By many measures the current stock market highs are crazy. We wrote months ago about how the stock market is ignoring the economy. Unemployment is still at historic lows, congress is not coming across with another stimulus, and people are running out of money. This will result in families tightening their belts, buying as little as possible, and driving the financials of many companies downward. Nevertheless, many investors seem to be ignoring the fundamentals and trying to eke out more profits before taking their profits. This approach of trying to hang in for the last bit of a bull market is sometimes called greater fool investing. The investor knows that at some level he or she is a fool for hanging around as the market gets risky but the profits are addicting. They plan to sell to a greater fool at the last moment. The risk of greater fool investing lies in the difficulty of predicting when the hammer will fall and the market will fall like a rock.

Will Investors Lose Like in the Dot Com or 1929 Crashes?

Market Watch writes about the same issue in their article about a bubble like the late 1990s or 1929.

A “greater fool” stock market might be at hand if a popular valuation measure continues to press higher, potentially kicking off another bubble to rival the late 1920s and 1990s, warned a Wall Street veteran who called the market’s rally off the March lows.

Barry Bannister, head of institutional equity strategy at Stifel, noted that the cyclically adjusted price-to-earnings, or CAPE, ratio was at or near levels last seen in the final two years of the 1920s and 1990s rallies. The CAPE ratio, devised by Nobel laureate economist Robert Shiller, measures the price of the S&P 500 SPX, -0.81% divided by average corporate earnings over the previous decade. By taking such a long view, its proponents argue that it smooths out cyclical variations and gives a better view of where valuations stand versus history.

We believe that the CAPE underestimates the problem because earnings have been excellent over the last decade and earnings going forward are highly suspect as the Covid-19 virus continues to damage the economy. Many businesses will not come back to previous levels and that will come back to haunt investors who seem to believe that the big tech companies can keep making money when all of their customers run out of cash and quit buying!

We previously quoted Warren Buffett when he compared the pre-dot com crash market to folks planning to dance until midnight at Cinderella’s ball but failing to notice that the clock on the wall had no hands.

At some point, smart investors will follow Jim Cramer’s old advice which is that you do not have a profit in the market until you take a profit. Those that start taking a profit now will have done quite nicely since the Covid-19 crash and recovery but will do even better if they start hedging their bets now instead of hoping for a greater fool to bail them out at the last minute before the next stock market crash.

Risk of Greater Fool Investing – DOC

Risk of Greater Fool Investing – PDF

Risk of Greater Fool Investing – Slideshare Version

Why Is the Stock Market Doing So Much Better Than the Economy?

A few months ago we asked why the stock market is ignoring the economy.  As we noted at that time, the stock market anticipates the next moves of the economy. .As such it has discounted airline stocks, hotels, and all tourism-related businesses among others. And, after a brief fall in prices it has not discounted the big tech stocks which are still leading the market. Much of this makes sense in that profits continue for many tech operations as businesses move online. What concerns us is that eventually there needs to be money being spent by ordinary people to buy things and that is what eventually supports everything else. As stimulus payments go away and Republicans in the US Senate wait, the economy may well be set for a fall and that could drive the market down.

Will the Market Crash Again in 2020?

If we go back to 1929 we see that there was lots of optimism along with pessimism as people bought back into the market and repeated drove prices back up. Unfortunately, the things that needed to be done in terms of credit and trade did not happen and the downward course of stocks went on for three years. New Balance says that another crash or at least large correction, or two, is possible. They look at other market crashes, their causes, and how in each case there were partial recoveries and losses on the way down. These crashes played out over a couple of years and were typically exacerbated by a lack of appropriate response or no response.

What is unsettling now is the optimism of some investors or perhaps pigheadedness of some investors in plowing money into stocks when the economy is just as likely to weaken as to improve. The 1929 crash was largely played out by 1932 but that is also when Roosevelt came into office and initiated stimulus programs. With elections coming up it is possible that a Democratic majority might take over the US Senate as well and hold the House of Representatives. And, if this happens along with a Democrat in the Oval Office we can expect to see impressive investments in US infrastructure and US R&D that could forestall any follow up dips in the market.

Will the Market Crash Again in 2020, Slideshare version

Will the Market Crash Again in 2020? – DOC

Will the Market Crash Again in 2020? – PDF

How Will Your Investments Do in the Second Half of 2020?

The New York Times asks what is next for stocks after the impressive recovery. Here is what they say about the second half of 2020 and stocks.

