We're Getting Way Ahead of Ourselves
Stocks are more expensive than ever... Bubbles are based in reality... We're getting way ahead of ourselves... This is how it feels in a market bubble... Signing up to lose money... There is a silver lining...
Fish gotta swim, birds gotta fly...
And I (Dan Ferris) have to tell you that this is a bubble...
Here in the Digest every Friday, I write to you about the investment themes, stories, and ideas I find impossible to ignore.
I can't resist the urge to share them with you.
And as you know, the massive market bubble we're living in has been No. 1 among those ideas this year. Once I see data that tells me stocks are more expensive today than any time in history... including the dot-com and 1929 peaks... it's too hard for me to look away.
I realize being bearish can be annoying, so today I've included a few of the most compelling types of stocks investors should consider buying right now.
I will get to those later...
As I said in my first Digest of 2021...
On the way up, it catapults you into the future... with asset prices rising on the highest of hopes.
Then, it wrenches you back into the past on the way down... as hopes go unrealized and investors flee risky assets in a panic.
Then I showed how the market had transported investors forward in time during the dot-com boom, then backward in time during the bust…
The Nasdaq Composite Index peaked at 5,048 on March 10, 2000. That moment provided a glimpse into the future – as the index wouldn't see that level again for 15 years.
Then, the time machine shifted into reverse at top speed... The dot-com bust took the Nasdaq down 78% to as low as 1,114 on October 9, 2002 – a level it hadn't seen since 1996.
Within a span of just 31 months, the Nasdaq time machine shifted from gazing 15 years into the future to six years in the past.
Eleven months later, the time machine is still in high gear. With three weeks left in 2021, the S&P 500 Index is up 24% as of today's close... That's historically a very high return.
Since January 4, 1928, the S&P 500 has increased at roughly 9% per year. This year's performance is more than two and a half times that historical average.
If we did the same exercise starting from the high closing price of the last bubble – October 9, 2007 – we get 8.1% per year. Let's say investors in the S&P 500 can expect 8.5% on average over the long term.
It doesn't sound like much, but I promise you, a way for millions of people with trillions in investment capital to make 8.5% a year for a long time without doing anything is the greatest thing that's ever happened in the history of investing.
But maybe we should expect even higher average returns over the next several decades...
Would it be so crazy to believe that the next decade will produce even greater returns than 8.5% as software continues to "eat the world," in the words of tech entrepreneur Marc Andreessen?
Those software businesses are way more profitable and capital efficient than the railroads and manufacturers that dominated the market a century ago... way more. They have the potential to produce much higher returns.
And just look around... There are cryptocurrencies, the metaverse, artificial intelligence, electric vehicles, 3D printing, genomics, space exploration, and even cannabis... It's an exciting time to be alive and investing for the future.
That's the thing about stock market bubbles... they're not completely without any foundation in reality. They couldn't even get going in the first place if they weren't based on something real.
The dot-com bubble, for example, was spot on in more ways than one...
The Internet really did change almost every business in the world and judging by the way the stock market soared back then, everybody knew it ‒ and they were right! Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) became the most valuable businesses ever created.
Virtually every great new business born since the dot-com peak is related to the Internet: Alphabet (GOOGL), Facebook (FB), Netflix (NFLX), PayPal (PYPL)... surely you understand how long such a list could get.
Looking around today, does anyone doubt that there'll be a lot more electric cars on the road in 10 years than there are today?
Or that virtual-reality technology will become much more popular, inspiring many to enter the metaverse, as I discussed in Tuesday's Digest?
The market gets these things right.
The problem for investors is that during a bubble, the market delivers the accompanying investment returns five, 10, or more years too early... and all at once, instead of gradually. As the trends take hold, they actually produce the boons that bubble-era bulls rightly expect.
But getting good investment returns is not about guessing at future business trends. (I can hear the keyboard cowboys typing, "But it is! It is!")
No, it's about allocating investment capital at a valuation that earns a return that is adequate to compensate the investor for the risk taken... And that's nearly impossible to do with assets that are clearly in a massive bubble, as stocks, bonds, many types of real estate, art, wine... and almost everything is today.
