On this week’s show, Karl discusses the massive rotation in the stock market this week. Plus, this ETF just had the 2nd worst week in its existence. He’ll reveal which ETF.
Hey, good morning everybody. Welcome to the show, Creating Richer Lives. My name is Karl Eggerss. (210) 526-0057 is our telephone number, and our website is CreatingRicherLives.com. This show is brought to you by Covenant, lifestyle, legacy, philanthropy. What does that mean exactly? A couple people have asked me, what exactly does that mean? Take a couple minutes to explain that. We firmly believe that we’re put on this planet to help people, and when you hear creating richer lives, what does that mean? Well, inevitably it’s a podcast and a company that tries to help people make more money, so that’s the term richer. That’s what we think of, but it’s much, much more than that.
Richer for us is also helping people in non-financial aspects of their lives. So our goals really at Covenant is to unburdened clients from the daily cares of financial management and really position them to maintain or enhance their lifestyles. That’s what we do. So richer lives is really a broad term and whatever that looks like for you, we’ve talked about it a little bit in previous podcasts, but whatever that looks like for you, we try to at Covenant try to help you achieve that through financial management, easing burdens, all types of things in those areas. So again, it’s not only financial aspects of your lives, but it’s also non-financial aspects. That’s what richer means to us and to most people we talk to. So just want to take a couple minutes to expand upon that.
So, interesting week in the markets, and maybe you didn’t see what happened, but there’s two big themes this week. Did you see it? Did you see what happened? Let’s first go through what was going on from day to day, and then we’ll kind of come back to the theme for just a minute. Monday was a pretty flat day, but bonds fell because interest rates started to rise. We started to see this theme, a couple of weeks ago we talked about it. This week was a real big shift in momentum. Names got hit, growth names, and the lagging value stocks took off. So we’ve seen value lag momentum or growth by quite a wide margin. I mean it’s a big, big, it’s almost two totally different markets underneath the surface of stocks. We saw that reverse in a big way, in fact, some people say this past Monday, based on different indicators, was the largest one-day shift in momentum since 2009. It was unbelievable. The Russell 2000 closed above it’s 200 day moving average. Which is again, people watch some of that just a smoothing mechanism. So we’ll come back to that a minute.
Tuesday, another pretty flat, quiet day. But again, the rotation continued. The momentum, money coming out of momentum or money coming out of momentum and flowing into value. Of course, we had the Apple event where they’re trying to convince us that the phone is so different that we must, we must go buy a new one. So coincidentally, I have a 10S Max and of course it started having issues the last couple of days. Conspiracy theory says, “Hmm, they have a little bug in there that makes me want to say I’m fed up with this phone. I’m going to go buy a new one.” And remember, most of what the new one does, faster processor, they claim three or four, I think it’s four more hours of battery life, which is important, but also it’s got three cameras on the back. If you stand back and look at it, it looks like a fidget spinner.
If you don’t know what that is, then you’re older because these are those, nevermind, I’m not going to explain it. But if you look on the back of the new iPhone, there are three cameras on there and you can use them in different ways, wide angle and gets better depth of field, et cetera. So camera is awesome on the 10S Max and probably awesomer on the 11, and the 11 pro. But again, pretty much whatever I expected. Nowadays we see a lot of leaks coming out. So we kind of know what’s coming at these events. The price of some of these Apple products really surprised some people because you saw some cheaper products, which that was really never an Apple concern. They just basically said, we have the best stuff. You’re going to pay for it and you’re going to like it. And everybody said, “Okay, yeah, we’ll do that.” And that’s what they did.
So we’re, we’re seeing some pressure, but again, technology, all this stuff’s getting better and better and better. And these phones are, in stating the obvious, captain obvious here, but these are mini computers in our pockets and they do a lot of stuff. And so it to me, and we talked about it last week with my love for technology, but to me this is something I don’t skimp on. I don’t skimp on my phone because it’s so important to my daily life, my work life, my personal life, that’s an area that I choose to spend a lot of money on relative to something else.
So Wednesday, pretty strong day. Dow’s up about 227 points. We saw the S and P 500 go above 3,000, we saw the Dow Jones go above 27,000 big fat round numbers. And after the bell, President Trump announced he was going to delay tarries for China until October 15th because they asked for it. It was a goodwill gesture, they got the 70th anniversary coming up, etc. So he said, I’ll delay them.
