One of the Worst Times in History to Buy
One of the worst times in history to buy… 'U.S. stocks are priced for lousy returns for several years to come'... The easiest way to 'hedge' today… Why trailing stops are more important than ever… If you have any money in the market, you must see this…
Regular Digest readers know most stocks are expensive today...
In fact, the broad market has rarely been more overvalued than it is right now. As Porter noted in the April 7 Digest...
Right now, large-cap U.S. stocks (represented by the benchmark S&P 500 Index) are trading at higher levels than at any other time in history, except for during the huge tech bubble of 2000. The chart below shows you the ratio between the market value of these companies and their annual sales. This "price to sales" ratio is one of the best ways to measure the real value (or lack of value) in the stock market because there are ways to inflate other measures, like book value ratios and earnings...
But Porter isn't the only one here sounding the alarm...
In the latest issue of Extreme Value, our colleague Dan Ferris also warned subscribers that most stocks are extremely overpriced today. Here's Dan...
The dot-com bubble was the most overpriced moment in U.S. stock market history, as measured by Harvard business professor Robert Shiller's cyclically adjusted 10-year average price-to-earnings (P/E) ratios.
The dot-com bubble peaked at a Shiller P/E ratio of 44. The 1929 crash was preceded by the second-highest Shiller P/E of 30. Today's Shiller P/E of 29.4 makes this the third most expensive moment in U.S. stock market history.
According to daily closing price data compiled by Bloomberg back to 1990, the dot-com bubble was also the most overpriced moment by price-to-sales ratio (2.35 times sales). By this measure, today is the second most expensive moment in U.S. stock market history.
History is clear...
As Dan explained, investors who buy stocks at extreme valuations like this tend to earn poor long-term returns. More from the issue...
March 23, 2000 was the only other time besides right now that the S&P 500 rose above 2 times sales. From the day's close (1,527.35), the index fell 49% to 776.76 on October 9, 2002. The S&P 500 didn't get back to its 2000 peak price level until mid-2007. The S&P 500 didn't eclipse its October 2007 peak until the first quarter of 2013.
The moral of the story: buying when the S&P 500 trades above 2 times sales can be very bad for your financial health.
If history is any guide, we are now entering one of the worst times to buy U.S. stocks.
To be clear, Dan isn't calling the top today...
Like Porter, he understands that just because stocks are extremely expensive doesn't mean they can't get even more expensive. But he says he's certain that U.S. stocks are now priced for very poor returns over the next few years...
I'm not telling you to sell everything and head for the hills. I'm not telling you to sell short stocks and forget about them for two years. For all we know, the big stock indexes could still shoot up in a speculative frenzy. That generally happens when investors get really manic. My colleague Steve Sjuggerud calls it a "Melt Up."
I'm only recognizing that current data indicates U.S. stocks are very expensive and come with plenty of risk right now. "Prepare, don't predict," and you'll be much better off...
Calling market tops and bottoms in the big indexes is totally unnecessary and you're highly likely to be wrong. All you need to do is recognize that U.S. stocks are priced for lousy returns for several years to come.
So what should you do with this information?
If you consider yourself a conservative, long-term investor, Dan says your best options are also the easiest. First, simply refuse to overpay for stocks...
Second, hold plenty of cash, so you'll be prepared to take advantage of opportunities when stocks inevitably become cheap again. Dan writes...
Remember, you can't get rich in stocks if you don't have enough cash to put to work when great ideas show up... You pay nothing to hold cash. There's no market risk, no execution or business risk, no credit risk, and little risk of a permanent reduction in its intrinsic value...
Hold cash and wait for something better to come along. It doesn't usually take long for that to happen.
You should also keep close watch on your existing positions...
As regular readers know, we as a company think all investors should manage risk in their portfolios by using trailing stop losses...
But they're even more important when stocks are expensive like they are today. Our research shows they can dramatically improve your long-term returns compared with a simple "buy and hold" approach.
Along with proper asset allocation (how you spread your investments across different asset classes like stocks, bonds, commodities, real estate, etc.) and position sizing (how much you put into any individual position), they are a powerful way to protect your hard-earned capital.
After all, we may not be able to predict when the market will peak and stock prices will fall. But reversion to the mean is inevitable.
Every speculative boom in history has been followed by a bust. We'd be foolish to believe this time is different. What good is riding stocks to incredible heights during a Melt Up, only to give back all those gains and more when the Melt Down arrives?
Make sure you're prepared...
Again, we're holding a special live event tomorrow night to be sure every Stansberry Research subscriber knows how to protect his capital...
This free event will explain how to use trailing stops and other simple strategies to protect your portfolio – and earn the biggest potential returns – during the final "innings" of this long bull market.
If you have any money in the market today, you cannot afford to miss it. Reserve your spot by clicking here.
New 52-week highs (as of 5/22/17): AMETEK (AME), Amazon (AMZN), Alibaba (BABA), Blackstone (BX), iShares MSCI Italy Capped Fund (EWI), iShares MSCI South Korea Capped Fund (EWY), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), iShares China Large-Cap Fund (FXI), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), JD.com (JD), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), Naspers (NPSNY), Nvidia (NVDA), PowerShares S&P 500 BuyWrite Fund (PBP), and Tencent (TCEHY).
In today's mailbag, more great feedback on Porter's Friday Digest... and perhaps the most incomprehensible subscriber e-mail we've ever received. Send your questions, comments, and cries for help to feedback@stansberryresearch.com.
