Check out my interview on Money Life With Chuck Jaffe; 'Signs of market froth' amid the long bull market; I still don't think a big crash is likely
1) Just last week, I did a podcast interview on Money Life With Chuck Jaffe...
I've appeared on the podcast a few times over the years. And in this one, I acknowledged that while investors have some reasons to be nervous, the market remains near record-high levels... and isn't showing signs of being over-inflated and ready to burst.
As I also explained, fundamentals are strong, and the U.S. has the best-performing economy in the world. (As such, investors have correctly priced stocks at rich levels.)
And as I said in the podcast, while that makes it harder for value investors to find great companies that the market has knocked down or mispriced, it doesn't make the market scary... or mean that a big downturn is building.
The key message is that when you're in a bull market – as we are now – ride it!
Check out the full Money Life episode right here.
2) On that note, bull markets don't generally end with a sudden crash, but instead with a blow-off top before the crash...
For example, think of the Japanese stock bubble ending in 1991, the Internet bubble peaking in 2000, the real estate bubble into 2008, and the meme stock bubble in early 2021.
And right now, there are some warning signs – as this story on the front page of today's Wall Street Journal notes: Investors Spot Signs of Market Froth During Long Bull Market. Excerpt:
Investors are fearful that some market gains are outpacing typical measures of underlying value after strong economic growth helped power the S&P 500 to record after record in a nearly two-year bull market.
Trade wars and DeepSeek's challenge to the AI boom have barely dented the enthusiasm. Meme stocks are back, options are on fire and bitcoin is trading around $100,000. That makes some traders nervous, because rising speculation can lead to market imbalances that at times presage sharp corrections.
"There have been signs of froth for a while," said Seema Shah, chief global strategist at Principal Asset Management. "The market is vulnerable to disappointment."
One source of concern: Ordinary investors are really bullish about a handful of popular companies.
Check out this chart from the article showing four companies whose stocks have done particularly well:
In another sign of froth, bitcoin has nearly doubled over the past year, far exceeding Ethereum – as this chart from Charlie Bilello's State of the Markets blog post last week shows:
3) But these warning signs aren't extreme or widespread enough to make me think a general market crash is likely.
Inflation, as I discussed in my February 6 e-mail, remains muted...
And corporate earnings are strong. As Bilello notes in that same blog post, they're up 9.5% over the past year. Here's the relevant chart he shared:
My biggest concern is valuation. As Bilello shows in this next chart from his post, the S&P 500 earnings multiple is around the high end of its historical range:
But this doesn't feel like an extreme bubble about to burst...
It simply means that investors should have modest expectations going forward.
As earnings catch up to the current valuations, stocks could go sideways for a while.
4) While today I'm wary of bitcoin or a super-popular stock that has become a market darling (every study shows that piling into the hottest sectors is a sure route to ruin), if you were smart or lucky enough to get in early and are sitting on big gains, I'm not arguing that you should immediately sell – much less short – them.
To understand why, take a look at AppLovin (APP), about which I wrote negatively on February 3. Since then, the stock is 40% thanks to a strong earnings report last week.
With the stock now trading at 37 times revenue, I feel even more strongly that it's one to avoid. But if I owned it and had large profits, rather than dumping it all, I would likely use a trailing-stop-loss strategy to protect most of my gains yet still capture any remaining upside.
For example, I might sell 20% now and sell additional 20% chunks if it declined 10%, 20%, 30%, and 40%.
This stock also underscores why I've always said that 99% of investors should never engage in short selling – it's just too dangerous.
In particular, never short a stock with accelerating revenue growth...
Just consider AppLovin's quarterly revenue over the past five years. As you can see in the chart below, it actually declined for more than a year starting in late 2021... but has taken off since then:
Is a doubling of revenue enough to justify an increase of 50 times in the stock over the past two years? I highly doubt it...
But I would never short this stock on the way up. Eventually, the fundamentals will likely slow and the stock will crack... so if I were to short it (which I don't recommend!), I would wait for a 20% to 30% pullback when the momentum was broken and then ride it down 50% to 80%.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.