Thursday, another huge shift again, saw money flowing out of large cap growth. So kind of one end of the quadrant to going into small cap value. So if you look in your 401k, you always have these options of where to put your money. And again, I’ve been telling you that it’s really important as we move along and mature in this bull market to really know what you own, and look underneath the hood a little bit because not all stocks are created equal. And we’ve seen that the last few years and it could be shifting here. So again, we’ll talk about that in just a minute.
Friday, the highly anticipated retail sales report. Remember last month it was better than expected and, remember I said this is great because again, if the consumer is spending there’s 70% of GDP, if they continue to spend, economy is okay. And we saw that, and the report that came out on Friday was a little better than expected. And, the last month’s was actually revised up. Now the what some people would consider the more reliable one, which takes out the food energy costs, because we know that you don’t actually eat or use gasoline. So we take that out to massage the numbers. But of course those are volatile numbers, and that’s why they claim they take them out. But that was a little weaker than expected. But bottom line is consumer is still in pretty good shape, hence our good but not great call, which is continuing to play out.
Again, a slowing economy, but the consumer is doing pretty well. So that was the week. Now in terms of what was moving, this is where we kind of get into the meat of it. S and P 500 up 1%, Dow Jones up 1.6. Okay, now we start drilling in. Dividend stocks, the Dow Jones select dividend index up 3%. S and P midcap 400 up almost 3%. Small caps up 5% roughly, 5% just this week. Did you see that? Not only that, but did you see value, depending on which index you look at, outperformed momentum by over 6% this week? A huge shift going on. Why is that?
Here’s the bottom line reason is there is no reason. That’s how stuff changes sometimes, and I don’t remember this, I was certainly around and had been in the markets for years, but in March of 2000, I think it was March 10th of 2000 to be specific, the stock market peaked, and we started that long two and a half year, three year bear market. The tech bubble burst. During that time on March 10th one of my colleagues said, “You know, I remember stocks falling that day.” Technology stocks fell that day for no particular reason. They just fell, and they fell a lot and of course back then everybody’s conditioned to just buy the dip because tech stocks just kept going up, but they just went up until guess what? They didn’t. There was no catalyst. There was nobody saying, “Okay, everybody, the bull market is over, things are going to change.” It just shifted.
Are we at that point in the value rotation, money coming out of growth stocks into value stocks. Again, there has been a big premium in the last few years with stocks that are growing fast. Whether they have profits or not doesn’t seem to matter, but companies that are growing the revenue a lot, there’s a big premium put on that. There’s also a premium put on companies that in certain areas that have been perceived as high income kind of safe stocks. There’s been some little pockets of overvaluation. At the same time we’ve seen money that’s flowing out and been left for dead, good quality stocks that aren’t growing very fast, but they’re just cheap and we’ve been talking about that for months and months and months.
But money clearly shifted from one place to another. So this week, if you just stood back, you said, yeah, it was pretty good week in the market, nothing dramatic. Under the surface it was fairly dramatic. Again, it was some of the biggest shifts. In fact, and this is according to bespoke, they said on Thursday, this was the second largest three-day move in small cap value relative to large cap growth since the financial crisis, and one of the largest moves since the data was even, I think invented for these two series since 1995. So this was not something to sneeze at. This is really important.
The reason it’s encouraging is because in the longterm, stocks move differently from one another. In other words, used to back in the day prior to the financial crisis, you could invest in, let’s say the Russell 3000, which is roughly 3000 stocks. I say roughly because some of these indices don’t have the number of stocks that you would think they would have in them for one reason or another, mergers, et cetera, but the Russell 3000, you could be diversified in there. Some stocks up, some stocks down. When ’08 happened, everything went down. Correlation went to one they call it. Everything fell. So in ’08, since that time we have this, we look back and we say, well if stock market goes down then everything must go down together, and what we believe will happen, or I believe I should say is that we will see rolling bear markets which is more typical.
