July, 2024 – In the last quarter all three indices (the Dow Jones, the S&P 500, and the NASDAQ) have posted new all-time highs. For many investors it seems like there is no risk of a downturn; the market will just keep going up forever. To students of history—or maybe old investors with a good memory—there is always a time late in the market cycle when investors flock to stocks without regard to the fundamentals—Greenspan called it “irrational exuberance.”
The chart above shows the valuations of the S&P 500 index broken down by the five basic metrics investors determine the fair market value of a stock. They are price-to-earnings, price-to-book, price-to-sales, price-to-cash flow, and dividend yield. The colored boxes indicate the historical range. In every single instance, the range is not just one deviation higher, but two or more!
But forget all the technical jargon, what you need to understand is this very simple thing:
All the newly created money since the pandemic has thrust stock prices to unreasonable levels. And these levels are not sustainable.
If you don’t believe me, believe Warren Buffett, who has been selling stocks and buying T-bills for at least nine months now:
“While loading up on T-bills – of which the government has been issuing a tsunami on a weekly basis – BRK dumped a [significant amount of stock] in Q1…after having sold [a significant amount of] shares in the prior quarter.”
“I don’t think anyone sitting at this table has any idea how to use it [the cash] effectively, and therefore we don’t use it,” Buffett said.
“We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money,” he said.
“We only swing at pitches we like,” he said. And right now, they’re not liking anything other than T-bills.”[i]
There’s that word: “risk.” It can be frustrating for some (usually younger) people to see these new highs when they are not fully participating—I understand. You hear all about the new highs; but no one ever talks about the risk. But the risk is literally off the charts.
The fear of missing out (FOMO) is a real psychological condition, almost physiological. We can always tell when this occurs because we get calls from a couple of clients in their late 80’s who want to be more aggressive.
Take a look at the NASDAQ since the pandemic. Obviously coming out of 2019 we recovered quite well thanks to all the fresh new money being constantly injected into the economy. The NASDAQ peaked out at the end of 2021 and then cratered during 2022, crawling back up to the level we saw in 2021. So that turned out to be a wild round trip. This year, really just since May 9, the NASDAQ has posted new all-time highs.
But we’ve seen this before. In 1987, in 1999, and again in 2007. When markets are going up no one ever asks about the risk. But what level of risk are these guileless, fevered aspirants taking on? In law school, we called a prospectus a “retrospectus” because no one ever looks at it until something goes wrong.
As I write this the Dow Jones is up over 600 points. Why? Because Trump survived the assassination attempt, and then he announced his running mate, and the market now expects him to win.
At practically the same time, Fed Chairman Jerome Powell testified that even though inflation is 3% and not their target 2%, they may lower rates anyway—which is a sign that they will almost certainly do so in September. Currently, there’s only a 7% chance they will lower rates at their July 31 meeting.[ii]
Even IF the Fed starts lowering rates this month, there is no guarantee that lower rates by themselves will save our economy. The Fed lowered rates prior to the crash of 2008, and the market crashed anyway. Take a look at our discussion of the 2008 market cycle in “The Tail of the Dragon.”[iii]
In addition, leading indicators are still negative, and growing more so. As the chart below shows, there has not been a time since 1970 when a recession did not follow a strong spike in negative leading indicators.
And there are other signs that there are cracks in the economy. Besides the obvious problem in commercial real estate—office space mainly—the housing market in some areas of the country has started to show weakness.
The two markets already experiencing issues are in Texas and Florida, which of course, also saw the largest number of migrations into those states during and after the pandemic.
Atlanta, Roswell, and Sandy Springs, Georgia are also on the list of the most vulnerable areas, by the way, though yet to see significant price drops.
Here are a few quotes we run into again and again:
“The U.S. housing market is already entering a "crash stage" in multiple cities across the country, according to expert Nick Gerli, CEO and founder of real estate analytics firm Reventure Consulting.
The housing market right now is very bifurcated," Gerli said. "And we actually have many cities that are entering a crash stage right now. This is what the mainstream headlines on the housing market are absolutely ignoring."[iv]
“Homeowners in Austin, Dallas, and Houston, Texas, are struggling to sell their homes, according to a recent analysis of home listings by AgentStory.com, a tech real estate company that tracks agent performance.
