A market melt up is more likely than a market meltdown; A 'Buffett devotee' made a big bet on crypto; I'm climbing the Grand Teton for KIPP NYC charter schools later this week
1) After all the chaos this year, everyone wants to know where the markets will go from here...
Well, two articles on this in recent days from the Wall Street Journal caught my eye.
The first appeared in today's print edition. And as it notes, a "run it hot" trade on Wall Street has been powering stocks ever higher. Here's an excerpt:
While slowing job growth and tariff-related costs remain primary concerns for investors, the core of the trade lies in betting on an economic resurgence, not a recession.
As the article notes, the thinking behind this is that tax cuts and lower interest rates will help the economy heat up. As such, that would fuel a "new burst of growth." As the article continues:
That line of reasoning has sent all manner of investments to records, from stocks to bitcoin to gold. Even if the labor market weakens further, many investors believe the near-term outlook remains bright, which they expect to fuel further gains across markets.
Meanwhile, the second WSJ article asks whether stocks are "headed for a meltup." As it says:
While there are signs that we may be in or entering that phase – near-record valuation, extreme market concentration and big gains in low-quality, speculative investments – the Fed's actions are being watched closely this time, too.
[Strategist Ed Yardeni] sees 25% odds of a meltup that would lift the S&P 500 to 7000 by year end and 20% odds of a correction. But he says the Fed cutting interest rates next week and signaling more cuts to come would increase meltup chances and decrease those of a correction.
Historically, when I've seen other investors become complacent and greedy – driving markets to all-time highs – I turn bearish. That's the kind of behavior happening today.
But I've often been too early with this kind of call. In fact, I've sometimes been years too early.
Long bull markets – like the one we've been in for more than 16 years, with a few brief hiccups – often go through an intense melt up phase at the end. This results in an enormous bubble. And then, the crash happens.
That second WSJ article mentions the tech stock/Internet bubble of the late 1990s... (I would also cite the "Roaring Twenties" bubble that ended on "Black Tuesday," October 29, 1929 – triggering the Great Depression. And I would cite the bubble with Japan's stock market in the late 1980s.)
Take a look at the chart below from the WSJ. It shows what happened to the tech-heavy Nasdaq Composite Index amid the Internet bubble:
Of course, the big question is where we are today compared with back then...
Is today similar to the beginning of 1999?
Or is it more than a year later – after the Nasdaq skyrocketed nearly 90% in 1999 and continued rising until its peak on March 10, 2000? (From which it then crashed by nearly 80% over the next two and a half years.)
I would argue that we're closer to the former. As I've said many times in my daily e-mails this year, I don't think we're in overall bubble territory.
Yes, stocks are richly valued. And yes, there are pockets of foolishness and speculation.
But when I look at the 10 largest stocks in the S&P 500 Index, which account for nearly 40% of its value, I'm only bearish on one of them: Tesla (TSLA). (That said, I still think it's too dangerous to outright short the stock.)
And as one example on the other hand (as I've discussed in many e-mails this year), I continue to love Alphabet (GOOGL) – even at current levels.
This situation looks different than the dot-com bubble peak in March 2000. Back then, the company with the biggest market cap – Cisco Systems (CSCO) – traded at nearly 200 times earnings.
Compare that to the forward price-to-earnings (P/E) multiples of today's tech giants:
In conclusion, I haven't been – and am still not – predicting a wild market melt up. However, I think it's more likely than a market meltdown.
So, if you own good stocks and/or index funds, my advice is the same as it has been the rest of this year...
Sit tight, stay the course, and keep expectations modest (I would guess the S&P 500 compounds at 4% to 5% over the next five years). However, hope to be surprised to the upside!
2) Another minor factor I'm keeping an eye on was mentioned in that second WSJ article from earlier:
Identifying turning points is more art than science. One informal sign is when skeptics can't stay away from the raucous party.
Another new WSJ article has a good example of this. As it notes, a Warren Buffett "devotee" recently made a big bet on cryptocurrencies:
Capital Group is a 94-year-old mutual-fund juggernaut known for its disciplined investing style. Mark Casey, a portfolio manager with 25 years of experience at the firm, quotes pioneering value-investor Benjamin Graham and says his "approach is very informed by Warren Buffett."
That is why it is so surprising that Capital Group has placed a huge bet on bitcoin – one of the largest by a mainstream investment firm – and that Casey has emerged as one of most outspoken backers of the digital currency in the so-called TradFi world.
And as the article continues:
"I just love bitcoin, I just think it is so interesting," Casey, 54, said on a podcast interview hosted by venture-capital firm Andreessen Horowitz last year, calling it "one of the coolest things that has ever been created by people."
In the past four years, Casey and his firm have turned less than $1 billion into more than $6 billion with investments in Strategy and other so-called bitcoin treasury companies whose sole focuses are loading up on the cryptocurrency.
When old-school Graham/Buffett/Charlie Munger investors like Casey throw in the towel and start speculating in high-flying Internet stocks (1999) or cryptocurrencies (today), it's a sign of a top.
But timing is key...
I don't see many traditional value-oriented managers piling into cryptos or crypto-related stocks.
So I don't think Casey's action is a sign of a bubble about to burst. Instead, this is more likely a potential catalyst for a bubble that hasn't yet formed.
Casey's peers must feel envy and pressure to keep up. When they all start to follow Casey, like lemmings going over a cliff, that will be the top.
3) Later this week, I'll be climbing the Grand Teton mountain in Wyoming with a guide...
The climb will cover 15 miles and 7,000 feet of vertical. Here's a map of the route:
This is the 10th year in a row that I've done a big climb to raise money for my favorite charity, KIPP NYC charter schools.
Over the past nine summers, I've raised more than $500,000 by climbing:
• Five Alps giants (the Matterhorn, Eiger, Mont Blanc, Jungfrau, and Monch)
• Tre Cime di Lavaredo in the Dolomites
• The Nose of El Capitan in Yosemite
• Mount Whitney (the tallest mountain in the continental U.S.) in eastern California
• Mount Shasta in northern California
• Mount Shuksan, Mount Baker, and Forbidden Peak in North Cascades National Park
The picture below, from July 4, 2016, was taken on the summit of my first peak: Mont Blanc, the highest mountain in the Alps:
In it, I'm wearing my favorite KIPP shirt. And I'll be wearing the same shirt on the summit of the Grand Teton after my climb.
It's a particularly special year because KIPP NYC is celebrating its 30th anniversary. So I'm dedicating my climb this year to this huge milestone and all that KIPP and its students have achieved in the past 30 years.
Wish me luck on the climb!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.