Markets feel increasingly bipolar … the right action plan … a special event with three of our top analysts
“Do I sell now and lock in profits? Or do I stay in the market as we head into a very uncertain 2022?”
That’s the number-one question on many investors’ minds right now.
While investing never comes with a crystal ball, predicting market direction feels especially challenging today. After all, whether you’re a bull or bear, our current market offers evidence to validate your position – whatever it is.
On the bearish side, there are all sorts of reasons for concern – stock market valuations, red hot inflation, the pandemic, the likelihood of rising rates in 2022…
As an example, let’s look at valuations. Everyone knows price-to-earnings ratios are super high, so let’s use a different way to look at valuation.
If we compare the total U.S. equity market capitalization to the U.S. GDP, that ratio comes in at 215%.
This is the highest level ever.
From Barron’s:
Such a high number isn’t good. It’s bad, often a sign that a correction is just around the corner.
In 1929, market cap to GDP hit an all-time high of about 100%, just before the famous stock market crash late that year.
In 2000, another high at about 150%, just before a bear market—a drop of at least 20%—began. In 2008, a multiyear high, just ahead of the financial crisis.
Then there’s inflation.
Consumer price inflation in the U.S. is now expected to average 4.4% in 2022. That’s way up from the 3.1% forecast that came just three months ago. Keep in mind, the Fed’s target rate was 2%.
Plus, on Tuesday, Federal Reserve Chairman, Jerome Powell, said it’s finally time to retire the word “transitory” in describing inflation. Not too encouraging.
Here’s The Wall Street Journal on the threat of inflation:
…there is a growing risk that households and businesses will come to expect that higher inflation rates will persist.
That is the outcome that central bankers fear most, since it opens the way for a vicious cycle of higher wage settlements and price rises intended to cover those higher costs.
Powell’s hawkish inflation comments have led many investors to believe we’re due for higher rates sooner than previously expected, which frightens investors.
Then, of course, there’s the recently-discovered Omicron variant of Covid-19. We don’t know enough about it to accurately assess its potential threat to the global population and economy. But there’s certainly the risk it will be a headwind to recovery.
So, what do you do? Sell stocks and go to cash?
Not so fast.
On Tuesday, billionaire hedge fund investor, Ray Dalio, warned investors who believe that cash is a “safe” place for their money.
From Dalio:
Cash is not a safe investment, is not a safe place because it will be taxed by inflation…
What we are seeing happen has played out many, many times in history; it’s like watching the movie over again.
The term “rock and a hard place” comes to mind.
***In the bullish camp, there’s plenty of reasons for optimism – minimally, for specific sectors
Let’s start with Omicron.
Billionaire investor, Bill Ackman, just pointed out a potential positive of Omicron.
Ackman tweeted:
Early reported data suggests that the omicron virus causes ‘mild to moderate’ symptoms (less severity) and is more transmissible. If this turns out to be true, this is bullish not bearish for markets.
That’s true.
If Omicron becomes the dominant strain, and is less dangerous than Delta, then negative economic effects could be muted. This would potentially accelerate our world’s return to normalcy.
As to the Fed and interest rates, despite Powell’s comments, he’s under immense pressure not to overstep. He’s also fundamentally dovish in terms of his policy perspective.
And keep in mind, even when we do see rates rise, it’s usually not the first rate-hike that hurts stocks.
From Invesco:
A review of past initial rate hikes in business cycles (’94, ‘04, ’15) indicates that returns remain robust in the 12 months prior to, and 36 months post, the first interest rate hike, weakening only when the US Treasury yield curve flattens.
And what about the case that U.S. stocks are horribly overvalued right now?
Well, let’s make two adjustments and reevaluate this narrative. Specifically, let’s evaluate future earnings, and then let’s break down “the market” into smaller components.
To make sure we’re all on the same page, the most common valuation metric is the “price-to-earnings” ratio, or “PE Ratio.”
But which “earnings” number an investor uses in this ratio has a profound impact on the final valuation – and there’s more than one option.