Between September 2023 and February 2024, the former pandemic boomtown of Austin had a staggering 65 percent of home listings above $2 million which did not sell, meaning the listings either expired or were removed.[v]
In addition, “listings have soared as prices fall in major Florida cities, according to a new report from real-estate listings site Redfin. The number of listings in February jumped nearly 30% in markets like Jacksonville and Miami compared to the same time last year. Meanwhile, prices dropped by as much as 7% in Jacksonville, to $254,000, and 3% in Miami, to $385,000. By contrast, median condo prices nationally rose 8% over the same period, to around $340,000.” [vi]
“Florida homeowners are slashing the price of their properties in the hope of attracting hesitant buyers, with one in four sellers having cut their initial asking price, according to data available on Zillow. As of Friday morning (6/14/24) there were 224,036 properties listed for sale on the online real estate marketplace, including single- and multi-family homes, townhomes, apartments, condos and lots. Of those, 52,469 had a price reduction.”[vii]
Do some research of your own—just Google “US housing market.” It’s fun.
And if you didn’t have a chance to read my last letter, “Peaking Under the Hood”[viii], it spells out exactly all the factors that lead us to the inevitable conclusion that a correction is imminent.
Remember, the media will never say it—only report it after it occurs. The one time Jim Kramer did raise a warning he was chastised horribly by practically everybody. That lesson was well-learned by all the mainstream media outlets.
And of course, everyone is talking about the upcoming election and how that will (or may) change the fate of the economy. It is possible there will be a short-term reaction, but the underlying fundamentals are so substantial that neither party or candidate can stave off the coming reckoning.
For our clients, we have taken all the steps we believe necessary to prepare for this coming reckoning—and yes, opportunity. We have a shopping list, and we are excited about it; just waiting for the “fat pitches” as Warren Buffet likes to say. Right now, the risk is just out of the park.
If you are unconvinced, overly concerned, completely confused, or just need some reassurance, I urge you to give me a call or come in for a visit. Also, don’t forget to register for the upcoming social event, Charcuterie Class, on August 13th and the Lunch n’ Learn on August 22nd both in the classroom. We will revisit many of these issues and enjoy some more charts. As always, a webinar will shortly follow on the 23rd for those who can’t make it to the office.
We appreciate having you as a client and a member of our family!
Sincerely yours,
J. Kevin Meaders, J.D. CFP, ChFC, CLU
The views and opinions are those of J. Kevin Meaders, J.D., CFP®, ChFC, CLU and should not be construed as individual investment advice, nor the opinions/views of Cetera Advisor Networks. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Additional risks are associated with international investing such as, currency fluctuation, political and economic stability, and differences in accounting standards. Due to volatility within the markets mentioned, options are subject to change without notice.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Dow Jones Industrial Average, Dow Jones, or simply the Dow, is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the United States. The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value, when government guarantees are mentioned, what is and what is not guaranteed must be clear.
Securities and advisory services are offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker-dealer and registered investment adviser. Cetera is under separate ownership from any other named entity.
Estate services offered by Magellan Legal, LLC and tax services offered by Magellan Tax, LLC. Estate and tax services offered separately from Cetera Advisor Networks LLC, which does not provide legal or tax advice.
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i https://wolfstreet.com/2024/05/06/buffett-invests-in-t-bills-instead-of-stocks-waits-for-bad-stuff-to-happen-cash-is-king-at-5-plus/
iihttps://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
iii//static.fmgsuite.com/media/documents/b7078abd-7f93-4697-b6fb-6a491f38e3e7.pdf
ivhttps://www.newsweek.com/housing-market-entering-crash-stage-multiple-cities-1920530
vhttps://www.newsweek.com/texas-homeowners-struggling-sell-houses-1887861
viihttps://www.floridatrend.com/article/40194/florida-house-prices-slashed-by-1-in-4-sellers
viii //static.fmgsuite.com/media/documents/81b7506f-1238-407a-924b-3ed2af7e5d0b.pdf