Amid a rising market, high valuations should equal low expectations; Don't fall for Trevor Milton's ridiculous narrative; I'm home from my European trip
1) The S&P 500 Index closed at yet another all-time high yesterday...
The stock market is powering along, and folks are getting more bullish. But as I'll explain today, amid all this, I'm feeling a bit more cautious than I previously was.
First though, two recent Wall Street Journal articles help explain the S&P 500's big surge. Here's the first: The U.S. Economy Is Regaining Its Swagger. Excerpt:
Now businesses and consumers are regaining their swagger, and evidence is mounting that those who held back are starting to splurge again.
The stock market is reaching record highs. The University of Michigan's consumer sentiment index, which tumbled in April to its lowest reading in almost three years, has begun climbing again. Retail sales are up more than economists had forecast, and sky-high inflation hasn't materialized – at least not yet.
And here's another one: The Global Economy Is Powering Through a Historic Increase in Tariffs. Excerpt:
Faced with extreme uncertainty, businesses and households have surprised economists with their ability to hedge, finding a short-term path through as they await clarity on where tariffs will end up.
Global producers brought forward purchases and rerouted goods destined for the U.S. through third-party countries that are subject to lower tariffs. For the most part, households and businesses have continued to spend and invest despite the uncertainty, analysts say.
The world economy grew at a 2.4% annual rate in the first half of this year, around its longer-term trend, according to JPMorgan.
And as the article continues:
Trade volumes are buoyant, stock markets on both sides of the Atlantic have rebounded to record highs and growth forecasts from Europe to Asia are being raised.
Investment, manufacturing employment, spending and overall activity all held up globally, according to Goldman Sachs.
Considering the economy's resilience and the rising market, investors are getting more and more bullish...
As I noted earlier this month, many of them have been piling into the stupidest meme stocks. (For more recent activity, see this WSJ article from earlier this week, Kohl's and Opendoor Headline a New Class of Meme Stocks... and my friend and former colleague Herb Greenberg's column from earlier this week as well, Scraping the Bottom of the Barrel).
Amid all this, I'm becoming more cautious... not because I'm predicting economic calamity, but simply due to valuation.
As Creative Planning's Charlie Bilello noted in his latest Week in Charts blog post on Wednesday, "the S&P 500's price to peak earnings ratio has moved up to 26.5, its highest level since 2000 and 54% above the historical median."
Take a look at this chart from Bilello's post:
The story is similar going all the way back to 1871. Robert Shiller's cyclically adjusted price-to-earnings ("CAPE") ratio, based on average inflation-adjusted earnings from the previous 10 years, has been surging recently – and it just surpassed its high from October 2021.
Take a look at this long-term chart of the S&P 500's CAPE ratio from Multpl.com:
To be clear, unlike late 1999 and early 2000, I do not think we're in outright bubble territory when it comes to valuations. (And I don't believe, as I did starting in early 2008, that we're on the verge of an economic crisis.)
But as I've been saying all year, as stocks continue to rise, you should temper your expectations for future returns.
2) Starting nearly five years ago on September 11, 2020, I warned my readers dozens of times (archive here) about the scam that was electric-truck maker Nikola.
The company went bankrupt, the stock went to zero, and its founder and CEO Trevor Milton was convicted of fraud and sent to prison.
On March 28, President Donald Trump pardoned Milton, who is now trying to restore his reputation by rewriting history.
Don't believe a word of it.
For details, read this extensive post on social platform X by now-retired short seller Nate Anderson of Hindenburg Research, who exposed the fraud. Anderson begins by referencing his experience:
I am Nate Anderson, the founder of Hindenburg Research referenced repeatedly in this bizarre and fantastical interview. During my career, I helped expose numerous financial scams, including over a dozen Ponzi schemes and numerous instances of public companies lying to and stealing from investors...
I am immensely proud of that career including our work on Nikola Motors referenced in [a recent Tucker Carlson interview].
And as Anderson continues in the post:
Trevor Milton is a convicted fraudster held criminally responsible for the incineration of hundreds of millions of dollars in retail investors' hard-earned money. As should be unsurprising, Milton in this interview seems to just fabricate key events and information out of thin air – unfortunately with zero critical questioning or pushback from Tucker.
For starters, contrary to Trevor Milton's implications that his prosecution was some sort of Biden administration conspiracy, conveniently neither Milton nor Tucker share that the investigation into Milton was started and disclosed in September 2020 – under the first TRUMP administration and well before the 2020 election.
There were numerous inaccuracies throughout the interview.
As I said, don't fall for Milton's attempts to restore his reputation.
3) If you've been following along with me in recent weeks, you'll know that I've been in Europe...
Well, I just got back on Wednesday afternoon from my trip. It covered one- to three-day stops in: Zurich, Siena and Trani in Italy, Geneva, Megève in France (and other towns in the French Alps), London, Warsaw in Poland, Kyiv in Ukraine, Warsaw again, St. Moritz in Switzerland, and Molfetta in Italy... phew!
The last two days were spent visiting my friend Ciccio Azzollini, with whom I co-host the Value Investing Seminar in Italy every year.
There, I saw his new baby, Bianca, who is only a week old.
Longtime readers know that I love little babies! Bianca is a tiny little thing, weighing only 5 pounds, 7 ounces – but has a good head of hair. Here are some pictures:
Congratulations to you and your family, Ciccio!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.