So here we are, at the end of another bubble year, stuck in the time machine, having earned roughly three years of return in a single year.
Would it be a surprise to learn that the time machine got ahead of itself?
No one should be surprised if the market time machine decides to take us back five to 10 years within the next two years...
That would take somewhere between 50% and 75% off the price of the S&P 500. You think it can't happen because it hasn't happened recently... but I promise it can happen. And it is virtually guaranteed that it will happen. Of course, I can't possibly know when.
The dire consequences of investing at bubble prices are not hard to find at all...
No matter how great the Internet turned out to be or how great a particular Internet-related business might have been, folks who got caught in the dot-com-bubble time machine by buying at the market peak got destroyed.
Some of those stocks were taken so far into the past that they've yet to get back to the present. Cisco (CSCO), AT&T (T), and probably a few others still haven't eclipsed their dot-com-era peak share prices.
I realize all those shares have probably changed hands so many times that the folks who bought in March 2000 have long since sold... But that's not the point.
The point is that equity is a long-term investment proposition, and the belief that you can pay any price no matter how high and still make a great return if you get the trend right is false...
And yes, I know that you could have bought Amazon and Apple at their dot-com highs and still made plenty of money. But good luck doing that with the bubbliest stocks, like Tesla (TSLA). It's really, really hard...
Now you understand why I said every market bubble is a time machine...
The current bubble is no different...
Near the bubble's highest point, all the money that gets invested should be expected to earn little or no return for a decade or more ‒ in some cases, permanently.
Check out the current earnings yield of the S&P 500. According to data compiled by Bloomberg, it hasn't been this low since at least 1954. Not only that, but it's negative. In other words, adjusted for inflation, the S&P 500 is priced to lose you money for several years.
Not every previous instance of a negative S&P 500 earnings yield was a precursor of a decline in the index's value. The point is not that this is a sell indicator. It's simply a picture showing that paying current prices is signing yourself up to lose money.
Nobody knows for how long, but economist and portfolio manager John Hussman's work suggests it's longer than most folks would ever guess... and longer than anyone can stand.
Hussman tracks five metrics that have correlated very negatively with the subsequent 10- and 12-year performance of the S&P 500. In other words, when Hussman's metrics are high, the S&P 500 has performed poorly over the next decade or so.
When they've been low, it has performed well...
I don't need to post Hussman's chart. Just take the earnings yield chart and flip it upside down... They're roughly the same.
Bottom line: his metrics have been at or near all-time highs recently, even when compared with the 1929 and 2000 peaks...
In other words, as I've said many times, stocks have never, ever been this expensive.
Though valuation is a poor timing mechanism in the short term, it is clearly the force of gravity over the long term. When I say, "stocks have never been this expensive," you should hear "return prospects have never been this bad."
In his most recent market comment, Hussman says all the market metrics he monitors hit an extreme he's never seen before:
[O]n Friday, November 19, we hit the motherlode. Across four decades of work in the financial markets, and over a century of historical data, I've never observed as many historical indications of a market peak occurring simultaneously.
I've seen similar statements from SentimenTrader.com's Jason Goepfert, though Jason is less consistently bearish and looks at dozens of different data sets.
I'll only speak for myself...
I'm not predicting a market top. I'm more concerned primarily with the relationship between risk and reward. At market extremes like we're seeing today, risk is much higher than normal ‒ and rewards are potentially much smaller.
And of course, I've never recommended selling all your stocks and heading for the hills. I've always recommended holding stocks, plenty of cash, some gold and silver, and maybe a little bitcoin... maybe.
Right about now, I wouldn't blame you for thinking, "For goodness sake, Dan, enough with the bearish hand-wringing!"
I hear you, but maybe you already know what I'll say about that reaction...
That's part of how it feels in a bubble. You get tired of hearing experienced, long-term, value-oriented investors who've seen it all more than once telling you how expensive everything is and how there's no way it will end well for many investors.
They'll be wrong all day long right up until they're proved right.
