Camarda’s regular readers will note we’ve been quite soft on US stock valuations for some time. Not that we’re calling for a major, sustained drop anytime soon…we think this tired old bull has a year or longer to run before collapsing under the weight of overvaluation, and shifting into bear mode. Still we stress several critical points: 1) many US stocks, particularly tech and growth stocks, are trading at very stretched valuations, and a significant correction is increasingly likely, one that will affect most if not all markets in the near term. It is simply very difficult to justify the valuations of such stocks. The stocks just don’t seem to be worth the money they cost, unless Goldilocks spreads her magic porridge so wide and far that the unlikeliest, most perfect scenarios play out for companies like Tesla. Some observers have called its valuation “insane.” Not that the cars are not wonderful – they are! But we have to separate the value of the products from the value of the stock, which are very different things. 2) While the US economy still powers along mightily – which is why this bull ain’t dead anytime soon – the rest of the world is really catching fire. And, unlike the US, whose market has been on an incredible tear for nearly a decade, non-US stock markets have not gone up nearly as much. So, even though many of the rest of the world’s stock market returns have kicked the US’s butt, they are still quite cheap and have lots of room to run. 2017’s rally has taken the US markets to bubbly levels – for most of the rest of the world, the party’s just getting started. 3) and, finally, we strongly believe that value will be key factor in profits going forward, and that there’s lots of upside even in US stocks if you buy right.
Make no mistake, we expect a bumpy 2018, particularly in the US. No less than the Wall Street Journal recently ran a piece called “How to Spot a Market Top,” noting “some worrisome signs investors should be watching.” Among them: “Investors are more optimistic about the markets than at any time since the tech bubble…” this is usually a bad sign that the crowd has become euphoric. “Wall Street’s ‘fear gauge’ is at record lows…” also of concern that the VIX volatility index is so low, indicating complacency and widespread believe that markets won’t drop. “Stock valuations are the highest since the dot-com bust…” well, you know what I think about, that, what goes up… “Risky investments have posted impressive gains, and one of the riskiest – bitcoin – has soared…” clearly, rampant speculation is not a good sign. And, finally, “tech stocks now have a bigger share of the market than at any time since the tech boom…” which, as you recall, did not end well as 1999 hit the 2000 wall.
But also make no mistake, Camarda is still bullish on US stocks, at least for a year or two, maybe longer. While non-US stocks seem far more attractive, there’s still plenty punch left in the US punch bowl, even if we expect a nasty spill sometime soon. And the requirements of diversification would never let us suggest investors stake all their dough on foreign stocks. A healthy allocation to US stocks is unavoidable – just make sure the US stocks are healthy, and not trading at crazy prices. Fair value is the key!
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