than a market that’s just going straight up and you don’t really, how do you get into it if you’re sitting on the sidelines with some cash? So we saw, the 450 point drop on Monday and the market tried to balance, but of course we’re seeing airline stocks get hit and gaming stocks and everything surrounding anything having to do with China or commerce in China really getting hit.

Tuesday of course we got the turnaround Tuesday, the bounce. Ended up about 200 points. It’s one of the best days for the stock market in a few months. We had some good, better than expected economic news from the durable goods orders and an actual manufacturing index called the Richmond fed manufacturing index was better than expected. And we’re seeing some green shoots from the manufacturing sector, which has been in a recession, no doubt. So the market was in a good mood. And then we saw Apple come out with earnings.

And then of course Wednesday we heard the fed didn’t, didn’t change interest rates, not a big shock there. Thursday, market was down about 200 points, rallied to finish up almost 200 points and then came Friday where the DOW Jones was down almost 600 points or over 600 points and really a just a sell off from the get go, Friday into the close.

Now keep in mind that we are sitting here, DOW Jones was down about 2% on Friday. We’re sitting here down about 3% from all time highs. So again, let’s take this into consideration that this is very different than even a couple of years ago, Christmas of 2018 or so when we, really a year and a half ago, not even a year and a half ago, where we saw that really nasty sell off that was really persistent every day this is different. What we’re watching here is investors in Wall Street really discounting, trying to predict the future. So what’s going to happen is, they’re watching the coronavirus and as we see the number of cases continue to go up at a fast rate, it’s been one of the faster rates when we look at some of these other viruses over the last several years, the death toll hasn’t been what it was in previous viruses, but as that ramps up, you see the stock market continues sell off more.

If we can see that peak and it is contained, that would cause us probably to have a bounce back pretty quickly and I’d think we have to be encouraged that this is something that the whole world, pretty much all the scientists around the world, all these laboratories are on the same page as much as they can be. From what I understand and they’re putting a lot of attention to it. This is not being downplayed. You’re seeing quarantines, you’re seeing airlines really restricting traffic and things of that nature in and out of these particular areas in China. That’s something, that’s a good thing, but until we see that look contained, the market’s probably going to continue to struggle here.

Now I don’t think it is also a coincidence that as we’re seeing Bernie Sanders poll numbers rise, we’re also seeing stocks back off a little bit. Why is that? While this isn’t a political statement, this is simply the fact that Bernie Sanders, his marginal tax rate that he wants is somewhere close to 70% and a capital gains rate of somewhere around 50% so if you’re sitting there with a portfolio of stocks considering selling, you think you better do it now or wait told next year or two years from now under a Sanders administration. So that has to play a part. We saw a similar volatility pickup back in oh, August, September, I can’t remember exactly when we saw Elizabeth warren’s numbers spike up a little bit as well, just because again, we have a change, a potential drastic change in how really money flows in and out of the United States and in and out of your pocket. And so that’s something that may be being discounted right now. So it was a good opportunity for investors to sell because we have that.

In addition, we have the coronavirus. And remember we were very stretched here recently. The Covenant investment committee met last week, as I mentioned on the podcast. And lot of people with a lot of different strengths and a lot of good information around the table and there was a handful of us and very clear that the economy is cruising at a lower altitude and so we’re more vulnerable to shocks such as the coronavirus, the potential for a slowdown that could really affect commerce and so forth. But we also were stretched and a lot of the technical indicators that I had come up with the last few years were clearly shown at the time they were stretched. That didn’t mean we necessarily had to do anything about it. It just meant that we wouldn’t be surprised to see a pause. The coronavirus is certainly something that gives people an excuse, a reason to sell stocks and again they’re trying to discount the stock market is a discounting mechanism.

So you have to think about that. If you own a stock, whether it’s an airline or a casino stock and they’re temporarily seeing their volume down. I mean you’re hearing about 90% drops in the foot traffic at some of these casinos and Macau, is that something that’s going to last forever or not? Because remember we’re discounting the future cash flows and profits of companies for years and is a few days, weeks, maybe even months going to affect the company in the long-term. So that’s what you have you have to ask. And so investors are discounting some of these stocks and they may be great opportunities, so we need to watch that. But watch over the next few days, do we see some type of peak in the number of cases, etc. And we’ve got obviously the volatility index, which has been low for quite a while down in the almost single digit range, is pushing 20 up is up about 30% this year. Or excuse me this week. And so that was clearly one of your winners this week.

