Speculation Is Rising

Jan 23, 2021 | Economy, Financial Planning, Investing, Retirement, Tax

There are some signs that speculation is rising in the stock market and it’s starting to look like 1999. What’s it mean for you and your portfolio?  Karl explains.

Hey, good morning, everybody. Welcome to the podcast. My name is Karl Eggerss. Thank you for joining me. We appreciate it as always. Our telephone number, 210-526-0057, our website, creatingricherlives.com, and just a reminder, this show is brought to you by Covenant Lifestyle. Legacy. Philanthropy. We use that process every day. I was fortunate to be in a few meetings this week with some families that we were explaining that process and got to see it in practical terms in terms of really what these families wanted to do with some of their money and, again, the lifestyle part being what you spend, what you want to spend, kind of the cash flow, if you will. Then, the legacy of, what do you want to do with this money as far as the next generation? Whether it’s kids, grandkids, maybe great-grandkids, and then the philanthropy part.

Do you want to give it away to charities? Either now or down the road? What are the tax ramifications or benefits of doing some of those things? That’s really are process and we talk through some of that with clients, and then we try to execute it. Those are really fun conversations because we’re really getting to be creative. There’s lots of ways in this environment with all the tax rules to strategize. There’s different ways to do it, different approaches, pros and cons, and a lot of it has to do with having conversations with people to really see what they want, how they envision this. Then, again, we execute it. Again, if you need our help, 210-526-0057, and look, we’re going to get into it, but things are going to change and planning is going to be really important the next few years.

All right. Well, a changing of the guard, right? A new week, a new President. The markets were closed, of course, Monday, due to the MLK holiday, and then Tuesday we did have inauguration, changing of the guard. Almost exactly half of the country happy and half of the country not so happy with the changing of the guard. One thing that we know is that, again, things are going to change, and so to me, people want to focus on the investment side, and it’s certainly important, but we really need to focus on the planning side.

We’re going to have to adapt. We don’t know if changes are going to go through this year or if they’re going to go through next year, but there could be changes to taxes, your taxes, there could be changes to how you plan your estate. There could be changes to how you purchase investment real estate. These are all things that could change and we don’t know the rules of the game just yet and we may not know for some time, but we have to stay flexible and we have to start having the conversations and planning right now.

Some of you, I know, are concerned about inflation, and we are, too. In fact, we’ll probably have a podcast in the next couple of weeks really diving deep on inflation, what we expect, and again, not predicting because nobody cam, but how we are really positioning some of our model portfolios for some inflation. We’ll get into that in the next couple of weeks.

In terms of Tuesday, markets did get off to a strong start as far as changing of the guard and, by the way, history does show that after inaugurations, markets do tend to be weak in February and March before they kind of resume up. This is also historically the weakest time of the year, so if you’re into seasonality, which I tend to talk about it, but I don’t tend to follow it because every year is different, of course. You hear about sell in May and go away, and then that works until it doesn’t. When we think about coming up, though, if you were to average all of the years, this tends to be kind of a weak time of the year, so we will see if it turns out that way. I think it could line up this particular year just because it’s been so strong that we could be due for some sort of breather. We did have eight of the 11 sectors higher on Tuesday and the breadth continues to impress.

In other words, the participation in this market by various sectors and industries continues to impress. Really, that is something that I would say a lot of people that pay attention to Wall Street focus on because you tend to see less participation before you see a big market drop. I don’t mean a very quick correction, but sometimes going to last a while. You tend to see the participation shrink. It’s only a handful of stocks and sectors really leading the way. We’re not seeing that right now. We’re seeing the opposite. We’re seeing broadening out quite a bit, even energy stocks. Oil went over $53 a barrel on Tuesday.