You saw it in dotcom bubble by the way. You saw certain sectors do pretty well. Certain industries do pretty well. A lot of stocks went up in the dotcom bubble, like as the stock market peaked in 2000 and went all the way down until March of 2003 or so. There were stocks that made money during that time, a lot of stocks. That was not the case in ’08. I think ’08 was an anomaly. I think 2000, the dotcom bubble was more typical. Some pockets going up, some going down. I mean when I talk about rolling bear markets, which you’ve heard me say before, which is sectors and industries going through their own little what we would call private bear markets. Didn’t we see that with the energy patch in 2014, 15? Didn’t we see oil go from $120 a barrel to $26 a barrel and take the energy stocks down with them, and there was bankruptcies, and we’re still feeling the effects today.
We already saw that bear market. And we’ve seen banks struggle, for example. Who’s to say those two areas don’t go up. While tech stocks maybe start stumbling, or utility stocks or consumer staples. And that rotation could make the overall market seem like it’s not really going anywhere, it’s just chugging along. But again, if you kind of fine tune your portfolio a little bit, and weight it towards the things where you do see the value, and underweight it towards the areas that you believe are overvalued, that’s how you can do pretty well. Now, not suggesting to get rid of everything on one side of the ledger, and ramp up all and own the most beaten up area, and that’s exclusively what you own. I’m not suggesting that, just like you’ve heard me in the last few weeks talk about the bond rally.
You don’t want to abandon bonds just because interest rates are so low that surely they can’t go any lower. Well, guess what they have? They’ve gone lower and lower and lower last several months. So had you not had bonds, again, you’d be missing out. Now, the other thing that did happen this week, speaking of bonds, with this momentum shift out and going into value stocks, the other thing that happened was interest rates rose. Coincidental, is it causation? I don’t know. I just know that there was a panicky situation in bonds where bonds were going vertical, interest rates plummeting, the 10 year treasury got down to 1.4%, and that has reversed and we went all the way back up to almost 1.9%. Now if you’re listening going, oh my gosh, one point something and it went up to one point something, big deal. Well, again, it’s all relative. We’re in a low interest rate environment, so move from 1.4 to 1.9 is a big deal. It is. In fact, it was the second worst week for the TLT, which is a treasury long-term treasury ETF, is was the second worst week in a long, long, long time. It may have been ever, I think for that particular ETF.
So it was some real hurting going on in the bond market this week. And it was really just reversing that panicky situation. Not saying interest rates are going to keep going up to the moon, but you did see a big shift in that bonds and again going into money was coming out of bonds and it was coming up momentum, and went into value stocks and dividend stocks. So very good week if you own certain types of stocks, and you got hit hard if you’ve been owning other types of stocks.
Now the stocks I got hit the hardest this week are the ones that have done the best. So it’s very difficult as an investor to be in the right place at the right time all the time. So diversification works, but tilting the portfolio one direction or another when you see some things that maybe a little more obvious to you, that’s kind of the way to do way to do it.
Now, another thing we saw this week, which was pretty interesting is and CIO, Justin Pawl sent me this, and this comes out of Absolute Strategy Research is the source for this, but it’s a global economic news flow. I don’t know how they calculate this, but the news flow right now globally is as negative as it was during the financial crisis. It’s hasn’t been this negative since the financial crisis and it kind of feels that way. We feel as if, is there any good news? I mean is there ever any good news?
And the reason we feel that way is because that’s really what’s happened, and the news flow is so negative, and it kind of coincides with the flows. We’re still seeing money coming out of equities and you go, Karl, that doesn’t make sense. How can we have the stock market going up? It’s pretty much at an all time high right now, and flows going out. There’s not a real easy way to explain that, but it does tell you that there’s money on the sideline still that could flow back into the markets when that news flow slows down. And in the news flow, what’s interesting is on the China front, which of course remember, another kind of interesting thing that happened this week, I thought, was we had some positive back to back to back kind of good news on trade.
So we had this meeting set for October, I think that was two weeks ago, late two weeks ago. That was a positive thing. Then we had, okay, we’re pushing off these tariffs until October 15th at the request of China, goodwill gesture. Okay, they do something good, we do something good. Then they come in and buy a bunch of soybeans, the most they’ve bought since June. So everybody’s playing a game here. And then we had a fourth thing that happened with trade. We heard little rumblings that, hey, let’s just get a deal done, a smaller deal. That way we can put the tariffs on the back burner. Well you remember, I’ve been talking about that, saying that I’d been hearing some rumblings of that. Perhaps we don’t deal with the intellectual property stuff just yet because that’s a bigger issue. Let’s just get the guts of the trade deal done.
