A Bull Market Doesn't End in Worry

This isn't the same frothy market we saw earlier this year... 'Going much better' in cryptos... A bull market doesn't end in worry... Three major concerns for investors today... Consumers turn bearish on stocks for first time in 14 months... High valuations didn't kill the bull market... Expectations for the Fed's rate-hiking timeline... A simple piece of advice amid all these worries...

This isn't the same frothy market we saw six months ago...

I (Chris Igou) noticed this shift in Las Vegas last month at our 19th annual Stansberry Conference and Alliance Meeting. It was a wonderful three-day event with a wide-ranging list of speakers. (If you joined us in person or online, thank you... And if not, you can read our Digest coverage here, here, and here.)

The overall conference was great. But today, I want to discuss something different that I noticed this year in the hallways, the breakout sessions, and even around the lunch tables. And it wasn't just from our speakers, but also from folks like yourself in attendance...

People are excited about cryptocurrencies.

When one of our speakers polled the audience, roughly 70% or more of the folks in the crowd noted that they owned bitcoin. And the excitement about cryptos didn't just end at the conference, either. It followed me on my way home, too...

My cab driver to the airport urged me to buy the latest "meme" cryptocurrency, Shiba Inu. And then, on the flight back to Florida, the young guy sitting next to me said...

I tried stocks for a while, but I didn't have much success. I've been into crypto lately, and it's going much better.

My seatmate didn't just add cryptocurrencies to his overall stock portfolio... He completely jumped ship on stocks and went "all in" on crypto.

My point is, the frothy market in stocks from early 2021 has shifted...

The "meme stocks" that everyone loved back then are cooling off in a big way.

Movie-theater owner AMC Entertainment (AMC) is more than 30% below its peak in June. And the same is true for GameStop (GME)... The video-game retailer peaked in January at more than $340 per share. And through a ton of volatility, it's down around 35% since then.

The folks who started trading just a few months ago likely haven't done so well. That's why people like my crypto-trading seatmate are losing interest in trading stocks and going elsewhere.

The extreme optimism in stocks is no longer there... In fact, real pockets of worry are showing up right now.

And longtime Digest readers know that a bull market doesn't end in worry... It ends in all-out greed. That's why even though the market is near all-time highs today, I believe we'll likely see even more upside in U.S. stocks from here.

Today, three major concerns are driving the worry in the stock market...

First, consumers are more bearish than bullish on stocks for the first time in 14 months...

We can see this extreme through the Conference Board's Consumer Confidence Survey. Each month, this survey goes out to about 3,000 households. One question it asks consumers is if they think stocks will increase, decrease, or stay the same.

The three ratings tally up to 100%. The specific numbers don't matter much, but the latest update from October highlights a big shift... Today, more consumers expect stocks to fall than to rise in the coming months.

That's not a sign of all-out greed to me. It tells me that folks are worried about stocks today. That negative sentiment means stocks have more room to run higher...

To see what this means for stocks moving forward, I looked at every time consumers in the Conference Board's survey turned bearish on stocks for the first time in 12 months.

This data goes back to 1991. Since then, we've had 18 other cases like what we're seeing today. And overall, it was a very bullish sign for U.S. stocks. Take a look...

When consumers turn bearish like they just did, you want to own U.S. stocks.

In fact, the typical annual return after one of these extremes is 12%. And 15 of the 18 previous times led to additional gains over the next year... That's an 83% win rate. I would take those odds any day.

Put simply, consumers' current fears are fuel for a continued stock market rally. And that isn't the only sign of worry in the market today...

The sky-high valuations from earlier this year are fading as well...

Companies had to shut down operations during the COVID-19 pandemic. Those shutdowns halted the earnings they were bringing in each quarter. And in turn, it sent one of the most commonly used valuation metrics soaring...

I'm talking about the price-to-earnings (P/E) ratio. This ratio tells us if the market is expensive or cheap based on its earnings...

The higher the P/E ratio, the more expensive the market. The lower this ratio gets, the cheaper it is.

When earnings fall more than the price of the market, it can send valuations higher. After all, you're paying more money for less earnings. That's what happened earlier this year...

The S&P 500's P/E ratio hit 31 back in February. That's the highest valuation in at least the past 70 years. Take a look...

You can see the recent spike in the chart... This peak eclipsed the previous record for the P/E ratio of around 30, which was set back in 2000 during the dot-com bubble.

Now, it might be easy to think that a market top is close since we're at a similar valuation to the 2000 bubble. But something different has happened over the past nine months...

As you can see in the chart, the S&P 500's record-high valuation has fallen back to Earth...

The companies that previously weren't bringing in earnings are now back in business. And they're thriving...

In the November 10 Digest, my colleague Kim Iskyan reported on this "Category 5 hurricane" happening across the board. At least 90% of S&P 500 companies have now reported third-quarter earnings... And 80% of them beat earnings expectations.

These strong earnings results helped drop the S&P 500's P/E ratio to 26 today. That's still relatively high. But it could drop even further in the coming months... The index's forward P/E ratio is 22.7.

In other words, high valuations didn't kill the bull market. And while they're still elevated at the moment, they're likely to keep falling further from here.

So if you're worried about today's valuations, you should know that they aren't enough to kill the market rally on their own. This is another concern that the market is shrugging off.

And the last piece of worry we're going to cover might be even bigger...

The Federal Reserve is getting closer to ending its 'easy money' policies...

This is another big shift in today's market.

Folks weren't worried at all about an interest rate hike happening earlier this year. But now, this is a hot-button topic as we close out 2021. And for good reason...

Low interest rates have fueled the current bull market.