One other interesting note is that the S&P 500, which of course is basically the 500 largest companies in the United States, has been really the leading index around the world, so when you compare it to other indices and other countries. It is now in 2021 lagging year to date by the most since 2015 compared to some of the world indices, so we are clearly seeing a rotation in that. In fact, emerging markets on Wednesday reached an all-time high. You know we’ve been bullish on emerging markets, I have specifically on this podcast and they are really starting to outperform quite a bit, but it was another strong day on Wednesday.

The Dow was up about 250 points and almost every sector was up. There was only one down, but the Nasdaq closed up over around 2% and after kind of pausing, some of these technology stocks kind of taking a back seat, we really started to see in the latter part of the week a pickup in some of these technology stocks. Are we about to see another run for technology stocks in terms of outperformance after kind of a pause? We’ll see. We’re going to talk just a minute about some of the speculation that I’m seeing. I mentioned it last week, but it is certainly getting worse and we’ll get into that and kind of what that means for you.

Thursday was kind of a flat day, but the MSCI All-World Index, as I mentioned earlier with emerging markets, the All-World Index also went to a new all-time high. Then, of course, Friday, kind of a pause, but the Russell 2000 had a very strong day on Friday, and remember, the Russell 2000 is small companies. It’s really a basket of 2,000 small companies, and on Friday, they had another good day. Again, we’re seeing a rotation not only in the international stocks, we’re seeing a rotation into from large companies down to small companies. They’re up about 1% on Friday.

Some of the outliers this week, home builders really broke out this week and they’ve kind of been moving sideways really since the summertime. Even though interest rates had been falling so low as far as refinancing and mortgage rates, home builders hadn’t really done anything. Now, they are starting to break out. They were up about 9% as a basket this week based on one index. Again, as I said, technology, up about 4% this week after kind of a pause, so technology may be starting another run here. Retail stocks, up 4%.

On the flip side of that, volatility did go down. We’re kind of still hovering in the low 20s here, so let’s continue to watch that, which I think I said last week that 20 is still up there. You’re still going to see some movement around in the markets, but again, it’s been kind of a tight range the last few weeks. Some of the specific country ETFs were down this week. Could be, again, changing of the guard. Who knows? There’s lots of reasons for that, but we did see kind of a pause in some of the metals and mining stocks. Some of the commodity indices which had been so strong kind of saw a pause. Again, watch those because I think some of those, it is just a pause, not necessarily a new downtrend.

Let’s talk about this speculation. In every bull market, you’re going to get some speculation, and what I mean by speculation is if you go to fill out an application at a brokerage house, sometimes they ask you what your goal is. Is it income? Is it capital preservation? Is it growth? They also have a box for, is it speculation? If you choose speculation, sometimes there’s some rules attached to that. Anytime you have a strong market, you have some speculation. People that are saying, “Hey, things are so good,” and they get greedy. I haven’t seen it this bad since the dot com bubble.

Now, before you get ultra concerned, again, this is in pockets of the market. I don’t see wild speculation all over the place, but I do see it in not necessarily even just technology stocks, I see it in various sectors and industries, but it’s with specific stocks. It is prevalent in technology, there is no question about it, but some of the things I’m seeing is if you look at the people that are trading options.

Now, most of you if I was to take a poll probably haven’t ever traded options, and options actually can be a more conservative approach and add some income to your portfolio, so it’s not always speculation, but if you’re buying call options, which is the right to buy a stock at a particular price, you’re using leverage. You’re controlling for one option controls a hundred shares of stock. We can monitor that and I’ve been monitoring the call options that are being traded by smaller investors and it’s on the rise quite a bit.

That tends to show you that people are not only going in and buying stocks, they’re going in and saying, “I want some extra return,” because if you’re using leverage, whether it’s margin, whether you’re borrowing from the bank, or whether you’re doing calls, your returns if you’re right are going to be enhanced quite a bit. It’s kind of like buying a piece of real estate. If you do it on borrowed money and you’re right and the investment goes up and you do it on borrowed money, it’s going to enhance your return quite a bit, which is why developer use so much borrowed money.

