Here’s What The World’s Best Investors Think About The Stock Market (Audio Podcast)

January 25, 2020

On this week’s show, Karl discusses the Coronavirus and the effects on the stock market and the economy.  Plus, tune in to hear what the smart guys on Wall Street think about the current stock market.

Welcome to Creating Richer Lives, where living a richer life goes beyond the balance in your bank account. In fact, it’s about what you do with your dollars, and how the choices you make with your money not only define your lifestyle now, but impact your legacy for years to come. Whether you’re working towards retirement or seeking ways to make philanthropy your goal, there is a road to get you there. It’s time to redefine what it means to have a richer life. Welcome to Creating Richer Lives. Here’s your host, Karl Eggerss.

Hey, good morning everybody. Welcome to Creating Richer Lives, the podcast. We appreciate you joining us. As always, my name is Karl Eggerss, and the show is brought to you by Covenant. Lifestyle, legacy, philanthropy, Covenant is a registered investment advisor, and really the goal of Covenant is to unburden clients from the daily cares of financial management. That can come in lots of different shapes and sizes, and all kinds of things. Regardless of your situation, if there’s a question you have and you need to either know the answer or you’re really wanting some analysis done, it doesn’t hurt to reach out to covenant (210) 526-0057. The website, of course, is creatingricherlives.com. In fact, I had somebody earlier in the week call me and say, “You know, I’m trying to retire in August. I think I can do it, but I’m just not sure. I may need some answers to that.”

Then they proceeded to tell me that they had taken social security back at age 62, and she was regretting that decision and she said, “I didn’t even know I could claim my ex-spouses social security.” That’s one of those, that had she just sought out Covenant for some financial planning, we would have been able to help her through that and make a wise decision because she probably left literally tens of thousands of dollars on the table by not doing that, in deferring her own social security until a later date, which would have meant more money for her down the road. That’s a classic example of you don’t need financial planning just when you’re about to retire. You need financial planning at various stages of life way, way early on, whether they’re you’re accumulating wealth in the best way to do that or yes, you’re in retirement and figuring out how to distribute those assets to yourself, a family member, a charity, whatever that might be.

That’s really why Covenant does say lifestyle, legacy philanthropy, because those are the three options you have to do with your money. One of them is not, trying to reduce the amount week we give to the IRS, right? Tax strategy and tax planning is involved in there. So, if you need any help in the financial realm or if you know somebody that does (210) 526-0057 or creatingricherlives.com. By the way in terms of accumulating and saving, I ran into something very interesting this week, and I’m going to touch on it a little bit. And as the weeks go on, I’ll give you more information. I’ve found a little, let’s call it a little glitch in the way people save in their 401k, and why you could be leaving some money on the table, just by the way you are saving. There is a way to save in your 401k, and we’ll talk about that in a minute.

This week was a very interesting week because those very news heavy for two main reasons. Number one, we had all the big wigs in Davos, Switzerland, all the bank presidents, all the hedge fund managers, the thought leaders. The president was there and big economic forum. I’m going to talk about what was the theme that came out of that? Because it was one theme, it seemed that I heard when I listened to a lot of these interviews, heard one theme. Then, secondly the Coronavirus was a big theme on Wall Street this week. Now, we need to look and figure out how severe is this, and is it something that can really impact the stock market going forward? But it did have an impact on the market this week. I think the stock market was probably down somewhere around 1% or so.

Small Caps got hit a little worse. Of course, emerging markets got hit the worst this week primarily because this virus is out of China, so it got hurt the worst and really, I mean some of the outliers this week and it was a true risk off week and we’ve seen that trade before where pretty much everything across the board goes down except for things like utilities, treasury bonds, gold, real estate, investment trusts. We’ve seen that type of trade before, and it was no different this week. The biggest area hit this week were the energy stocks, the S&P 500 sector. The energy sector was down over 4% ,and now it’s down almost 6% this year. Oil and the energy sector getting off to a pretty rough start so far in 2020. This week, again the biggest mover, you saw things like oil down over 7%, natural gas down 6% gasoline, not a bad thing here, down 7.6%. We’ll see if that translates down to the gas pump near your house.