Where they go next is a mystery. There’s so much uncertainty about the coronavirus crisis that roughly 40 percent of the S&P 500, about 200 companies, have withdrawn their customary forecasts about how their businesses will perform in the months ahead, according to data from S&P Capital IQ.

This means that investors are working on gut hunches instead of rational thinking about company projections. The concern voiced by The Times is that many folks will be in for a rude shock when earnings reports come out in July. The recent market volatility reflects the tension between worried investors who want to see real numbers and those who are buying on every bit of good news while selling whenever the news is bad.

A popular measure that Warren Buffett attests to is the comparison of the total value of the stock market to the gross national product. The economy is not doing well and it is likely that many companies are making less money than investors would like to see. As more and more people remain out of work and congress drags its feet on more stimulus money, nobody is going to have any money to buy things.

Thriftiness Will Slow Spending

A young woman friend of the family said after the Financial Crisis that most of her friends had started to “sound like grandma” who survived the Great Depression and never quit being thrifty. It is our opinion that this way of thinking will become more pervasive as more and more folks run out of money and cannot find work. The net effect will be that spending will drop across the economy and affect all sectors. Some sectors like travel, dining, and hotels be hit harder and for longer than others but even the tech companies will see reduced sales as their customers start counting their pennies.

The other concern is that the virus is in charge of how things go from here and those economies and countries that deal effectively with the virus will open sooner, remain open, and return to a semblance of normal before a vaccine or medicine emerges to improve the global situation. The USA in not in this category as it cases are skyrocketing while countries in Europe and Asia are maintaining low infection rates and resuming what passes for normal activity in these times.

As the stock market buys on speculation and sells on the news it may well be that when earnings reports come in later in July that the second half of 2020 may turn out to be dismal for your investments and everyone else’s.

How Will Your Investments Do in the Second Half of 2020? – Slideshare

How Will Your Investments Do in the Second Half of 2020? – DOC

How Will Your Investments Do in the Second Half of 2020? – PDF

Covid-19 Era Investment Opportunities

Russell Investments looked at evaluating growth and value stocks in the era of covid-19. Before making any specific suggestions, they offer some useful insights.

At its core, value investing anchors around exploiting short-term human behavior. Essentially, investors place too much of a focus on short-term outlooks.
Like growth investors, though, value investors also need to take a multi-year approach, as they don’t necessarily know which sectors, industries or parts of the market might fall out of favor. Generally speaking, you need to be willing to cast a pretty wide net, often over a number of years. Patience is required to exploit time-horizon biases.

The “take home lesson” from this is that you should diversify your investment portfolio if you want to benefit from buying cheap growth stocks today with the hope of seeing excellent long term profits.
If you are looking deals, you are more likely to find them in the value stock category right now as the spread between P/E values of growth and value stocks has widened significantly, as it did during the dot com bubble.

J.P. Morgan

A specific comment that they make is that the covid-19 crisis will accelerate changes in the tech sector and our ever-increasing reliance on tech and the internet, as we noted in our previous articles about the risks of covid-19 era investing.

They go on to note the following.

There’s been an enormous amount of consolidation in the stock market among companies within industries over the last 30 years or so, particularly over the last 20 years. Essentially, companies have been buying each other. The net effect of this is that the top four companies in most global industries now have, on average, 30% of the total industry revenue compared to roughly 20% in the past,” he explained. Ultimately, this concentration has led to rising returns and an increase in profitability for companies.

Examples include MasterCard, Google, and Facebook which routinely add users at virtually no incremental cost. These folks are so strongly positioned that it is hard for anyone to compete with them.
Virtually all large tech companies have the resources to add new products and services and will continue to benefit as the world moves increasingly to tech in all aspects of our lives.

Now Is (Always) the Time to Invest in Value Stocks

They make an excellent point that many investors wait until the future seems more secure to resume putting money into stocks. But, the best values are to be found when things look the worst. The best value occur when most folks are afraid to invest which is similar to the Buffett saying that you should be greedy when others are fearful.

The “take home lesson” seems to be that by using intrinsic stock value as a guide and by hedging your bets with portfolio diversification, the covid-19 era presents many investing opportunities for those willing to do a bit of homework and exercise a bit of patience.

Covid-19 Era Investment Opportunities – Slideshare

Covid-19 Era Investment Opportunities – DOC

Covid-19 Era Investment Opportunities – PDF