Are You Worried? Read This... There's More Upside Than You Can Imagine
Editor's note: If you've read the Digest for long, you know all about the "Melt Up"...
For years, True Wealth Systems editor Steve Sjuggerud has trumpeted the idea of a final "blow-off top" before the end of a major boom... and maintained that it would happen once again. But after COVID-19 threw the world into a tailspin this year, many folks wondered if the pandemic crashed the Melt Up before it could really take off this time...
In short, the answer is no.
The markets have since rallied back to new all-time highs. But Steve believes we're just getting started... Those who act now stand to make huge profits in the coming months.
Today's Masters Series is adapted from the August 11 and 12 editions of his free DailyWealth e-letter. In it, Steve explains how we can tell stocks are still cheap today – and why you need to be bold and take advantage of this incredible opportunity right now...
Are You Worried? Read This... There's More Upside Than You Can Imagine
My friend, many investments are cheaper than you can imagine right now...
There's so much investing opportunity today, I hardly know where to begin!
"Steve, have you lost your mind?" you might be thinking. "You know that we're in a pandemic... that stock prices are at new all-time highs... and that house prices are now above their 2006 peak... right? So how can you possibly say that these investments are cheap?!"
You're asking the right questions, of course...
How can houses be cheap when they are selling at all-time highs? I realize it sounds like a ridiculous thing to say. And how can stocks be cheap when they're just below their highs, too?
I'll cover it all today. And hopefully you'll walk away feeling like I do... darn excited.
You've probably heard me tell this story before. But I keep telling it because, honestly, I know a lot of folks have a hard time believing me.
If that's you, then please hear me out today. Because this is darn important for us going forward.
If you buy into what I'm talking about, then you will have a huge advantage over your peers in your investments...
You will have conviction that you are doing the right thing... And best of all, chances are great that you will make a heck of a lot more money than just about anyone you know.
There's a crucial detail that tells us that investments are darn cheap today...
Interest rates.
We have record-low interest rates, which benefits companies (and their stock prices). And we have record-low mortgage rates, which benefits the housing market.
Let's stick with the housing idea to start...
The truth is that most people don't buy a house based on its sticker price... They buy it based on its monthly payment.
So I built a revealing chart. And it's one you likely haven't seen before. It's based on the simple idea that mortgage payments are critical in determining the "fair value" of the median house in America.
Three things are included in my fair-value calculation (all adjusted for inflation)...
- The median house price in America.
- The median income in America.
- Mortgage rates.
The result is fascinating...
In the 1980s, when mortgage rates were sky-high, houses were expensive based on my chart.
After that, interest rates went down, and by the 1990s, housing was fairly priced. Then the housing boom took hold, and by 2006, house prices were overvalued.
But the most fascinating part of all of this is what's happening today. Take a look...
You can see from the black line that house prices bottomed in 2011. That makes sense... Home prices had been crashing for years at that time. And since then, they've soared again.
That boom in house prices is what has people worried about real estate now. House prices have gone up so much, people think they can't go up much further.
But look at my "fair value" line in blue above...
Thanks to record-low mortgage rates, the fair value of houses in America today has actually gone up faster than house prices have gone up. The typical home in America is underpriced by about $75,000!
You've heard me say for years that the largest part of my financial portfolio is in Florida real estate. Now you see why... I'm putting my money where my mouth is on this trade.
Higher interest rates would, of course, make houses less of a "value." But we are not there yet. And with the COVID-19 recession, higher interest rates are still a long way off.
The Federal Reserve is going to do all it can to stimulate the economy, with the tools it has always relied on – and that means we are in for lower rates for a long period of time.
That's it, my friend. That's the thing that matters most in the market today.
We have record-low interest rates. And that makes housing a better deal than you can imagine. So if you're in the market to buy a home, don't put it off... You want to act now.
And the thing is, low interest rates are also creating big value for stocks, too. It's happening despite the rally we've already seen since March. And that's not the only reason to get excited.
Let me explain...
The interest-rate story is what makes real estate cheaper than you can imagine... And the same is true for the stock market.
Think about it... You earn about 0% with your money in the bank. But stocks at a price-to-earnings (P/E) ratio of 20 (20-to-1) have an "earnings yield" (E/P) ratio of 5% (that's 1-to-20).
When you buy a stock at a P/E of 20, you are buying an earnings yield of 5%. Compare that to earning 0% in the bank... or 0.6% on a 10-year bond.
So as you can see, the earnings yield is a way to measure value while keeping interest rates in mind. And it shows that stocks are a great value right now.
Even if stocks doubled in price to a P/E of 40, then their earnings yield would be 2.5% – which is still pretty good, relative to other investments these days.
Again, if you've followed my work recently, you already know this. But there's even more to the story.
Regular readers know I like to buy what's cheap, hated, and in an uptrend...
The earnings yield shows us that stocks are not expensive, thanks to interest rates. You can also see that stocks are in an uptrend – you don't need any fancy charts from me to know that.
But are stocks hated?
You've probably noticed that investors are talking more about the stock market this year. The ups and downs have gotten people's attention. And heck, we hardly had any sporting events to bet on for several months... Might as well bet on stocks, right?
It might feel like more people are buying in, which is an essential part of a Melt Up in stocks. But the data tells me that we are simply not there yet.
Remember, a Melt Up is the last big push of a major stock boom, when you tend to see the biggest gains. Stocks are loved in the later stages of a Melt Up... Investors start buying up stocks and stock funds to a crazy degree.
But that isn't happening yet...
This simple chart sums it up. Since 2017, investors have been consistently pulling money out of American stock funds (exchange-traded and mutual funds). And they have been consistently putting money into bond funds (which pay next to nothing!).
Take a look. More than $1 trillion has flowed into bond funds since 2017...
So is this a sign of the end? With the huge rise in stock prices this year, did you miss it?
No, and no.
There's plenty of upside ahead. So be bold, and take advantage of it!
Most other folks are too hung up on the new highs in stock prices. They're not willing to accept that stocks are a good deal, relative to bonds or money in the bank. But they are a good deal today – thanks to record-low interest rates. And as the chart above shows, they're hated, too.
I hope that you are bold enough to see these new highs for what they are. New highs in price mean nothing... What truly matters is what you get for your money – which is a lot today.
Yes, we are at new highs in stocks. And yes – significantly higher prices are ahead.
Good investing,
Dr. Steve Sjuggerud
Editor's note: The COVID-19 pandemic didn't stop the Melt Up... but it did change it. Now, Steve is throwing out his old playbook...
You see, Steve has been tracking a string of anomalies in the financial markets... And he believes most Americans are about to make a dangerous mistake with their money. Even folks like you – who know about the Melt Up from the Digest – could be in trouble.
That's why on Wednesday, October 21, at 8 p.m. Eastern time, Steve is hosting a FREE event to explain his latest thoughts... and detail how you should prepare. If you know exactly what's coming, this could be the first step to becoming incredibly wealthy – no matter what your financial situation looks like today. Save your seat right here.