The Worst Mistake an Investor Could Make Right Now
Editor's note: Fear is permeating the market... But it's not time to sell.
Between soaring valuations and the past week's roller-coaster ride in stocks, many investors are worried that the bull market is on its last leg. But Stansberry Research senior partner Steve Sjuggerud says all the negative sentiment right now tells us the exact opposite...
In short, investor panic is a sign that the market still has plenty of room to run. And while holding stocks through uncertain times isn't easy, Steve says it's the right move from here.
In today's Masters Series, updated from the October 4, 2021 Digest, Steve explains why fear creates some of the best buying opportunities... why valuations alone won't kill the bull market... and why the trend is more important than daily price swings...
The Worst Mistake an Investor Could Make Right Now
Last February, I made the biggest update to my "Melt Up" thesis in years...
As regular Digest readers know, I've been bullish for the past decade. I've urged my readers to stay long stocks that entire time, regardless of whatever worries gripped the market along the way.
I unveiled my Melt Up thesis in 2015. And it has played out just as I predicted since then... Stocks have soared to incredible heights once again, despite plenty of market fears.
That's because when it comes to peaks and bottoms, I've had the most success in my career using sentiment to time the market.
That's also why last February, my views on the market took a hard turn...
The Melt Down Will Arrive – Here, in 2021
That was the headline of the March 2021 issue of my True Wealth newsletter.
To put it simply, market sentiment had hit crazy levels at the time... Everyone was bullish. And that, to me, was the signal that the current Melt Up was coming to an end.
Remember, shares of video-game retailer GameStop (GME) had just soared more than 1,000% in a now-legendary short squeeze. The "GameStop story" became so popular that it quickly spread outside of the world of finance and into pop culture...
Folks plastered memes all over social media site Reddit to hype up the trade. Teens got on video app TikTok to talk about investing. And streaming giant Netflix (NFLX) started talking about turning the whole saga into a feature film.
It felt like we were quickly approaching a top – that moment just before the Melt Down where everyone who piled into the market looks around and realizes, quite simply...
There is no one left to buy.
That's when the panic happens. And it's why, at the time, I expected that we would see the Melt Down begin by the end of the year.
But when the variables change, my outlook changes with it. And last October, I announced that I was no longer expecting the Melt Down to begin in 2021. In fact, I now believe the Melt Up still has plenty of room to run.
I'm actually as bullish right now as I have been in more than a year. Here's why...
Is everyone you know in love with stocks right now?
Are you getting calls or e-mails from friends and acquaintances talking about the next hot initial public offering?
If I had asked you these questions last February, the answer surely would've been "yes."
I was personally flooded with these kinds of questions early last year. GameStop got things going... And then, the euphoria turned to other "meme stocks," cryptos, and just about anything else folks thought they could use to "get rich quick."
The story has changed dramatically since then, though... I haven't gotten any of these questions in months. No one seems to care anymore.
And in the case of the meme stocks, the data proves that out. GameStop is still up nearly 400% since the start of 2021. But excitement around the stock is nowhere near the levels from early last year.
Just take a look at the Google Trends data below. It shows Google searches for GameStop's ticker "GME" since mid-2021...
Search interest in the stock has basically gone back to normal.
In other words, the casual market observer no longer cares... The get-rich-quick attitude that many first-time investors brought to the market isn't in the driver's seat anymore.
This may not sound like a big deal on its own. But it's pretty crazy when you consider the year we've had...
The S&P 500 Index – which excludes GameStop – was up roughly 29% in 2021. That strong rally has come on the back of huge earnings growth from market giants like Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).
The U.S. economy is recovering, and the biggest companies are profiting from it. That continues to be true even after the market's recent drop.
Even with that reality, though, the majority of American investors are once again very scared about the stock market.
In fact, CNN's "Fear & Greed Index" shows that we hit "Extreme Fear" levels several times toward the end of 2021 – for the first time since the bottom of the COVID-19 crash in 2020. And with the market's recent sell-off, investors are getting scared once again. Take a look...
And as we've seen throughout history, these moments of extreme pessimism and fear – like what we're seeing right now – make the best opportunities for investors...
We saw it back in 2009, when everyone was still too spooked to buy. And yet, it turned out to be the greatest buying opportunity in American history.
