On this week’s show, Karl discusses how the Friday jobs report may have saved the day. Plus, which economics really matter?
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All right, let’s jump right in it here. By the way, next week we’re going to have on Casey Keller to talk about the best savings account ever created. How’s that for a tease? That’ll make you come back and listen, right? And it truly is the best savings account ever created and it’s something you may be aware of but maybe not using properly. So we’re going to get into that next week. He will be in studio discussing that. So I’ve asked him to come in to chat about that. You can also follow us on our social media. We’re on Facebook, we’re on Twitter, etcetera, so make sure you do that and share the show with folks. We’re trying to get more listeners, and we do every week. Many of you hear us each and every week and we thank you for that.
All right, it was an interesting week, and as I do, when we get a little bit of volatility, I asked the question to you, what did you do? Monday, Dow jumped about 100 points. Everything was looking pretty good. Everybody’s pretty confident. Maybe we get a China deal, blah, blah blah, and then we come in Tuesday and we got … big headline here … the worst ISM Manufacturing survey in 10 years. It’s supposed to be 50.4, which doesn’t mean much to you, but above 50 means expansion, below 50 means contraction. It was 47.8. Recession fear spike, the VIX jumps up, the volatility index, the Dow falls almost 350 points and, by the way, we had a big drop first day of October. Are we going to have the same fourth quarter we did last year? That was a big concern that day and then, of course, Thursday, and I’ll come back to what happened earlier in the week, but to tie that together, that ISM Manufacturing survey, there is an ISM services that also came out survey. It was below where it should have been as well.
Now here’s the thing with these, those are surveys. That’s the keyword. Now, is it apples to apples? Yes, it is. We see that every month. It gets reported. But you need to understand when you see some of these headlines, what is actual hard economic data and what are polls or surveys? As you know, who fills out surveys? Human beings. Are human beings emotional? Do you think most human beings in the United States, given all the headlines, whether it’s impeachment, trade wars, geopolitical risks, whatever it is, do you think people feel great right now or do you think they feel okay? Pretty general question, but most people are concerned about potential recession. So when they fill these surveys out, whoever does, they’re not in a great mood and that’s what it tells you. So what you need to look at is the difference, and every day we get probably five or six economic indicators coming out on my Bloomberg machine, flashes and actually has audio, which is a little spooky. The computer starts talking to me, telling me what’s going on. It said that we had these economic reports. Look, the economic reports either, again, are hard data, which is real economic numbers, or it’s soft, which is surveys.
The difference right now between the hard data and the soft data is pretty wide. What’s happening is the soft data is getting worse and worse and the hard data is actually doing pretty well. You can go back and look, but various studies suggest that when we have that type of divergence, the stock market usually responds pretty well and it makes sense because if the real data is pretty good but people just don’t feel good about it, eventually, as the market goes up, they change their tune and things come back in line. That was a big thing this week. I mean that’s what caused the stock market to fall 350 points on Tuesday, fall an additional 500 points on Wednesday, fall 300 points on Thursday. So we were sitting here down 11, 1200 points at the lows, and then Thursday we saw little turnaround. Earlier in the week I had emailed our team internally with a technical picture showing that we could see some pullback this week just based on some technical levels. We got that pullback and then it got fairly oversold, right? The pendulum swung too far one way and we got a little bounce on Thursday and, of course, we got the bounce on Friday, and the bounce on Friday was a relief rally.
Why was it a relief? Because the fears of earlier in the week with these ISM surveys was that were the same fears we saw back in August, which is recession, right? We see all these economic indicators, headlines, the worst manufacturing survey in 10 years, Dow falls, people are, “Oh my gosh, here we go again.” So those recession fears are real and are the chances and the odds of a recession higher today than they were several months ago? Yes, they are. But we still don’t see that happen, but the odds are higher. You know why? Another reason they’re higher is because we haven’t had one, and that’s a natural part of the economic cycle is a recession. So at some point we will have one and we’re closer today than we were yesterday. But as I’ve been saying, even if we do have recession, who’s not to say it’s not a mild recession versus a huge financial crisis, which is what people are fearful of. We’re going to have a recession at some point. That’s a normal part of the business cycle, but the fear of this recession and the “Is the Federal Reserve lowering interest rate fast enough?” is the concern.
If you want to hear some positive, have you noticed, remember all the talk about the inverted yield curve about a month ago, two months ago? We were doomed to go into recession. We are doomed for financial crisis because the yield curve had flattened. Remember, the yield curve being long-term interest rates, that difference between that and short term interest rates. Normally, long-term interest rates are higher than short, and that wasn’t the case. It actually flipped the other way where the short-term rates were higher than the long-term rates. That has resolved itself partially because the Fed lowered interest rates. They control the short side. They lowered it, but many thought that that wouldn’t fix anything, and it has. The yield curve steepened. That’s a really good sign.