Now, we know what the repercussions of that can be also, but watching this call options and the trades going through, it is going up a lot and that’s concern. I’ve also been watching a basket of technology stocks that if you look at the companies that don’t have a profit that are basically promising in the future that they might have a profit and they have some neat technology, that basket of technology stocks that are nonprofitable is far outpacing companies that are profitable. Again, it’s just one more element that over the long term that it’s probably not normal. Markets go up because companies give a profit to shareholders. Right now, people are buying companies that have no profits.

Now, third thing I’m seeing, I mentioned the frenzy in the company Signal last week. It’s called Signal Advance, IGL was the ticker. Down 55% this week. Remember I talked about the big spike, the Elon Musk tweet, and then the fall? Well, after I talked about that, it was down another 50% this past week, but we also saw in things like bigger companies like GameStop, GameStop this week was up 83%.

What’s amazing is there was some news, the stock popped, and then it just continued to run. In fact, it was up over 50% just on Friday alone and the volume in GameStop on Friday was what you typically see in a whole year. It’s as if people are buying things and not really checking reality. There’s valuation concerns. There’s tons of speculation and it’s not just with a handful of stocks. I can look around. I’m seeing stocks that are literally in the last few weeks going from… an example would be from $2 to $18.

For those of you that are new, think about it. If the stock market were to average 10% a year, that means if a stock was $2, it went to $2.20. That’s a 10% move just to put into context. We’re seeing stocks go up from $2 to $18, so huge, huge moves. We’re seeing wild volatility. Of course, we see cryptocurrencies… Bitcoin went from 40,000 down to 29,000 pretty quickly, then the next day it bounces back to 33 or 34,000, and so speculation’s all over the place.

Why are we seeing this, number one? Number two, what does it have to do with you? Well, number one, I think we’re seeing this because I think COVID played a part in this. What I mean by that is when everybody was hunkered down across the country for those few weeks and everybody had to work from home, I think, number one, there was no sports going on. I think people that needed that adrenaline rush and were used to betting on sports turned to the stock market, and with technology, very easy to do nowadays. I think that was part of it.

I think the second part was people that were working from home maybe weren’t as productive as they should have been and maybe not focusing on their job and necessarily doing everything that they were supposed to and maybe had one of their tabs open on their Chrome or Internet Explorer that they started trading the stock market and trading stocks. I think that was led by really the big drop we saw.

I think when we saw the big drop in the stock market, it made people say, “Well, there’s got to be some opportunities,” and it was primarily in a lot of technology, stay-at-home stocks, but I think COVID really was the tipping point here. I’m telling you, it feels very much like 1999. There’s a lot of Twitter accounts, there are, again, if you look at something like Reddit, social media site, there’s these kind of chat rooms in there. People mention a stock and there’s like a feeding frenzy. People just go buy it without any research just because everybody else is saying it, and that’s very reminiscent of some of the chat rooms and things that I saw back in the 1990s.

What does this have to do with you? Does it bring down the whole market? Now, I actually think it was more prevalent in the late ’90s in terms of how many of the non-technology stocks that were affected by the dot com bubble. Back then, we did see some of the bigger companies with ridiculous valuations. I remember even Coca-Cola and companies like that, it was not just technology, but here’s what’s interesting. That’s a very good thing for you to go back and look at because after the 1990s and we saw the dot com bubble burst, it wasn’t just the dot com bubble. Other stocks went down. However, it didn’t take the entire market down with it.

In fact, if you really do some analysis, and we’ve done it, if you look at the Standard & Poor’s 500, the 500 companies, there was a lot of companies from 2000 through 2003 that fall where the S&P fell let’s call it 50% and the Nasdaq fell more. There was plenty of stocks that went up during that time in the index, so there was some places to hide. In other words, diversification did work.

It was really the people that were heavily focused either overweight individual stocks, the wrong stocks. They had too much in technology. Those were the people that really got hurt. If you had a diversified portfolio and you had maybe some alternative types of mutual funds, you had some real estate, you had some bonds, you had some stocks there not in technology, you did okay during that time. It wasn’t that everybody lost money during the dot com bust.