Of course, we saw it again in mid-2020, when COVID-19 was still casting a long shadow of pessimism over our country's economy. And we all know what happened next... Stocks went on to double off their March 2020 bottom.
Today, stocks are hated once again. That's a far cry from this time last year, when hundreds of thousands of new investors were creating brokerage accounts... every single day.
Remember that bull markets only end at moments of extreme euphoria and positivity. That's when there's no one left to buy.
But as I've said, we simply aren't seeing that right now.
That's why I've changed my Melt Down prediction. As I explained in last Saturday's Masters Series, I now believe the Melt Up should easily push well into 2022... or beyond.
And yes, I believe that in spite of the sky-high valuations in stocks today...
I realize that for many investors, valuations are a key reason to be fearful right now.
But in a Melt Up scenario, you don't have to ask yourself whether stocks are cheap relative to the rest of history... They never are.
Instead, here's what you must understand... Valuations alone don't kill bull markets.
Let me share my personal experience with this...
Back in 1994, I was working as an international broker. Stock prices had gone up for 12 out of the previous 13 years. And as you might guess, after that extended boom in stock prices, most rational people at that time thought prices couldn't go much higher.
But then, they did go higher... Stocks soared 38% in 1995.
Based on the S&P 500's cyclically adjusted price-to-earnings ("CAPE") ratio, stocks had only been that expensive two times in history – in 1929 and the late 1960s. Take a look...
Not unlike today, those two previous peaks were significant. The Great Depression followed the 1929 peak. And stocks shed nearly half their value in the 1970s after the late-1960s peak.
So in 1994 and 1995, any rational person would've said again that valuations were extreme. But after soaring 38% in 1995, stocks jumped another 23% in 1996. And that still wasn't the end of it...
Stocks soared another 33% in 1997. By the end of that year, stocks had become more expensive than at any time in history. Take a look...
That was a sure "sell" signal, right?
Nope.
Instead, what happened next shocked all rational people...
The S&P 500 went up 29% in 1998. And tech stocks went up even more... The tech-heavy Nasdaq Composite Index soared 40% that year. Finally, in 1999, the Nasdaq soared 86% before the top arrived.
That's why I think the worst mistake someone could make right now is selling simply because stocks are expensive.
Yes, the current CAPE ratio of 36 is high... But no, that alone won't cause a market crash.
The Melt Up is still in place. And the last thing you want is to be kicking yourself for the next 10 years after missing out on the biggest, fastest gains in the history of the stock market.
I'm not saying it will be easy. There will be some days... weeks... even months... where it will go against every instinct to not sell.
You're probably feeling that way right now...
The S&P 500 nearly entered correction territory last Monday... dipping more than 10% below its January 3 all-time high before rebounding slightly to finish the day. The Nasdaq and the Dow Jones Industrial Average have experienced wild swings this week as well.
Interest rates have risen in recent weeks, too... The 10-year U.S. Treasury yield is up from around 1.2% in early August to about 1.8% today. Of course, when rates rise, it means more competition for stocks.
Plus, the Federal Reserve is planning on raising rates several times starting this year. As I explained last weekend, rate hikes won't immediately kill the bull market... But regardless, the news has investors worried.
When you look at those headlines – and watch the market stutter a bit – it's easy to be fearful.
But in the end, it's critical for investors like us to ignore the daily ups and downs that make the mainstream headlines. Instead, we must always focus on the overall trend.
And overall, despite the recent swings, stocks still have plenty of room to run. The huge sentiment shift makes me sure of it.
Good investing,
Steve Sjuggerud
Editor's note: Steve believes stocks will continue to soar... But even he admits that it's impossible to know the market's future.
That's why this past week, he joined fellow Stansberry Research senior partner Dr. David "Doc" Eifrig and Director of Research Matt Weinschenk for an urgent investment briefing. Steve, Doc, and Matt shared their playbook for how to come out on top of the wildest market in 10 years – no matter where it goes next...
It's a unique strategy that's better than any single stock, bond, exchange-traded fund, or crypto... And it has outperformed the S&P 500 over the past five years. Plus, this approach could take you as little as 30 minutes per month to use. Get all the details right here.