So we were coming into Friday morning with some fear that we were going to have a bad jobs report, because we had this really big anticipated jobs report. What happened in September? Was it going to confirm these bad surveys? Was it going to confirm that things are starting to fall apart again? The payroll number, the non-farm payrolls for September came in at 136,000, which was worse than the estimate of 145,000, but as usual, last month’s was revised. They changed it, and that’s the problem with these. They always tinker around with them after the fact. They revised last month’s up by 38,000, a big revision up. So when you blended the two months together, there was a sigh of relief. You could almost hear it around Wall Street.
Why is that so important? Because we’ve been saying the consumer is 70% of the economy, big part. If the consumer keeps spending, economy’s okay. If the consumer has trouble, that’s when we could go into recession. Now, there was a slower pace of raises. People are still getting raises, a little bit slower pace in September than the prior month, but they’re still getting raises, and we have unemployment at a 50-year low, five-zero. Unbelievable. So it doesn’t smell and look like a recession, but as we’ve been saying, we’ve been slowing down and we’re more vulnerable, especially to a shock, as I’ve been saying, a shock to the economy. So we’ve been slowing, but is there a recession? It sure doesn’t feel like one and look like one, but we did see interest rates come down a bit probably because of that wage number that wasn’t as good. But one of the most overused terms is Goldilocks. There’s a lot of overused terms in our industry, the stock picker’s market where Wall Street meets Main Street, the new normal. These are all things that we’re tired of hearing over and over for the last 10 years.
Another one is, it’s a Goldilocks economy, not too hot, not too cold. We have the Federal Reserve that’s going to probably continue lowering interest rates and yet the economy is still okay. That’s a good combination for stocks, and we still have things like dividends paying more than bonds. In that environment, people tend to go towards stocks. By the way, with all these economic reports that I mentioned earlier that came out this week, there’s another survey, if you want to get into the survey thing, there’s another company called Markit, M-A-R-K-I-T. They do their own manufacturing and services, and theirs have been coming in okay. So who do you believe? Well, ISM goes back much further so they get more credibility on the street, but there are other surveys that weren’t as bad just for comparison’s sake.
Now, a couple of things that happened this week. Number one, there were some interesting discussion about what happens when the stock market gets off to a bad start in October because we know that last October, November, December was pretty darn bad. People are scared of October primarily because of 1987. Bespoke did a really interesting study that said, “What happens when the S&P 500 falls over 1% the first day of trading in October?” They grabbed all these times this has happened going back to 1931 and, I don’t know, there’s maybe 10 or 12 times that’s happened. The median gain the rest of October is 1.97%; the median gain the rest of the year, 7.25%, with only one of those times where the stock market continued to fall, which was 1931, Great Depression.
So generally speaking, when October starts off bad, we tend to have a pretty good run the rest of the year for what that’s worth. I give you these kind of tongue-in-cheek, there’s some statistics behind it, but who’s to say this October is not different? But we do have some history on our side in terms of a positive market after a bad first day. We had really three first days, bad days. We had obviously down 350 that first day, and then we had 500, and then fortunately we had a little Thursday intraday turnaround. But I can tell you, we’re seeing probably a mediocre rally on Thursday and Friday was definitely a little stronger and built as the day went on, which was encouraging.
Other big news this week, this is really big, is Charles Schwab announced 0% commissions. Now, full disclaimer, we keep our client’s accounts at Charles Schwab or Fidelity. So Charles Schwab goes to 0% commissions. So the trade stocks there, and they already had a lot of ETFs that were free, but to trade stocks, it’s free. Free trading. Why would they do this? Well, here’s what’s interesting. People often wonder where do these places make their money? Remember, Charles Schwab is a bank. So what they pay out, what they lend, that’s where they make a lot of their money. They also have a lot of other things they do. Trading, I believe I have this right, is about 8% of their revenue. So they got hurt that day. The stock fell when they announced this because that’s less trading revenue. But guess what else happened? TD Ameritrade followed suit. E*Trade, their stock was down 25% I believe that day. So the companies that are relying on trading for the revenue got hit harder.
So Charles Schwab is playing prevent defense here. We already know there’s places that do free trading. They’re the first broke … and this was inevitable. I mean if you’ve been watching, when I first started in the ’90s, discount brokerage houses were still charging $30 a trade. It was a significant amount and it’s been coming down, down, down, and here we are at zero. Probably Fidelity will follow suit, but these places do make money. It’s almost a lost leader, to be able to announce and advertise free trading gets people to open accounts there, thus they make money in other ways, and that’s the plan.
