Stocks are at dangerous valuations … but big money can still be made by focusing on megatrends … an overview of 5G and energy storage … the crypto megatrend is surging again

 

Historically speaking, the stock market is trading at money-losing levels.

To be clear, you can still make enormous returns going forward. But decades’ worth of historical data suggests we’d be wise to note our lofty levels.

Let’s put some numbers on this with the help of our macro specialist, Eric Fry, editor of Investment Report.

For newer Digest readers, Eric is a classic top-down investor. This means he starts his investment process by analyzing entire sectors and macro influences – we’re talking interest rates, business cycles, disruptive technologies, geopolitical events, and, of course, valuations.

Valuations are critically important because, all things equal, the higher the price you pay for an investment, the lower your future return.

So, where are valuations today?

The S&P 500 has spent the majority of this year trading above a price-to-earnings ratio (PE) level of 28. Recently it’s dipped to 27.

An important question to ask is “historically, when an investor buys at these elevated levels, what does it mean for returns over the ensuing 10 years?”

Here’s Eric:

Since 1953, the S&P 500 has traded above 27 times earnings only 3% of the time. The average 10-year returns from those lofty levels was minus 8%.

The episodes above 28 times earnings delivered 10-year returns of minus 15%… without one single positive outcome…

Either way, those valuations do not bode well for the coming decade.

***The appropriate response to this includes offensive and defensive strategies

Let’s begin with defense…

Last week, here in the Digest, we looked at today’s market from a slightly different, but related, perspective – the torrent of retail dollars flooding the stock market. Historically, mom ‘n pop dollars are the last money in before a major inflection point.

But our point wasn’t that it’s time to bail on stocks…but rather, it’s time to know when and why you’ll bail on stocks.

From last week’s Digest:

Yes, there’s a healthy amount of craziness in today’s market. But craziness can last a long time. And periods of craziness can mint literal fortunes for investors.

Plus, think about one very big difference this time around…

We’re in brand-new territory when it comes to the mind-boggling amount of new currency that’s sloshing around the United States (and the globe).

Specifically, the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan have exploded their combined assets to $24 trillion.

You might also think of this $24 trillion as a massive wad of chewing gum… capable of becoming the largest bubble in history before it eventually pops.

But…

That could be a long way away.

Today, investors have one important job – create a risk-mitigation plan and stick to it.

As the heart of such a plan is a specific stop-loss in mind for each stock you own. Your job is to show discipline if a falling market triggers this stop.

Your stop-losses can be as wide or narrow as you want, reflecting your specific temperament, as well as the unique volatility fingerprint of each stock you own. The important thing is thinking through these details, identifying appropriate stop-loss levels, and then acting on them.

It’s difficult, but this is how the professional money-managers prevent a small loss from snowballing into a portfolio-crushing loss.

To be clear, we’re not calling for the market to roll over. But you’re going to sleep better knowing that you have a response plan if it does.

***As to “offense,” how does an investor approach a stock market that’s hovering around all-time highs and trading at highly-elevated valuations?

The simple answer is you become more selective.

Back to Eric:

As the risk of widespread market weakness grows, investing selectively in the strongest long-term trends become imperative…

It isn’t easy – but it’s possible.

There are two specific long-term megatrends on Eric’s radar: the global 5G rollout and the worldwide energy storage boom. These trends have already been picking up steam, with certain sector-leaders showing massive growth.

Here’s Eric illustrating with details on 5G’s growth:

Based on recent estimates from industry sources, 5G networks will generate a whopping $56 trillion in global sales activity by 2050. For example:

• Artificial intelligence is on pace to unlock over $30 trillion in new revenue.
• The Internet of Things is going to add $19 trillion to the economy.
• And driverless cars are predicted to add $7 trillion.

You get the idea. Typically, an industry measures its growth potential in the billions of dollars, not trillions.

And here’s more on energy storage:

The U.S. storage boom is already well underway.

As the chart below shows, the rolling 12-month total of American energy storage deployments has increased for four straight quarters… and done so by a gigantic margin.

Last year, the United States installed more energy storage than it had during the preceding seven years, combined.

And U.S. deployments are starting to accelerate so dramatically that the research team at Wood Mackenzie expects this year’s tally to be three times greater than last year’s record setter.

Returning to you and your portfolio, if we’re following Eric’s playbook, it means asking yourself some questions…

Are your positions riding the coattails of a long-legs trend? If not, what’s going to continue to push their prices higher if the broad market begins weakening?

By the way, if you’re an Investment Report subscriber, don’t miss Eric’s August issue, which published last week. It provides a great walk through the status of your 5G and energy storage plays.

***Meanwhile, the crypto megatrend continues its recent bullish momentum

As we noted here in the Digest last week, bitcoin has been surging.

Below, you can see the crypto climbing 55% since mid-July.

The question has been whether this furious rally will hold.

Our crypto specialist, Luke Lango, answered this for Crypto Investor Network subscribers over the weekend:

In our last Weekly Update, we talked about the question marks surrounding the big “Bitcoin Breakout” from $30,000 to $45,000, as some investors were wondering whether or not the rally had staying power.

Those questions appear to have been answered this week, as Bitcoin and most of the crypto market have continued to power higher with healthy momentum.

Luke points out how we’re seeing strength both on a technical and fundamental level.

From his update:

(Bitcoin is) breaking every key level of technical resistance, and from a technical analysis perspective, this breakout has all the makings of the previous multi-month surges in Bitcoin (2013, 2017, and 2020)…

More importantly, though, the fundamentals underlying this rally are strong.

You’re getting so-called “Goldilocks” inflation that is just hot enough to keep investors worried about U.S. dollar devaluation and seek a hedge against that, but not hot enough to force the Fed to rapidly hike rates and kill investor risk appetites.

It’s the perfect inflation backdrop to stimulate crypto market demand.

***The next level to watch is roughly 50,000

Below, you can see how this was a key area of support as bitcoin hit all-time highs earlier this year.

Given the recent, meteoric rise, look for a period of consolidation and profit-taking. So, we might not pierce 50,000 in the immediate near-term. But breaking this technical ceiling is just a matter of time.

Before we wrap up, can you guess the latest retailer who wants in on cryptocurrencies?

Walmart.

News this morning is that the mega-retailer is looking to hire a crypto expert to help the company develop strategies for digital currencies.

The flood gates are opening. Is your portfolio ready?

Here’s Luke to take us out:

All in all, things look great in the crypto markets. 

We fully expect this current breakout to hit some resistance soon, and for our portfolio to consolidate in the immediate term. But such consolidation will prove healthy, and will likely serve as the basis for another jump higher in our coins.

The long-term upside potential from here is enormous.

Have a good evening,

Jeff Remsburg