On this week’s show, Karl looks back at 2019 and gives listeners a glimpse into 2020 and how we should approach it.
Hey good morning everybody. Welcome to Creating Richer Lives. Hope you had a great Christmas and an upcoming happy New Year. Our telephone number, (210) 526-0057, our website CreatingRicherLives.com, my name is Karl Eggerss and as I mentioned, hope you had a great Christmas and this is our last show of the year, so it’s been a great year, not only for the markets but for our company. For me personally, a lot of changes. As you know, kind of midway through the year Eggerss Capital Management merged with Covenant and we couldn’t be happier. We’re doing some really good things together and we look forward to 2020 to bring you more information, more education. You know, we do a lot of audio, we obviously do some video in terms of television interviews and articles from some of our, our key people in advisors really bringing you information in their specialty.
We have a lot of people that specialize in a lot of different areas. We’re going to continue to bring that to you in 2020. Hopefully we will roll out some more of our own video, maybe some round tables, things like that. And of course more interviews as well. And we’ve gotten a lot of good feedback on Covenant U, which we rolled out, probably sometime in September. And just a reminder Covenant U is our educational piece that goes out every Monday afternoon. And essentially what we do is anything we’ve posted on the Covenant website, CreatingRicherLives.com it’s in that email in one email. And so instead of bombarding you with emails every time we put something on the site, because sometimes we may put one or two things on on a day. Instead of sending you multiple emails, we just send one per week and it has everything in there.
Now if you want to continue to get the podcast when it’s released or anything when it’s released, you can check our website, you can subscribe to Apple podcasts or Spotify or Stitcher. We are on all those platforms and the podcast is on there and of course all of our articles, anything we do, radio interviews, television interviews, pieces we put on there are going to be on CreatingRicherLives.com right on the main page. Now if you want to get Covenant U sent directly to your inbox on Monday afternoons, just go to our website and you can sign up for it there and if you need our help, of course, (210) 526-0057 or CreatingRicherLives.com.
The show, as I was talking about just a minute ago, has been brought to you by Covenant. I should say “is brought to you by Covenant” it wasn’t “has been”, it is brought to you by Covenant.
At Covenant, one of our goals is to really unburden clients from the daily cares of financial management. We do that each and every day and we’re going to continue to do that. If you didn’t know, this past week, the Secure Act was passed, I’ll be talking about that on a television interview tomorrow morning. If you’re in the South Texas area on CVS, I will be discussing the Secure Act and really a few…
It was really kind of quiet the last few months and we’ve, we talked about it on the Podcast with one of our financial advisors, David Akright, who came in a few months ago to tell us about how it was shaping up. I remember it was passed in the house and it was going over to the Senate and I thought, and I think David thought, there would be some changes to this Secure Act and I don’t really think there was any modifications to it, but it got signed, it got done.
The two main things that you probably will affect you more than anything, most of our listeners, is going to be the inherited IRA. So if you inherit an IRA the next few years from a parent, sibling, you will have 10 years to take that money out as opposed to over your lifetime. That’s one major change. The second one is the Required Minimum Distributions, RMDs will not start at 70-and-a-half. They will start at 72.
Those are the two biggest things coming out of this that I saw. Of course there’s some other things and I’ll cover some of those in my television interview, which we will post next week on the website.
We had that going on, and really this week in the markets was really all about what some are calling this blow-off top. When they say a blow-off top, that insinuates of course that it’s the top, it’s over and it’s easy to have our minds look at the stock market going up, tremendous year of real big run into the end of the year. The Santa Claus rally saw a tweet today saying Santa is not playing around, he’s not. Stock market doing very well coming into the end of the year. Our minds want to look at that and say, “well, the calendar ends December 31st so because the calendar ends, naturally, something has to change on January 1st”. Well, the only thing that really has to change is the fact that we’re in a new tax year.