Now, it’s great for you and I. It’s great. We have free trading. That is a big deal because it allows you to do things. Maybe you’re on the fringe in terms of the size of your portfolio and you wanted to use individual equities, but you’ve been using ETFs or funds because you just didn’t want to pay transaction costs. That’s not the case anymore. So we have zero commissions there and, again, everybody’s following suit. But really fascinating. It’s changed the ballgame. When, I would ask, when are we going to see negative commissions? We’ve seen negative interest rates. When do we see negative commissions? When do they start paying you to do a trade? You buy hundred shares of XYZ stock and we’re going to put five bucks in your account. Who knows? That may happen. That may happen.
The other thing we’re seeing is a big drop in real estate prices in certain areas and primarily they are the most heated areas. We’re still seeing strong gains in a lot of areas, and housing is actually starting to pick up, but in terms of these overpriced areas like Manhattan, a report came out this week that Manhattan real estate prices are falling at the fastest pace since the financial crisis. Remember, we were seeing apartments and condos going for 3,000 bucks a foot, $3,000 a foot. So for that to come down, it should, that’s frothy, that’s a bubble. At some point, they’ll get to equilibrium and people take advantage. But you’re seeing a lot of foreign money dry up and, and that can be for several reasons. We got oil prices fall and so wealthy people from oil rich countries maybe not coming in; Brazil has been struggling. There’s issues in Hong Kong. We obviously see China slowing down. So a lot of the foreign buying in Manhattan is slowing down. That’s probably why you’re seeing this more so than just the economy slowing and it’s falling.
But this is very different than 2008 financial crisis when all housing was overpriced, generally speaking. You have pockets, and it’s no different than the stock market. You have pockets of bubbles and you have in the stocks and you have pockets of bubbles in real estate, perfectly normal capitalism. There’s also good deals around, if you look hard, just like in the stock market. So I think we need to make sure we don’t paint a huge broad brush, whether it’s real estate or whether it’s stocks, that everything’s expensive, therefore, I should sit in cash or, therefore, I should sell all my real estate. That’s one of the big mistakes people can make.
So we know what moved the markets this week. What actually did move? Well, after all that volatility and jostle and back and forth, markets were slightly down. Small caps probably got hit harder than large caps. I think the Dow is down less than 1%, the S&P down less than half a percent. Small caps’ down depending on which index you look at somewhere around between one-and-a-half and two-and-a-half percent; international markets’ down for developed; interesting, emerging markets’ up on the week based on the EEM emerging market, the MSCI emerging markets ETF, which was up about 0.8% and you still had this, it’s weird, you still have a value momentum back and forth, almost this tug of war where we heard … two weeks ago you heard me talk about value having a dramatic out-performance. That subsided quite a bit, so everything’s still going up. It’s just there’s a lot of back and forth, and we did see bonds gain partially this week. We also saw gold up a little bit this week as well. In terms of sectors, the things that got hurt the worst: financials, energy, and materials, were all in the red. The strongest areas you saw were technology, information technology, specifically healthcare. Those were the two biggest gainers and we also saw staples go up this week as well.
So really, again, a lot of movement, but you see the theme here is that we’re still churning around but I think the longer we go without breaking down, which is everybody’s fear, eventually we will burst out to the upside with some good news because we have a lot of negative news flow. We’ve talked about the negative equity flows coming out. We know we got political stuff happening and protests. You name it, there’s a lot of things negative going on. If we get positive interest rate environment in terms of the Fed lowering rates and if we get good earnings and some progress on the trade deal, I think we do burst out to the upside and, again, what happens when we break to new highs? It tends to suck more money and it tends to cause people to go, “Oops, I was wrong,” premature, and they start buying and it’s a self-fulfilling prophecy and up you go. That’s generally what happens.
All right, everybody, that is going to wrap it up. Don’t forget to tune in next week and also go to creatingricherlives.com, and if you need our help, 210-526-0057; 210-526-0057. Don’t forget, you can listen to the podcast on Spotify. We’re on Stitcher. We’re on iHeartRadio. Of course, we’re on Apple Podcasts. You can listen to it on creatingricherlives.com, if you wish. Tons of ways to listen to it. Share it, like it, comment, do all those social media type things and we’d appreciate it, as always. We thank you, as always, for listening to the podcast. Thank you for your comments, positive feedback and your emails, asking questions and giving thoughts. Again, going back to the very beginning of the show, what did I ask you? Did you do anything this week? Did it start to scare you that we were starting to get a little more volatility? Did you buy anything or did you hold still? I can tell you, we did see for the most part. We held still. We didn’t do much. All right, have a great week, everybody.
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