That's because in a low-rate environment, there's not much competition for stocks...

You're essentially earning 0% interest in your savings account. Bonds yield next to nothing. So if you're looking to earn anything in the current environment, the answer is stocks.

When rates start to rise, though, competition for stocks begins to increase... Investors have an increasing number of options to earn interest on their capital.

That's why all eyes are on what the Federal Reserve will do next. Take a look at this U.S. News & World Report headline from earlier this month...

The central bank has several tools to help support and stabilize the economy. One of those tools is short-term interest rates...

As long as the Fed keeps rates near zero, it will help fuel the economy. And it keeps the competition for stocks really low. But the Fed can't do this forever...

When the economy is booming and starts to overheat, that can cause inflation to soar. We're seeing inflation show up today, thanks to supply-chain issues and shortages.

Simply, interest rates have been low since the start of the pandemic. But that could change soon, based on today's economy...

According to Fed funds futures contracts, options traders are betting on two rate hikes in 2022. And they expect that we'll see three more increases in 2023.

In other words, the majority of folks don't expect this low-rate environment to last much longer. But does that mean it's time to get out of stocks as this policy shifts?

You might be surprised to learn that the answer is no – at least in the short term...

Folks think that the first hint of higher rates is a bad thing... That's because rate hikes do ultimately come before major stock market crashes...

The key is, however, that the initial kickoff doesn't spell immediate disaster.

We've seen this story play out over and over again in the past. As my mentor and friend, Dr. Steve Sjuggerud, and I explained in the October issue of our True Wealth Systems newsletter...

Let's start in the late 1990s. The Fed began hiking rates in June 1999. It went on to hike rates five more times before the S&P 500 finally peaked in September 2000.

Importantly, the S&P 500 rallied another 12% from the initial rate hike in 1999 to its eventual peak.

The first Fed hike wasn't a dagger to the heart... While the S&P 500 fell shortly after, it went on to even higher highs over the next 15 months.

Yes, the market eventually crashed. But there was plenty of additional upside for investors before that happened... And worried investors who stepped aside missed those gains.

More from last month's True Wealth Systems issue...

This isn't unique to the late 1990s. A similar scenario took place before the 2008 financial crisis...

The [Fed] raised rates in June 2004. But if you remember the 2000s boom, you know that was nowhere near the eventual peak. U.S. stocks rallied for years after that rate hike.

There were 17 rate hikes from June 2004 through mid-2006. And the S&P 500 rallied the whole time. Investors could've locked in 46% gains before stocks peaked in October 2007.

The most recent example of this phenomenon came from 2016 into 2020...

The Fed made its first hike at the end of 2015. And it raised rates eight more times between the end of 2016 and the end of 2018. But that didn't slow the market down at all. As we explained in True Wealth Systems...

U.S. stocks rallied almost 80% from the start of 2016 to their peak in early 2020. And we all know what caused the bust last year. It wasn't rising interest rates... It was COVID-19. So this is another case where stocks soared for years after the Fed's first rate hike.

Yes, the Fed could hike interest rates two times in 2022 – and perhaps a few more times the following year. But as you can see, those initial hikes aren't something to fear...

In fact, the market will likely rally well after the Fed hikes rates for the first time next year.

As I hope you've seen today, the bull market likely will continue to climb the 'Wall of Worry'...

Even though the S&P 500 is at an all-time high today, things simply aren't as frothy as earlier this year.

Folks are turning away from stocks... Instead, like the young man on my flight back home, they're putting their money in other places like cryptos.

But as I've explained, these people likely will miss out on plenty of upside potential...

Essentially, consumers turning bearish for the first time in more than a year is positive for stocks. Valuations aren't the boogeyman that will end today's bull run. And the initial Fed rate hike won't stop the pulse of this boom either – at least not immediately.

This isn't the same market from just a few months ago.

Worry is starting to set in... yet the S&P 500 remains in a strong uptrend. You want to take advantage of the good times as long as they continue. So my advice today is simple...

Stay long.

New 52-week highs (as of 11/19/21): Apple (AAPL), Analog Devices (ADI), Atkore (ATKR), Best Buy (BBY), Costco Wholesale (COST), Fortive (FTV), Home Depot (HD), Intuit (INTU), IQVIA (IQV), Ingersoll Rand (IR), Lennar (LEN), Microsoft (MSFT), MYR Group (MYRG), Palo Alto Networks (PANW), ProShares Ultra QQQ Fund (QLD), ProShares Ultra Technology Fund (ROM), Trex (TREX), ProShares Ultra Semiconductors Fund (USD), and Verisk Analytics (VRSK).

In today's mailbag, a subscriber writes in with his opinion on taxes – or more specifically, those folks who "fuss about rising taxes." What's on your mind? We always welcome your thoughts, comments, and observations at feedback@stansberryresearch.com.

"Rather than fuss about rising taxes – which it's a result of the cost of about everything going up, except wages – how about advocate for wages commensurate with productivity?

"Sure, it will mean paying American prices for things, but it will support American wages for American jobs... Plus, increased wages by default increase tax revenues across the board.

"People do not need a cheap TV in every room or to drive excessively optioned cars. Hand-crank windows, for example, work just fine. The 1% can only buy so much stuff and eat so much food, so cut the upward money flow back a bit. If everyone can buy and eat, we will all have more.

"The boom in the 1950s and '60s was paid for by high-wage jobs. If we want a fixed infrastructure, which is an investment that pays dividends, we need to stop paying out subsidies to zombie businesses and those that do not pay their workers.

"Stop whining about taxes!" – Paid-up subscriber Dave M.

Good investing,

Chris Igou Jacksonville, Florida November 22, 2021