Is it possible that we get a sell-off in January? It’s likely. How much it is, what you do about it, very difficult to navigate. People could have said that a month ago, three months ago, six months ago, but we are in the short term overbought, which is a technical term, meaning everybody’s in the deep end of the pool. Everybody’s in. I mean we saw on a week ago Friday the SPY, which is the Spiders they call it. It’s an ETF that mimics Standard and Poor’s 500 index, 500 of the largest companies in the U S took in $11 billion. It was the biggest one day flow in several years and it’s up was the fifth all time for an ETF. That was a week ago Friday.
Money is pouring into the stock market and as I’ve reiterated the last few weeks, the biggest difference between what we see now and a year ago is the fact of, not only has the Fed dropped rates, but they are signaling that they’re not going to raise them anytime soon. That’s at least there, when they speak. You have to read between the lines, but that’s what the market is celebrating, that not only did they get the message that hiking was the wrong move a year ago and they stopped that dead in their tracks and reversed it and actually cut interest rates three times, but they may be on the sidelines for a while longer.
On top of that and something that doesn’t get talked about a ton unless you’re watching the financial media a little bit, mainly on Twitter or something like that, or if you’re following Wall Street, is many believed the Fed is engaged in “quantitative easing” and that phrase you hadn’t heard for several years because the Fed was shrinking their balance sheet, they were tightening essentially, they have reversed course and are loosening once again. That is a powerful thing driving the stock market.
It’s not just the fact that the economy at least in 2019 averted a recession because it was slowing down. We were saying for several weeks close, right? We’re close to a recession, but we didn’t think we’re going to have one, but we were vulnerable and many believed we would have one. Therefore the stock markets started to struggle a little bit. There were some times they pulled back. Seven percent I think was the biggest pullback we saw in 2019 but that fear was very brief and we averted that. Didn’t see a recession in 2019 and so the stock market and Wall Street and investors poured money back into the stock market.
At the same time, the Fed was cutting rates, and at the same time, and this is again very important, is that they started increasing their balance sheet again: quantitative easing. They will say, “we’re not doing that, that is not what we’re doing”, but they did.
Remember, a few months ago the repo problems we talked about on the Podcast where there were some problems with overnight lending, where basically there’s banks trying to borrow and they couldn’t do it. And so the Fed had to step in and we chalked it up to a technical glitch. Many did as well. But it has continued and as it’s continued, the Fed has injected money into the system. Trying to grease the wheels, if you will.
That combination of a good economy that avoided a recession, the Fed dropping rates and injecting money in, is the recipe that, gets the stock market up 20 something percent this year, 30 something percent depending on which index you look at. Is that also the thing that makes the bears go, “you know what, isn’t this kind of what got us into some trouble in the past?”
Maybe, but what we do is, again, we’re focused on two things. From the client perspective, we’re focused on building an allocation that makes sense for them and their situation, based on their cash flows, their basic financial plan, maybe their in-depth financial plan, maybe their legacy goals, what are they wanting to leave to charity or the next generation. We’re building a portfolio based on the long term for that. In the short term, how do we, how do we maneuver through this stuff? And really, what we’re doing is looking at the economy, looking at interest rates, studying not only the fundamentals, but the technicals and we’re looking at sentiment. And right now, sentiment is pretty darn good, which is a contrarian indicator. When you see record flows into the stock market, it makes you go, “you know what, this kind of getting one sided”.
Remember, we were talking about how money was flowing out of the stock market and money was going into the bond market a few months ago, even just a few weeks ago. Well now it’s seems to be going the other direction. It’s going into the market, which again is propelling stocks up, but it’s also causing us maybe to pause a little bit and say, “do we need to adjust anything at this point?”
Now again, as I said, the reason it’s important this time of right now is because we’re ending the year and we get into a new tax year. And when that happens, people lock in gains. Because if you sell something on January 1st you don’t have to pay taxes on it until April of 2021 right? So you could see some adjustments in January. Will it be like clockwork? Who knows? I think we know the market’s overbought. What we don’t know is what happens when it pulls back because you can look back and there are several statistics that would show that yes, short term we’re due for a pullback, deferring new purchases may not be a bad idea. Rebalancing, as I’ve suggested in past shows is a definite right. You just need to re… Take some cream off the top, right? And reallocate.