Copper down almost 6%. We saw, again, this risk on trade unwind a little bit and it didn’t really hit the equity markets that much. We saw some pressure, especially on Friday with the stock market, but it was not a dramatic reversal, but it did. You could tell it got people thinking, is now the time to lock in some profits after this very persistent run in the stock market. The last several months, seems like everyday we look up it’s a new high, it’s green, right? It’s because, primarily, it’s been my theory and I think a lot of us at Covenant, our investment committee met this week, and we’ll talk about that in a minute. The theory being that there’s, almost regardless what’s going on, as long as the federal reserve is there and has your back and has, is injecting money into the system every day through the repo market.

Some would consider it quantitative easing, keeping interest rates low, that trumps everything. The stock market continues to go up based on that liquidity, and really regardless of what happens, and you can almost see it because we know in 2019, profits of companies were flat. We didn’t have any earnings growth on the S&P 500 last year. The profits literally were flat, but yet the stock market went up considerably. What does that mean? That means stocks are more expensive now than they were. As we fast forward here, there are estimates showing that as we move through this earning season and the next one, and the next one, it’s four that we’ll have this year, these quarters that you’ll see it re-accelerate. If it doesn’t, that is something to watch, because stocks will continue to get more expensive or they will get cheaper because they will come down in price.

That’s something to watch. But really these two issues this week was Davos, Switzerland and the Coronavirus. Now, let’s talk about the Davos Switzerland first. You may say, boring economic forum. Who really cares about that,, and you’re pretty much right. But what’s interesting is some of the greatest investors of our time were there and they were all speaking and that was, I was trying to gather what was there, what was the theme? What was the thing we could grab from each of these folks? Ray Dalio, Bridgewater, his takeaway, his famous quote this week was “cash is trash”. Kind of scary when you hear people say that because also now the stock market goes down, it starts going down. But his point was as the Fed’s printing money, injecting capital, keeping interest rates low, you’re getting penalized to hold cash as you have for most of the last decade.

that’s what he meant, is cash is trash. Paul Tudor Jones, one of the best investors of all time said this is similar to 1999, and he said, we probably won’t see this end, this run, meaning this bull market, until the fed has to raise rates sooner rather than later. They don’t think they’re going to have to raise rates. If they do because a thing is going up and we start to get some inflation, all of a sudden they may have to raise rates sooner and that will choke perhaps the economy off, but it certainly will make investors run the other way. He’s saying, Hey, we’re in 1999. This thing’s running up and it will continue until maybe the fed does something different. Now remember, all these folks are saying there are issues to deal with.

It’s just the issues are different than the performance of the stock market. David Tepper, he’s now owner of the Carolina Panthers, just wrote a huge check to the ex-Baylor head coach. He’s got very deep pockets because he’s been an unbelievable investor. He was probably, he probably got famous. He was behind the scenes, and then he started doing some public comments, probably got very famous in 2013 when he said, essentially the Fed’s got your back, and as long as they’re there, it’s kind of a fed put, if you will, where every time something bad happens, they’re going to lower rates, inject money, and the market’s going to keep going up. Sure enough, it did. He has a tremendous track record. His takeaway was keep riding that horse. You just ride that horse until it doesn’t work anymore. His takeaway, Stanley Drunkenmiller, probably remember him from seventies and eighties excellent, excellent investor.

His takeaway was, hard not to be constructive with wild monetary stimulus globally. So again, it’s not just the US and our federal reserve. It is globally, what’s going on in terms of the amount of money being injected into the system. What did all these people say? They all said the same thing. They all said, they all pointed to, some were talking about climate change. Some were talking about our trade deficits. Some were talking about student loan debt. It mean, we have real issues, right? They all said that and they all acknowledged that. But these are guys that are paid to make money, which is different than solving the world problems. Some of them do

… Try to do that because a lot of them are philanthropic, but they all said, “Look, you have to participate in this because the FED is putting this in.” They’re not saying they agree with it, they’re just saying it is what it is. And I think that’s a valuable lesson that sometimes investors I talk to like to take a stand. I don’t like what China’s doing, so I’m not going to invest in Chinese stocks. Well, you’re probably buying their products. I’m not going to do this because I think… I don’t like how this restaurant’s doing something, so I’m not going to eat there, and you kind of have this… You take a stand on something. That’s all fine and good, but when it comes to investing, it’s a little more difficult to do that unless you’re buying really individual companies.