The real problem for someone like me, whose job is to highlight investment risks and opportunities for you, is that the bubble is so gigantic now, it tends to the be the story I can't ignore... so it winds up here in the Digest.
I wind up telling you more about the bubble than I do about some very attractive opportunities in the stock market...
So here it goes, I like silver stocks right now...
Full disclosure: I own a few shares of a silver stock exchange-traded fund ("ETF"), and there is probably some silver exposure in my and my wife's 401(k) via gold stock ETFs.
On this week's Stansberry Investor Hour episode, I spoke with Silver Stock Analyst editor Garrett Goggin... And man did he deliver! He gave us the names, ticker symbols, and investment thesis for three of his favorite silver stocks.
Garrett told us how one of those three stocks tends to rise more than any other silver stock when prices go up. Unfortunately, that also means it tends to move down more when silver prices fall, as they've done this year... To learn more about Silver Stock Analyst, click here.
I like cannabis stocks, too. They were in a massive bubble until their share prices all crashed, starting in February. At this point, they've fallen so far that the whole industry is one giant value play...
Cannabis Capitalist editor Thomas Carroll is more excited about these stocks than he's been since he started covering them several years ago. In fact, he sent me a list of 10 cannabis stocks that looked so cheap I wanted to stop what I was doing and buy them all right away.
Amidst a sea of overvalued equities, cannabis stocks and silver miners are two bright spots of opportunity. I bet you could place an equal amount of money into each stock on Garrett and Tom's lists, forget you own them for several years, and dramatically outperform the S&P 500.
Not only that, but Mike Barrett and I continue to find cash-gushing, market-dominating Crown Jewel stocks to recommend in our Extreme Value newsletter each month. The December issue, published today, features another one.
Mike knows more about calculating the intrinsic value of a business than I do...
Or anyone else I've ever met.
He's been contributing that expertise to Extreme Value for the last decade. Now he's doing it with small, early-stage companies in his own, new research service, 10x Investor. To learn more, click here now. This special offer ends at midnight tonight.
It's the same as with Garrett and Tom. You can put an equal sum into every name on Mike's list, and as long as you keep up with his updates, you'll probably make plenty of money.
Clearly, I can still get excited about buying stocks these days... In fact, let me just say this...
I will never fail to let you know when I'm excited about an investment opportunity, like the ones I've highlighted in today's Digest.
It's the primary job we all do here.
Mike Barrett and I do that every month for readers of Extreme Value. Stansberry Investor Hour guests do it just about every week. And of course, you're only receiving this Digest because you've subscribed to one of the many great Stansberry Research services.
But ‒ and I have an important but ‒ I'll continue to believe that it's very important to be the lone voice of all those you listen to who regularly reminds you that this is how it feels to invest in a bubble... and of the losses you can suffer if you're not careful.
Fish gotta swim, birds gotta fly, and as long as stocks trade at stratospheric valuations, Dan Ferris has gotta tell you to be careful out there.
New 52-week highs (as of 12/9/21): AbbVie (ABBV), CVS Health (CVS), Hershey (HSY), Lennar (LEN), McDonald's (MCD), and Procter & Gamble (PG).
Today's mailbag includes a comment about my Digest from Tuesday, as well as a "boots on the ground" observation on my colleague Kim Iskyan's Digest about the "bullwhip effect" with the supply chain. What's on your mind? Tell us at feedback@stansberryresearch.com.
"Just when I think you can't top your latest essay on crazy, you do. I thoroughly enjoy a good belly laugh at 5 [a.m.] with my morning coffee. Thank you and Mike [Barrett] for your work!" – Paid-up subscriber Londale K.
"I regularly drive by RV superstores. My recent observations have seen the parking lots literally overflowing with units.
"[Then] last night, I got an e-mail from a dealership asking if I am still interested in buying – I had inquired about one in 2019. The e-mail confirmed my suspicions... Peak demand has passed." – Paid-up subscriber G.H.
Good investing,
Dan Ferris
Eagle Point, Oregon
December 10, 2021