Sometimes statistically we have been looking at some things that show us that when we have these overbought conditions, yes, you may get a short term pullback, but it oftentimes leads to more gains in the long-term bull market. That’s really important to understand that just because we’re overbought doesn’t mean that a top is put in. As I’ve said many times for many years on this Podcast, tops are a process. They roll over. You see deterioration, and I’ve used this analogy before, it’s as if you’re driving on the road and your hubcap falls off. I don’t know who still has hubcaps, but let’s just play along. You have a hubcap, right? Okay, your parents’ car had a hubcap. You’re driving along, you have a hubcap and the hubcap falls off and then another one falls off and then the tailpipe falls off and then some paint flakes off and then the side mirror falls off. The car’s beginning to disintegrate and fall apart as you’re driving along.
That’s what happens when you’re transitioning from a bull market to a bear market, it’s classic. You see deterioration. We’re not seeing that right now. Then usually that deterioration happens months in advance. You start to see less and less stocks participating, which is equivalent of paint flaking off the car. The tailpipe fallen off. That’s what happens. Sector by sector starts to fall off. We’re not seeing that right now, so there are still internal strength in this market. Supply demand is still good based on all the stuff that I look at, which is more on the technical side.
On the fundamental side. Yes, you’ve had earnings flatten out and the stock market continue up. Either the stock market comes back into line, or the stock market, or investors are predicting, that earnings will start to accelerate once again. We don’t know and it’s hard to project that out, but it’s something to watch.
There’s been multiple expansion, they call it. The PE ratio is going up as people are paying more and more for stocks in anticipation of who knows what. Yes, we’ve got the tariff kind of easing back. We’ll see if Trump rolls some more back. China obviously said, this was on Monday, they were reportedly, “we’re going to lower tariffs on hundreds of products in 2020”. That de-escalation is really helping sentiment as well.
There’s a lot of good things going on that would cause people to buy stocks, but what’s priced in, that’s what we don’t know.
You know, is all the tariff good news priced in? The loose Fed, is that all priced in? We don’t know. So we can monitor. All we can do is number one, from a market perspective, we can look at sentiment and say, yes, people are all in on this market. They like it. That’s a problem. It’s a contrarian problem. Number two, we can look at our technical indicators and they’re overbought short term. Long term still looks good, but the other thing and the most important thing I think is for you to look at your situation. Just because the stock market is up a lot this year does not mean that you should have made more money because you may not own 100% stocks. Do you know that semiconductors for example, are up about 60 some odd percent this year. Now, you could look at that and say, “I wish I owned semiconductors. I should’ve bought more of those. I should have owned more of those.” I mean, technology itself is up almost 50%, five zero, so it’s easy to say, “yeah, I should own more of that. I should own more stocks.”
Forget about that. What you should have done is depending on what you are trying to do in the long term with your portfolio, if it’s money that you don’t need, if it’s money that is multi-generational, perhaps that’s money that can be at risk and can be more equity allocated on stocks and yes, that money probably is going to be up in the 20s or even 30 something percent this year, but for those that are not wanting to take all that risk looking for income, you’re not going to be up that much. That’s okay. You’re still fulfilling what you’re supposed to be doing if you’re doing it correctly.
I mean, I see so many portfolios that are literally just a popery of different investment ideas and themes and they have nothing to do with what the client’s trying to accomplish. I talk to people sometimes they say, “here’s my portfolio. I’m a little nervous” and I look at it and say, “you should be nervous because what you own does not match what you’re telling me, and in terms of what you’re trying to accomplish in terms of your fear.” “Well, I’m scared we’re going to have a pullback.” “Well, you should be scared because you are pretty risky, but you’re telling me you’re not that risky but your portfolio suggests otherwise. There’s a mismatch.”
That’s really what we do every day, is analyze that for folks, come up with a plan and then build a portfolio. Now in that portfolio, we’re making overweights, underweights we’re making tactical allocations to different things for different reasons and that’s the fine tuning of the portfolio.