And even so, you still don’t know exactly what those companies are doing. But their theme was, look, the FED is loose, they’re putting money in the system and there’s really no other place but the financial markets, and as you do that cash depreciates, your dollars are worth less. That’s the takeaway. Those are some of the biggest money makers, some of the most successful investors of our lifetime saying that. Okay? So think about that, that that makes sense. Doesn’t mean you let your guard down. It doesn’t mean you go 100% stocks, any of that stuff. It just means that this market may keep going longer than you think because of that simple fact. That’s what came out of Davos, Switzerland.

Then of course, Tuesday we hear about this virus and this virus, the coronavirus has only been around just a couple of weeks. The good news as it’s spreading, the good news is that it was found early on. We have a lot more technology nowadays and apparently it’s not as severe as past viruses, it’s just it’s more aggressive in terms of its spreading. That’s just what I’m hearing. You may hear something different. I’m no expert on this. What does it mean for the stock market? Well, if you look back at the SARS, remember the SARS virus and this is maybe a distant cousin of SARS. The impact on the GDP of each country back in 2003 when this… When SARS came out, you really… Hong Kong, China, they got hit. The China’s GDP dropped by about 1%, Hong Kong is almost 2.5%. During that time the U.S. didn’t really… It hurt a little bit. It definitely hurt a little bit, but not that much.

What does that mean going forward? Well, here’s the thing. I mean, you really saw it specially as the news continued to trickle out Wednesday, Thursday and Friday, another case confirmed in the U.S., more deaths in China, two cases in Europe. The fear here is that it’s going to hurt the economy. So again, we go back and at SARS, how did it affect the economy? If it spreads and they can’t contain it, then yes, it would affect travel, it would affect hotels and the economy would slow down. People would hunker down. There was some theories even that Netflix rose on Friday simply because more Chinese people are going to stay home and watch Netflix. Okay?

There was a chart put out… This is actually… Charles Schwab and FactSet, I guess teamed up to put out a chart of all the various viruses since 1980 and kind of plotted them on top of the stock market. And the point of this really is that there is no correlation, SARS came out at the end of a horrible dotcom bear market, so it almost looks like SARS sparked the subsequent rally from ’03 to ’07. Of course that wasn’t the case. Same thing, April of ’09, the swine flu. Remember that? H1N1, that was April of ’09. So are you telling me that the swine flu was your trigger signal to go buy stocks for the next decade? No. It just points out that at various times these have come out, markets have done different things, but I would say completely unrelated.

We’ve had HIV and AIDS in June of ’81, the pneumonic plague in the early 90s, Asian flu, SARS, swine flu. We’ve had MERS, remember? M-E-R-S. Measles in December of 2014 and in 2019. Ebola, Zika, I mean the Cholera outbreak in 2010, we’ve had all these different things along the way and what Schwab and FactSet were attempting to do is say, “Plot all these when this happened, and then let’s see how the stock market did.” And they were like, “Hey, look, the stock market actually has risen a month after these came out.” Well, here’s the hard part. They use a dot. SARS, April of ’03, well, it didn’t really come out in April of ’03. So these things last a while, and so you’d almost have to do a timeline, but it’s a futile exercise, it doesn’t matter in terms of the longterm prospects for the stock market.

Now again, if it snowballed and turned into some massive thing that the world’s never seen before, of course it would affect it. And is it going to affect GDP? Yes, it might, depending on what happens with it. But there again, as I just said what these other investors were pointing out, there are bigger issues in terms of what’s moving the stock market, but you could clearly see that when the news got worse this week, you started to see the risk off trade. Go buy bonds, go buy gold, go buy utility stocks and get out of stocks that’s what happened this week.

Here’s the real issue that we see at Covenant and I had a conversation with our chief investment officer, Justin Pawl yesterday as we do every Friday kind of wrap up and just discuss the week at hand. By the way, he has a weekly blog, so if you like some in written form, of course we transcribe the podcast, but if you want a different format, a quick five minute synopsis on Mondays mornings, that is the place to go. Go to creatingricherlives.com and you’ll see his blog he posts up there and it’s some of the same thoughts that I have here. A little more condensed version and a little different way because he writes it differently than I speak. But we get together on Fridays and we were discussing the fact that the plane right now, we’ll call it the global economy, the plane is cruising along at not a real high altitude, so you don’t have as much room as you might have in the past for stuff like this.

