Look, I get it. The trailing multiple for the S&P is over 38, much higher than the median historic average of just under 15. Other metrics such as price to sales, price to cash flow, p/c ratio and investor sentiment surveys suggest extreme optimism. You’d have to be living under a rock not to be aware of the new retail, Robinhood trader or the bubble-like action within small-cap stocks, traditionally a speculative favorite. Special Purpose Acquisition Companies, or SPACs, which essentially are ‘blank check’ IPOs, have become all the rage indicating adoption of risk we haven’t seen since the late ‘90s Dot-Com frenzy.
Legendary investors such as Jeremy Grantham are warning of bubbles bursting. Real estate prices have also gone bonkers and the amount of people now ‘entering the rental market’ are at levels not seen since the 2004-2005 real estate peak. If I hear another person tell me how easy it is to make money with a rental property, I may lose my lunch. Combine all of this information with stimulus checks, another round of PPP loans, student loan interest forgiveness and rental payment forbearance and it’s hard not to want to crawl into a cave for fear of the coming demise.
So why on earth do I remain optimistic about stocks right here and now? I mean, if you know me you know I’m agnostic when it comes to price. I started the business during the Dot Com crash and gained a reputation for telling folks to ‘sell now and ask questions later.’ How about 2007 and 2008, did I stay bullish thinking it was just a little ‘blip?’ That’s a strong NO, in fact I lost a few clients near the end of 2007 when we underperformed due to raising cash ahead of 2008. So why am I not bearish in the face of all this hubris that is clearly flowing throughout the markets? It’s very simple, there is one key ingredient missing and it’s a big one.
In fact, whenever I hear someone writing or discussing the bubble and subsequently not participating, it is a pretty good bet they are not involved with general retail investors at all. Why do I say this? Well, it’s really quite simple. The general investor, the real general investor with money, not the Robinhood trader with a stimulus check but the retiree with a 7-figure IRA is absolutely petrified. More than likely this person is holding excessive amounts of cash, they have below average stock exposure and just about daily they struggle with wanting to sell all and get out completely. How do I know this? Because I work with over 600 of you and I know the struggle is real.
You see, for a speculative bubble to be nearing an end, it comes when the speculative pool is filled. It comes when the conversations I have with folks aren’t about reducing exposure, remaining invested or buying gold but rather when I have to calm enthusiasm, preach how important it is to remain conservative and unfortunately, I will more than likely have to lose a few clients to someone taking much more risk, which I believe will inevitably end very poorly.
When I started in this business, I always used to look at the seasoned pros and wonder just how they knew what they knew. They didn’t cite other people; they didn’t subscribe to obscure data points but they always seemed to have a finger on the pulse of what was happening. Fast forward 20 years and I now have the answer, experience. It really takes living through, investing in and working with people throughout multiple business cycles before you can really gain a grasp for where we are.
Yes, anything can happen and at any moment I reserve the right to change my mind but from my vantage point, as hard as it is to stare at all the speculative fever and remain sane, one must understand that generally speaking most people still are scared of the market, feel a crash is inevitable and struggle with wanting out on any sign of weakness. What does this mean? In my opinion it means the party can last longer than most people expect, and we may have some more songs to play before the music stops.
This doesn’t mean you throw caution to the wind chasing stocks. In fact, just yesterday I appeared on CNBC discussing how dangerous that is. You can see that clip HERE.
While at the same time I was on CNBC, Logan appeared on TD Ameritrade’s network discussing similar thoughts. You can see his clip HERE.