You see, investors who believe stocks are expensive today tend to look at either the trailing-12-month earnings figure, or a longer-term, 10-year averaged earnings number, used in the “Shiller PE.”
Right now, as you can see below, the Shiller PE number is 39.12 – one of the highest readings ever.
But bulls will say “this is all wrong – why use earnings from the past when we’re interested in where the stock market is going? We should be using future earnings estimates.”
So, what happens to valuations when we sub in future earnings estimates?
According to market research company, FactSet, the forward 12-month PE ratio for the S&P 500 is 21.4. For context, this is higher than the 5-year average of 18.4 as well as the 10-year average of 16.5.
However, it’s not outrageously higher. And it’s certainly not up in the nosebleed levels we just saw with the Shiller PE ratio.
Plus, this masks what’s actually expensive in the S&P – namely, popular mega-cap stocks.
To illustrate, below, we look at three charts from economist Ed Yardeni.
The top chart is the forward PE ratio of the S&P 500 LargeCap.
The mid chart is the forward PE ratio of the S&P 400 MidCap.
And the bottom chart is the forward PE ratio of the S&P 600 SmallCap.
The charts go all the way back to 1999.
What you’re going to see is large cap stocks (on top) trading at high valuations that are approaching the levels seen in the dot-com bust. But if you look at mid- and small-cap stocks (2nd and 3rd charts), they’re trading at roughly average valuations since 1999.
This supports the idea that there are certain, super-popular mega-stocks that are expensive, skewing the overall valuation of the market. But the kneejerk judgement that “all” stocks are expensive is inaccurate.
Given this, bulls argue that, sure, “the market” might be expensive, but there are plenty of opportunities with attractive valuations if you know where to look.
***So, what’s the answer?
This is where things get exciting.
Louis Navellier, Eric Fry, and Luke Lango are three of InvestorPlace’s most respected, and most successful analysts.
For any readers less familiar, Louis is one of the pioneering founders of quantitative analysis. That’s the practice of using predictive algorithms to forecast major moves in stocks and in the broad markets.
His models have correctly predicted three of the biggest corrections of the past 25 years including Black Monday in 1987, the dotcom crash in 2000 and the 2008 financial crisis.
Eric is a big-picture, macro specialist. He’s also probably the most successful investor you’ve never heard of.
In 2016, some of the world’s best money managers and stock pickers, including Eric, participated in an annual investing contest. Leon Cooperman, David Einhorn, Bill Ackman…
Eric beat them all. He posted a one-year gain of 150%.
Beyond that, over his career, Eric has dug up 40 different 1,000%+ returning investments. Most investors never get one.
Finally, Luke is something of a prodigy.
From a perfect score on his SATs, to an illustrious academic career at CalTech, to being the #1-ranked analyst (out of more than 15,000 investment experts) on TipRanks, Luke is no stranger to success.
His focus on hypergrowth stocks has helped him amass a double-digit list of triple- and quadruple-digit winners.
I offer these backgrounds because, next Tuesday, these three investors will be sitting down to discuss the state of the markets today, what’s on the way tomorrow, and what to do about it in your portfolio.
What I find fascinating is that, though they each approach the market with different styles, they’ve found agreement in how to handle today’s market craziness.
And this points back to the question that opened this Digest…
“Do I sell now and lock in profits? Or do I stay in the market as we head into a very uncertain 2022?”
Well, on Tuesday, December 17, at 7 p.m. (EST) you’re invited to hear Louis, Eric, Luke’s answer at an event called the Early Warning Summit 2022.
The guys will be discussing the major market moves they see impacting stocks next year. More importantly, they’ll detail how you should prepare for these moves in your portfolio today.
The event is 100% free. Even if you’re comfortable with how your portfolio is positioned, tune in simply to learn what three world-class investors believe is coming our way.
Of course, if you’re nervous about whether your money is invested wisely for tomorrow’s market, then joining us on Tuesday is all the more important.
You can reserve your free seat by clicking here.
It’s a challenging time to an investor. I hope you’ll let Louis, Eric, and Luke make it easier for you next Tuesday.
Have a good evening,
Jeff Remsburg