What do I mean by that? Well, if this turns into something that really does affect the economy, you don’t have as much room for air. It could tip you into recession versus if our economy has grown at 4% per year, you would have a little more buffer. The planes flying a little lower is what we kind of discussed. And it’s interesting because we had our investment committee meeting this week, our quarterly, and we get together and discuss themes, what we’re changing in our portfolios, et cetera. And you’re seeing some mixed signals for sure. I don’t think there’s anything dramatic now versus a quarter ago in terms of the economy. There are some good things and some bad things. We are going through a manufacturing recession in the United States, probably globally as well. That’s nothing new. Some would say, “Well yeah, we’re switching to a service economy,” but there’s more to it than that.

Really what we’re watching… Some of the big things we’re watching… Probably the main things watching the wages and the hours worked, because what happens when people work less? They make less money, hence they have less to spend hence… You could say the economy’s slow, so that’s something we’re watching. You go back to 2015 and ’16 which was a… Could have been a little mild recession. I think it was at that point and certainly an earnings recession and during that time you saw industrial production fall, you saw oil fall and we’re seeing industrial production fall. We’re seeing some of these things start to look like they may be rolling over a bit. Now again, you balance that with look at housing, housing’s been doing fantastic. That’s a great indicator, people buy houses, guess what they’re going to do? They’re going to go fill them up with stuff. They’re going to buy stuff. Let’s watch that.

We also discussed student loan debt, how it’s continuing to be a bigger and bigger problem that needs to be addressed in some form or fashion. We will have our economic quarterly update written sometime later in the week and we’ll put that out and I’ll remind you next week how to get that. And again where, where are we right now? BEcause there’s a lot of mixed signals and, but that’s why you may be seeing rates at least for the short term, kind of have a cap on them and you saw interest rates go down this week. We never know about sentiment though, right? In other words, there may be valid reasons for interest rates to stay down, but sometimes they just go up, so that’s something we need to monitor.

This is all fluid as it always is. But that’s why what we’re talking about is once you know, based on you and your financial advisor helping you through kind of what the big picture looks like in terms of allocation, how much safer income oriented money do I need and have? Versus how much growth oriented, capital gains oriented money do I have or need or should have? Once you determine that, you still got to drill down within there and figure out how to do that. Where’d I get the income with rates at a 10 year treasury in the United States at 1.7%? Lots of places to get income outside of the liquid treasury markets. There’s lots of ways to do that and to me, it’s a combination of those things to try to boost your yield. And the same thing on the equity markets.

Do you go U.S.? Do you go international? Do you go large companies, small companies, growth companies, value companies? The answer is yes, yes and yes. It’s just you need to have a combination of those and they need to be weighted towards where you see the best pound for pound value. And as the market continues to mature and move along here, it is getting, I don’t want to say harder, but there are certainly, in my opinion, a bifurcated market that continues to happen, which is the shiny object companies, the story stocks are getting a higher valuation,

And those would involve technology companies, the names you’ve heard of. Those would involve some really good consumer brands. Great companies, it’s just you’re paying a lot for them. There’s no doubt about that. On the flip-side, the companies that are boring, the companies that seem to be left for dead. I call them the garage sale companies, the things you find at a garage sale that … They got little nicks and bruises on them, but boy, what a great deal. There are a lot of those companies still. So if you own mutual funds, or you own ETFs, or you own individual stocks, you need to know what you own. You need to look under the hood and make sure. I keep telling you that. And as the markets move along here, and especially as we go through corrections, which we will at some point, you need to understand kind of how much bumpiness in the road are you willing to take and what does that look like?

Again, I think investors are being lulled to sleep the last few years because things have been so good. And yes, we’ve had some sharp corrections December, or the fourth quarter of 2018, but we had such a rapid recovery that most people didn’t even notice what happened. And so, the corrections that may last a little longer, not to say in ’08, but just a 15% drop, but it stays down there for a longer time, like maybe a year. What do you do during that environment? Do you have enough income? Can you withstand that volatility? And we are likely to see volatility as we move along in the year because of the election. We can’t wait until the election to kind of deal with it. We need to be thinking about it now. So this is where you do the stress test. This is where you look back at the fourth quarter of ’18 and say, “How did my portfolio do during that time?”