And look, the things that one this week in terms of gains and they weren’t huge, but treasuries, gold, utility stocks, it’s the usual suspects. And on the flip side, anything having to do with a growing economy, copper, energy, industrials, anything like that really suffered this week, not a big surprise. Hey, by the way, go refinance. The 30 year bond is back below 2% again and the 10 year bond in the United States around one and a half percent. Interesting to watch because you see oil prices dropping 5% or 6% this week and down a lot recently. You see interest rates coming down.

Are those two things doing the heavy lifting to support our economy? In other words, they’re doing some of the work that maybe the federal reserve doesn’t have to do, but here’s the thing we need to consider. Not only do I think the world is paying attention to the coronavirus and doing everything they can to contain this, but China and the US are there to provide more stimulus if need be. Now I can hear some of you saying we don’t want the central banks intervening any more than they have to. I understand that, I’m not judging what they do or how they do it. All I’m simply saying is it’s clear when they provide liquidity to markets like it and you make money and that’s what’s been happening and so can they do more? Absolutely they can do more and they will do more if this virus continues to spread. But don’t underestimate the power of lower interest rates on the housing market, lower gasoline prices in your car and the boost that that might provide. So interesting that the coronavirus might actually be stimulated in the long-term here.

So let’s watch that. But again, this is a very news driven type of sell-off. We need to be watching earnings as we’re getting more and more of these earnings coming out because that’s really what you’re buying as an investor. So let’s watch that. Now I do want to switch gears because last week I talked briefly and I didn’t get to it because we just ran out of time about your 401(k). How do you fund your 401(k)? Depending on that answer, you may or may not be getting the full company match. So if you go back and look, and let’s just say hypothetically your company matches dollar for dollar up to 5% of your paycheck and at the end of the year you go and look at what your earnings were and you also look at the match that was given to you by the company. And if it’s not 5%, you didn’t get the full match.

And the reason why that may have been is because they are matching on a per paycheck basis. And depending on your income, you may be stopping your funding of the 401(k) because you’re maxing out earlier in the year. So for example, depending on your salary, you may max out your 401(k) in July or August. And so you’re really literally not putting any more money in in September, October, November, December. And so you’re not getting the match on that. And so you think, well, I’m going to save as much as possible and as early as possible so that I can get it in the 401(k) and growing and that’s a good rule of thumb. However, when it comes to the match, generally spreading it out over the rest of the year is better and it’s a mathematical equation formula, what have you.

So maybe I’ll come up with up a little calculator to figure that out for you. But if you’re a lower income earner, that’s probably not the case. If you’re a higher income earner. There’s a high likelihood that you may not be getting the match, I’ve known people that that has happened to. If you need help calculating that, reach out to Covenant, (210) 526-0057, we can help you figure that out so that way doesn’t happen to you. And furthermore, along those same lines, should you even be doing the pre-tax if you have a Roth 401(k) available to you? What if you have a brokerage link available to you? Are you taking any consideration if you should do the mega Roth? So those are all things that have to do with the 401(k) and other things to consider.

But I did want to point out because I’ve seen this where people may not be getting their maximum 401(k) contribution. So just look at yours and again, if you need help reach out to us, we’re here to help you. But I wanted to bring that up because that is a key thing. That is free money that you do not want to miss because if they’re matching in my example dollar for dollar up to 5% you put in 5% you are doubling your money, you do not want to not have that type of return. That’s regardless of what the stock market or the bond markets do. So I hope that’s helpful to you.

Again, our whole purpose here is to really educate you on everything financial and look, at Covenant, we do a lot more than financial things for a lot of our clients, but financial and educating you, it’s near and dear to my heart. That’s what this podcast has been about for more than 10 years is putting out education for you. And along the way I get to help some of you on a day to day basis and I get to meet a lot of you and I get, some of you we’ve met one or two times, some of you have just emailed back and forth and you’ve been listeners a long time. So we want to continue to do that, broaden the show and educate you even more. And bringing up things like this, we’re going to bring them to you, we’re going to continue to do that. So I hope you have a great weekend and this should be an entertaining Superbowl. So go enjoy it and we’ll see you right back here next week on Creating Richer Lives, the podcast.

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