Are you worried that a big stock market crash is coming? If so, you’re not alone. In fact, more than half of America feels the same way.
According to a new survey from Allianz Life, 54% of U.S. investors are worried that a big market crash is on the horizon. And more than two-thirds of the 1,005 respondents in that survey said that they are hoarding cash to protect themselves against such fallout.
But this could prove to be a huge mistake.
A stock market crash isn’t coming. In fact, following the January correction in stocks, my team and I believe that this is a golden buying opportunity for patient investors — the type of opportunity that only happens once every few years.
And guess what? The data is on our side.
The big concern about stocks in 2022, of course, is valuations. On the heels of its best three-year-stretch since 2000, the stock market has expanded to historically rich valuation levels. At any point in time, that’s problematic. But in 2022, that is especially problematic because the Federal Reserve is going to hike interest rates this year — an action that naturally forces stock market valuations to move lower.
Stock Market Spook
Research from Bank of America (NASDAQ:BAC) released yesterday illustrates the big problem here. The BofA team compared the S&P 500’s trailing price-to-earnings multiple as it entered each of the last 10 rate-hike cycles, dating back to 1971.
The data shows that the Fed is hiking into an overvalued stock market. The S&P 500’s average price-to-earnings multiple prior to each of the last 10 rate-hike cycles was about 16X. Today’s multiple — above 22X.
Admittedly, that’s spooky data. But it’s also incomplete data.
The reality is that stocks don’t exist in a vacuum. They exist in an ecosystem of financial assets, and investors have a choice to capitalize on any number of those assets. Therefore, absolute valuation on stocks matters less than relative valuation.
Stocks can be expensive on a historical basis. But if they’re relatively cheap when compared to other investable liquid assets, like bonds, then those stocks can keep powering higher.
That’s why astute investors don’t just look at the S&P 500’s price-to-earnings multiple to decide whether stocks are cheap or expensive. They look at the price-to-earnings multiple relative to the yield on bonds.
Specifically, they look at the earnings yield on stocks — which is simply one divided by the price-to-earnings multiple — relative to the risk-free rate, or the yield on 10-year Treasury notes.
Looking at the Full Picture
When you look at that more complete and contextualized data, you start to see that stocks aren’t overvalued here in 2022. Rather, so long as yields remain low, they’re undervalued following the recent market sell-off.
We went ahead and “completed” Bank of America’s chart to contextualize stock market valuations ahead of rate-hike cycles with Treasury yields. It paints a much different and more accurate representation of today’s market valuations.
Specifically, the S&P 500’s earnings yield premium today is about 2.6%, well above the historical average of 0.1% ahead of rate-hike cycles. This means that the Fed is not hiking rates into an overvalued market. Rather, it’s hiking rates into an undervalued market.
Of course, the big risk here is that the Fed gets super-aggressive on rate hikes. It could send the 10-year soaring to 4- or 5% and thereby erode the earnings yield premium.
But for several reasons, we view such an outcome as incredibly unlikely.
Stock Market Rebound Incoming
And to that end, we don’t think a stock market crash is coming. Instead, we believe stocks are due for a big rebound over the next 12 months.
Now isn’t the time to sell. It’s the time to buy!
Right now, there is one, tiny $3 wonder stock on our radar that presents an exceptionally good buying opportunity.
But let me warn you; this isn’t a stock for everyone. Most stocks are designed to protect your wealth. This one is meant to make you wealthy.
If you’re willing to take that risk, then I suggest you click here. Find out how to potentially “strike it rich” with this stock pick.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