Assuming it’s the same, “How did I do and am I comfortable if something like that happened again?” What you can’t do is, “Well, I think it’s going to go down, so I’m going to shift everything to this side of the ledger and just sit and wait and then when it goes down, I’ll go by back in.” Easier said than done because when it starts going down, most people don’t buy back in. They tend to think there’s more coming and it’s very challenging. So putting a portfolio together, especially now where we’re near all time highs, and interest rates are near all time lows, and you have things like commodities that haven’t done very well the last few years. It’s challenging. Do you get off the train, so to speak, lightly from the things that have done extremely well and start reallocating the things that haven’t? And I would say partially, yes. That’s what rebalancing is all about.

That’s what asset allocation is all about. So I’ll give you more details along the way here in terms of next week. Again, we’ll have our economic summary put out and I’ll give you more details on kind of … If you’re not going to read it, I will summarize it for you, but just know that we still have an economy that is, we’re calling it good but not great still. It’s still there. It’s still good. It’s just there … It’s vulnerable and that hasn’t changed. There’s going to be some people on one side of the fence that are usually the politics influence, but they say this is the greatest economy of our lifetime. There’s others that are like, “This is the worst economy of our lifetime. Look at all the debt, look at all this, look at all that.” It’s always something in between, isn’t it?

I mean, we have an economy that is … It’s cruising along. We’re doing okay. I mean, look, the jobs market has been great and is it going to start curling up? Meaning, the unemployment rate. We need to watch that. Some on our committee think the fed should be cutting right now, again, another rate cut. So again, let’s watch that as it moves along here. But bottom line is this Coronavirus is something that shouldn’t and hasn’t had a history. These types of viruses had a longterm effect on the stock market, but any news event, and I’ve said this multiple times on this podcast, the market can correct anytime for any reason and it sometimes gives you a great opportunity and sometimes it’s legit reasons. And this week was a classic example of that type of news-driven sell off and it may continue.

The market is stretched here, there’s no doubt about it. I was pointing out in our investment committee meeting, looking at some indicators that I’ve looked at over the years that I created that the market’s stretched, there’s no doubt about it. It’s stretched in the short-term. Stretched doesn’t mean we have a bear market because I still don’t believe there’s any signs of a bear market approaching. A correction looks very likely. But again, why aren’t we doing massive changes? Because we don’t know the magnitude, nor do we know the exact timing. But even if we knew the exact timing, even if it starts today, is it 2%? is it five, 10, or 20? We don’t know. And so therefore, you have to plan for all of those in advance. In other words, can I go through a 10% or a 20% with the portfolio that I have right now?

And again, I’m not suggesting you don’t make modifications, I’m just suggesting you have to have some sort of a core portfolio that is kind of in your eyes all weather to a certain extent. So we will see more information coming out on this Coronavirus, there’s no doubt about it. As the weekend goes along and it’s … Again, hopefully we’ll be contained but you’re seeing tons of cities kind of in lock-down in China. But we’ve seen it in the US. We’ve seen it in Europe. And it’s always, always scary. These are scary events. Anytime there’s a virus or anything like that, it is scary and how fast it can spread and so forth. But we are living in 2020 with excellent technology. These countries are for the most part I think on the same page in terms of helping each other and trying to stem this off on I have no doubt they will.

But we could see a little dent in economic growth and that’s why the market really has struggled a little bit this week. But as I said, look, the stock market again for the year, still up. A pretty good January so far, but a little sucker punch in the gut from this week. But primarily, it was in some of those really effected areas. All right. Hey, don’t forget to 210-526-0057 and our website, creatingricherlives.com. Thanks for joining us and joining me. Appreciate it. As always, share the podcast, share the love, send it to your friends and tell them there’s lots of ways to get our information. So we love educating folks. That’s what we do and we want to educate more. All right, folks. Have a great weekend. We’ll see you back here next week on the podcast, Creating Richer Lives.

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