"Porter, I am a 'paid up' Stansberry Alliance member. Years ago, though I don't remember when, I found you and your company. I watched some of your sales videos, and started buying some of your newsletters. I bought several as you had various special offers on them. I read everything, and really understood your goal of 'Telling you what I would want to know if our roles were reversed.' After years of assuming that my high intelligence and education including knowledge of financial markets would make me a successful investor turned out to be untrue, I became loyal to the education that you gave to 'real people.'
"A few years into spending what was a really significant amount of money for a small player like me, I was invited to become an Alliance member by a member of your staff. I was quite impressed that a rather senior person on your staff called me personally to make this offer. The cost of this upgrade was extremely significant to me, as that amount of money simply added to my investments would be significant. However, by that point, I realized that good advice and the insight of really knowing what is going on is more valuable than putting that same amount money in my retirement savings (which I would have probably lost in the market by now).
"So, I did it, and now I am a lifetime Alliance member. I have all you offer for life, and I intend to use it on a daily basis as long as I am still kicking. If at all possible, I will leave it to my son to build his life starting much younger. I hope he then teaches his children like I never was.
"This leads up to my point. I have been reading the Digest for years, and I love the 'free' insights it gives into what is really happening, and I particularly look forward to your personal issue on Fridays.
"This Digest titled 'Are you an amateur or a pro?' was my favorite ever. You asked how I felt Wednesday. You asked how I did. I watched the market open that morning, and seeing the market open down, with gold up, as often correlates, I was giddy. How did I do? Frankly, it was my best day in several weeks.
"I have 2/3 of my money in your Total Portfolio, and was excited to see how your low volatility long recommendations would do in a down market, and how the hedges would do in the same.
"I have 1/3 of my portfolio in a 50:50 combination of your Stansberry Gold & Silver Investor portfolio mixed with John Doody's gold and silver stock portfolios. I believe that the extreme creation of 'money' by governments around the world will finally catch up with reality, and the price of truly valuable commodities like gold and silver will reflect the extremely diluted value of fiat currencies (as I mostly learned from you). I am prepared to hold this 1/3 of my portfolio long term through extreme pain (losses) because reality can be delayed, but never avoided. I have time to wait for reality to catch up with whatever it is we are living in today. This will make some real profits given time...
"Wednesday, when the market 'crashed' by less than 2%, your Total Portfolio long positions held up reasonably well. Your Portfolio hedges rocked. Avis has made me several thousand dollars on its own. My gold and silver positions exploded.
"On the Wednesday you asked about, my portfolio beat the S&P by almost 6%! People were panicking. WTH? I MADE money! I made money in recent 'up' market days too. This is just the icing on the cake of a well thought-out strategy!
"I have learned... from you. I was as stubbornly wrong in how I approached investing as anyone, but given some effort, your advice and trying to accept, internalize and really 'learn' (as there is 'no such thing as teaching'), I have become a real investor.
"As the Digest said, 'Are you an amateur, or a pro?' Wow! I had no idea, but as my future depends on this, I may actually say, I am a 'pro' per that Digest. Finally!
"I was excited to see the market open Wednesday, and I checked it from time to time over the day at work. I got more and more excited to get home and see how I did. I KNEW I beat the market... but by how much? Wow! It was a lot! I did well.
"Bring it on, whatever it is! You have me prepared, and I will stay that way because am LISTENING and thus learning. I'm becoming a pro at creating wealth, stability and a lasting future for my wife and myself. THANK YOU!" – Paid-up Stansberry Alliance member John L.
"I was feeling a bit discouraged because my 'folio was lagging the big indexes. Then Wed. came and my 'folio was FLAT while the mkt was down. A great reminder that following your (as a group) advice about diversification, balance, and position size is THE right way to invest! Thanks." – Paid-up subscriber Woody B.
"I never send comments in positive or negative, mainly because of my time restraints. I would like to comment on Wednesday after the 320-point market drop, I smiled because my portfolio built with your recommendations dropped 1%. I also took advantage and added additional shares because of your insights and thoughts to several positions.
"Please thank everyone at Stansberry for ALL the forward thinking, great articles and recommendations like my TradeStops account making today's markets, with your help, more manageable and more profitable! Thank you again." – Paid-up subscriber Michael B.
"I just read your responses to the questions in the May 19 Digest. Just when I thought my satisfaction with my subscription couldn't rise any higher, you once again amaze with a rare combination of wisdom and comedy in your responses...
"'Horse meet water,' 'folks... end up dying in a fire because no one told them which exit to use,' 'Red, Green, Yellow... hard to understand... do you drive?' Where in heaven's name do you get these hilarious jabs? I must have gone to the community college of sarcasm instead of the Ivy League University as you obviously did. Golly, and I was only expecting some financial guidance when I subscribed!" – Paid-up subscriber Randy Travis
"I don't know how you put up with the whackos, but I guess whenever you are in business it goes along with the territory. I'm no stock picking pro, but I've learned enough through years of experience (the hard way) that bumps up and bumps down in stock prices overall (aka the market) usually don't last when the trend is going the other way. Keep up the good work. Your analysis is the best I've found anywhere." – Paid-up subscriber Al Rutherford
Brill comment: You have no idea, Al...
"reply:) Are You an Amateur or a Pro? What is really going to bake your noodle is, would you have spoken against 'me', but not the Spirit, three time. If it was made known to me before the appointed Time of the, Three Times?" – Paid-up subscriber Scott T.
Regards,
Justin Brill
Baltimore, Maryland
May 23, 2017