What you should not be doing is what you will hear over the next few weeks. Well, the stock market has gone straight up and we’ve got an election coming up and I, I think I’m going to move 50% of my money to the sidelines. That’s just a recipe for disaster. Look at December 24th of 2019, I was actually buying that day in the pit, in the belly of a very scary straight down market that had fallen almost 20% across the board because it was the Warren Buffet quote, right, there was blood in the streets. And so we bought some that day. You fast forward till now, it’s a complete opposite situation. But back then people are probably doing that. I’m scared. I need to get out, I need to protect my retirement. And they were selling down at the lows instead of doing what they should have been doing, which is staying disciplined and buying just like, here we are now.
Don’t get too cocky. Don’t get too cute with this market either. Now before you run out and say, “okay, Karl says we’re overbought,” we could look for little pullback. He says not to overthink this, and don’t go crazy with the portfolio and move a bunch of stuff around. That’s true. And the reason why is because, if you look back, you know, especially given what happened in 2018, I think I said December 24th of 2019 a few minutes ago, I meant 18, but if you look back a year ago for the year of 2018 the stock market was a tough, tough place to be. Whereas if you look at it this year, it was a great place to be. It’s not number one who cares a year by year, right? Who cares if it’s had a great May or a bad December that that doesn’t matter.
You put, you put 18 together with 19, it’s pretty clear now what was going on, which was tariffs and Fed hiking in a slowing economy. Those were, that was a recipe for a tough, tough market and we went sideways from January of 18 all the way through most of 19. Finally when you started to hear that we may get a trade deal and the Fed started cutting rates, basically undoing all of that stuff we were talking about, the economy stopped decelerating and at least flattened out. Everything started to get better again.
But when you put those two years together it’s good, but it’s not so outrageous that you got to be taking a ton of money off the table. This is not March of 2000. There are some pockets in the market that are very extended but the market as a whole is not. We still have good broad based participation, and again, at the end of the day, it’s supply and demand, and supply and demand looks very good to me.
You’re starting to see rates move up as well, right? That was something that we’re sitting at about one point almost 1.9 on the 10 year. We had touched down to 1.4 back in September and those were interesting because that was the same level we touched back in 2016. Will we get back to 3% which is where we were mid 18, who knows, but we definitely broke out technically and you’re starting to see some money move out of bonds a little bit, but a lot of that money’s flown into the stock market and you’re also seeing money go into areas like gold. You’re starting to see some of the foreign money or the foreign markets do very well. They didn’t have as good a year as the domestic markets, but you’re starting to see a little bit of movement, especially emerging markets, really doing well the last few weeks as the dollar…
Maybe the dollar starts to struggle. That’s something you have to watch. The dollar has rolled over very clearly now. In fact, it’s at its lowest level since maybe July. That dollar pulling back is going to be good for gold. It’s going to be good for commodities in general. It’s going to be good for foreign markets and that just helps everything in terms of broadening out what’s working. So very good into the year and again, let’s see what happens in January. I think we’ll see a little bit of rotation as we move into November. Obviously the election is going to play and have an impact on the stock market. But don’t overthink it now and again, be so cute to think, “well you know what I’ll do, I’ll just take my profits from 2019, I’ll park them on the sidelines, I’ll wait till the stock market drops and then I’ll buy right after the election.”
How did that work the last time? It didn’t work very well in terms of the timing and moving all that money back and forth. So again, go back to, what are you trying to do, and build a portfolio from there. We will help as best we can educate you and guide you through that the next several months as we go into 2020.
If you need some specific help, specific questions, how does the Secure Act affect you? How does Social Security and Medicare? Should you take up pension versus a lump sum? Those are questions we get every single day and a lot of times we will find ways to optimize that for folks and actually increase what they could have received. We will do tax strategies for them sometimes that again, wring out extra dollars that were not there or they didn’t think that were there. These are strategies we put in for people every day. If you need that type of specific help (210) 526-0057 or go to CreatingRicherLives.com.
Alright, have a wonderful New Year’s Eve and we will see you back here on Creating Richer Lives. The podcast in 2020, weird to say. Alright. Have a great rest of your weekend guys.
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