Way back in ancient times -- 1987 to be exact, I was a guest speaker at a convention of financial professionals where I was asked what was going to happen in the market -- it was flying at that time, not unlike today's stock market.
As I thoughtfully contemplated (more on this in a bit) I predicted that the market was supremely overpriced and headed for a crash. Sure enough, a few months later -- October 1987 to be exact, the market had its biggest one day crash -- 22%. The stock market had frozen, panic set in and the geniuses who predicted trees growing to the sky were shown to have been human after all.
I was invited back to speak the following year and hailed as the genius who had correctly predicted the stock market crash and was expected to provide even more stock market prognostications. Given I had no clue as to what was going to occur in the future, I admitted publicly that I had not bothered to sell any of my investments -- which had recovered nicely and then some by then -- but in reality I had only relied upon two factors in making my prediction: my mother-in-law and cocktail party chatter indexes -- basically: when my mother-in-law started telling me about the stocks she was buying and everyone at parties I attended was bragging about how much money they were making in the market I felt that was cause for a sell off to occur. This in NOT INTELLIGENCE! This was pure, dumb luck making me look far smarter (or prescient) than I was!
Mentioned below in a brief article from today's Wall Street Journal are two old Wall Street Adages it makes sense to pay attention to and I commend them to you: "no one's ever lost money taking a profit" and "don't mistake a bull market for brains!"
I learned a long time ago that nothing was more stupid than attempting to predict the market's direction and I am not doing so here. So my advice is to always keep a steady hand on the tiller and pay heed to Kipling's advice in his poem IF: "If you can keep your head while all about you are losing theirs...!"
From The Wall Street Journal
July 15th, 2024
Don’t let the hum of the bull tune out signs warning that a bear may be lurking.
July 14, 2024 5:17 pm ET
The third season of the terrific show “The Bear” blends family dysfunction with the ups and downs of high-end restaurants. With markets chasing new highs—get out those Dow 40000 hats—this column is about a different kind of dysfunctional beast. Is the market bear dead, or is it about to sneak up on us?
A U.S. equity strategist told me the story of a Japanese portfolio manager who sat in his office in July 1987 asking for stock ideas. The strategist’s model was based on a proprietary survey of investor sentiment, though it never really worked. Nonetheless, he read off a list of dozens of stocks. The portfolio manager then asked if he would kindly put in an order for 20,000 shares of each. The Dow Jones Industrial Averagepeakedat 2722 in late August and crashed 22.6% on Oct. 19.
A friend was a portfolio manager of a massive growth-stock fund in 1999. He told me he bought shares ofYahoo, Cisco, F5 Networks, Infosys and othersevery day because money flowed into his fund every day. The tech-heavy Nasdaq index peaked on March 10, 2000. As money began to flow out, he had to sell every day. By year’s end,Nasdaqhad fallen by more than half.
I metCathie Woodas she was filing papers for her “disruptive innovation” funds—to “change the way the world works.” Her ARK Innovation exchange-traded fund, ARKK, launched in October 2014 and charges 0.75% management fees. In 2020 it was up153%as stimulus money flew in, driving more buying. ARKK peaked in February 2021 with$28 billionin assets. Since then, its net asset value is down 70%, even amid a roaring bull market, especially in tech.Morningstarrecentlycalculatedthat Ms. Wood’s Ark Invest funds have destroyed more than $14 billion in wealth. One of my favorite Wall Street sayings is, “Don’t mistake a bull market for brains.”
In almost every bull run, stock momentum lures in investors at the worst moment, I call them momos, ensuring they get burned when the buying stops. Since 2009, excepting a few brief sell-offs, cash has been trash. That made some sense during the era of zero interest rates. But now with higher inflation and short rates above 5%? Confusing. Maybe investors are already anticipating anotherDonald Trumpantiregulation pro-growth presidency, forgetting that he is married to a growth-killing pro-tariff agenda. Is the bear dead, or does it have a long fuse?
Predicting stock markets is a fool’s errand. MySeries 7 testfor General Securities Representative Qualification lapsed long ago, so you won’t get investment advice from me. But there are warning signs.
Have we run out of buyers? Sometimes there are triggers that scare them away: oil shocks, viruses, bank failures. But sometimes they simply collapse from exhaustion. More than 40% of householdsreportedlyown stocks—a higher percentage than in 2000. It was 20% in 2010. Some market indicators also point to asset managers being fully invested. Who’s left to buy?
Market breadth is concerning. The 1973 market peak was driven by stretched valuations of the Nifty Fifty, which includedIBM,Coca-ColaandGEbut also Polaroid andXerox. Fifty? Now it’s the Magnificent Seven:Alphabet,Amazon,Apple,Meta,Microsoft,NvidiaandTesla. Seven? Artificial-intelligence hype, way ahead of even the rosiest of realities, drove Nvidia to make up almost athirdof the S&P 500’s first half gains. Another quarter came from Amazon, Meta, Microsoft andEli Lilly. Maybe fat bulls need Mounjaro.
Stock values feel divorced from reality. The so-calledWarren Buffettindicator—the ratio between total stock-market value and gross domestic product—was 138% in March 2000. It’snow196%. Certainly not a buy signal. And Bitcoin, my go-to bubblicious bat signal, is down about20%since March. A dead canary?
“Don’t worry, be happy,” the bulls sing. Inflation is slain, and the Fed will cut rates. But investors won’t like the reason for those cuts. We’re already seeing earnings disasters—Nike,Walgreens,Lululemon, Delta andWells Fargo. If the economy slows, earnings glitches and stock implosions become contagious. Plus, banks’ exposure to commercial real estate is scary, with buildings being dumped at huge haircuts almost weekly. This is now infecting rental buildings, and there are signs of a private housing glut. Inventory inDenveris up nearly 37%. Sure, markets climb a “wall of worry,” and bull markets tend to last longer than people expect, but sometimes the nightmares are real. Recessions are like honey to bears.
Even writing about the bear is bullish. Bull runs end when everyone is a believer. Still, another favorite saying of mine is, “No one’s ever lost money taking a profit.” Someday, cash will be king again. I prefer to buy stocks when everyone hates them.