Now, what we remember is 2008 when almost everything went down because it was a financial crisis. My point in telling you that is going forward, if we see some of that speculation come out of the market, it’s quite possible that, again, there’s going to be plenty of places to hide if you are diversified and you’re not overly concentrated in some of these high speculative areas. I’m talking to some people who are doing some of this speculation and I see some of their emotions and activities surrounding it, but I don’t think it’s as prevalent, at least what I’m seeing as far as my contacts, that I saw in the ’90s. I literally would have an 85-year-old widow call me and want to participate in an IPO.

I’m not exaggerating when I say that. I don’t see that type of speculation now. This is kind of… it’s a little bit different, but it does reek of 1999. I would just caution any of you that are in some stocks that let’s call them momentum stocks, stocks that don’t have profits. Maybe it’s, again, a heavy weight in your portfolio because it’s done well. Just be very cautious about what you own and, again stick to I would say more of a system. This is what we try to do at Covenant. We’re trying to stay out of the ditches, and most people we work with are, obviously, either building for retirement, in retirement, they’ve saved, they’ve done well, and they’re trying to enjoy a nice life, so they can do this Lifestyle. Legacy. Philanthropy process.

They have the money to do those various things and we help them do that, and so they’re not wildly speculating, but some of you listening may be doing some of that and I would just caution you because some of these things don’t end well. We’ve seen this before. I don’t meet many people that don’t say something about the dot com bubble and how they lost money. I don’t have many people that say, “I retired during the dot com bubble because I made so much money and I was able to get out just at the right time.” I mean, how many people do you know that honestly say that? Not many, and I don’t want that to be the same thing this go-round.

In terms of the overall market, outside of that speculation in certain areas, we continue to see strong breadth, again, participation, the rotation which is really healthy happening. We have continued low interest rates. We have stimulus that’s going to continue to come in some form or fashion, so all of the things that I’ve been talking about the last few weeks, and I’ve been pretty consistent on that, before the election and after the election, and now into the inauguration are still present.

The recovery has slowed a bit, no doubt about it, but again, what we’re focusing on is the stock market and the signs of everything we see continues to look very good. It does not mean that we cannot have a short-term correction. It does not mean we won’t have some volatility, but signs of a long-term bear market and the market rolling over are not present currently, but do use this time to focus on maybe rebalancing. Maybe because bonds haven’t had a great run in the last few months, maybe for you, you need to add to that. Maybe you have too many stocks in your portfolio, stock exposure through mutual funds, ETFs, or individual stocks.

This is the time to maybe look at that and look at rebalancing. We’re at the beginning of a new tax year, so it’s again not a bad time to take some of those gains. You have a whole year to think about how to maybe offset some of those gains in the future. There’s a lot of things to be doing, but again, I think as we move forward in this year and we get more clarity, we’re going to be focusing on financial planning.

By the way, I want to give a shout-out to Covenant. We made an acquisition that became public this week, acquiring the One Advocate Group out of San Antonio five-person team, so really bringing on some talented people that are going to dovetail nicely into what we’re doing. Covenant continues to grow, bringing on some new advisors and really just our bench and our depth of knowledge is expanding, and that’s what we need. We have some very complicated cases sometimes and I see advisors collaborate quite a bit because we all have different experiences and it’s a lot of fun to watch.

Pat on the back to the leadership team at Covenant for really a great 2020 and continue to expand so we can really just continue to bring you more information and education. Of course, I’m going to continue to do more interviews this year and on all different topics, so stay tuned for all of that. You guys have a great week and don’t forget, creatingricherlives.com. Don’t forget to share the podcast. Tell a friend about it. We had a lot of downloads last year, a lot of new people listening to the podcast and we want to continue to expand it. Have a great weekend, everybody. Take care.

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