So it’s kind of a mini trade deal. Let’s get that done. And, and we heard all of that this week, and yet the stock market didn’t roar up, because it’s not really oversold right now. It’s not like we’re sitting on the recent lows and everybody’s looking for some bit of good news. So I thought that was interesting that what has been good news with trade is something that has now just kind of, eh, we don’t really believe it anymore. That could be part of it. Like, yeah, now we’re waiting for the next tweet because somebody made somebody mad, they didn’t do what they were supposed to, and we’re putting on the tariffs tomorrow. We’re kind of waiting for that in this yo-yo back and forth, or tennis match, which by the way, if you watch the US Open, speaking of tennis, classic match, between Nadal and the Russian guy, Medvedev, unbelievable, unbelievable match.
But that’s how this trade thing has been. It’s been a tennis match. Back and forth and back and forth. And we’re not going anywhere. Again, the markets aren’t very different now than they were January of ’18, and here we are in September of 2019, so we’re coming up on two years with not any meaningful progress. So hopefully this momentum can continue, but I thought was interesting the market’s reaction to that was kind of, eh, whereas a few weeks ago, it seems like those things would have really gotten the market going. I mean that probably could have put on a thousand points on the Dow, maybe 1500 points. It didn’t really do that this week.
But this news flow, going back to that for a minute, the flows are still negative. The news flow is negative. I think we’re still suffering from kind of this post era of the financial crisis where we’re just looking for the bottom to drop out, and there’s a lot of shell shock. I mean, again, if you ask around, there’s nobody that’s super excited about the stock market. And for those of you in the stock market, that is a fabulous thing because as it continues to climb, as potentially a trade deal gets done, as the world doesn’t go into recession and the US doesn’t go into recession, and if all those things do happen and we get this improvement, the stock market should breach the new highs and keep going up.
And if that happens, guess what, here come the chasers, all the people that are sitting on the sidelines with that cash, all the people that are negative on the market, pile in. But a very fascinating chart to think about the news flow being as negative as it is. And if you look at some of the surveys, same thing, not a lot of bulls out there. We’re at highs, and yet there’s not a lot of people who like the market. So very good contrarian stuff. If you are, again, in the market right now.
Didn’t want to let you guys know that doing another CBS interview this Sunday, not sure if it’s in the 6:00 AM hour or the 7:00 AM hour. It’s a two hour show, but we’ll be talking about the secure act and discussing that, and it looks like it’s going to turn into a weekly interview on CBS every Sunday morning. So excited about that, and just bringing more information to you guys in a different way.
And again, if you go to Creating Richer Lives, you can sign up for the blog. If we’re not getting that emailed to you, there’s a way to do that on there and we’re going to put more information on there. We’re going to have articles on there. We’re going to have, our video on there, which obviously is TV interviews, plus just videos we put together either sharing my screen to show you some things that are just easier to show you on the computer, or interviews with a lot of our internal folks bringing you all kinds of information that we do in our office, and of course the podcast and radio interviews and things like that. So we really want to bring you a lot information because these are things that we’re talking about that we’re putting into practice.
We talk about Roth conversions, for example, we’re not just saying, hey, that’s a neat thing. We’re actually doing that for folks when it makes sense in their portfolios, in their financial plans because it helps their financial situation. So these are things we’re, all these things we bring you are things we’re observing, and then we’re putting into practice and that’s why I kind of tell you what’s going on in the markets to look for. When we’re talking about value is really stretched, underperforming growth and momentum. What we’re really saying is at some point that’s going to turn because it just, things don’t go in one direction for forever and that was something that did turn this week in a very rapid pace, but if you weren’t really paying attention, you just kind of ah, average week in the markets. We want to show you what’s going on under the surface, and then again bring you some of these financial planning tips and things that we see can impact you. Like the secure act, that’s going to impact if it goes through, it’s going to impact almost everybody listening because most of you have IRAs, and you have 401ks that it’s all about that. Some of you have have inherited money, the rules may be changing for inherited IRAs.
So those are things that impact you. That’s why we bring it to you. And these are things that we do in our practice that at Covenant each and every week. So again, if you need our help or a friend does (210) 526-0057, or go to CreatingRicherLives.com is our website. Hey everybody, have a great weekend and we will talk to you soon.
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