In recent years I referred to the US stock market as being like an avalanche-prone snowy slope. There is no point trying to guess the shape, size, or timing of the final snowflake, the one which triggers the devastating collapse. You just need to know that this is the state of things, and be prepared. Don’t predict. Prepare.
Sometimes it can be observed that the vulnerability to that avalanche is even greater today than yesterday. Winds pick up, temperature rises, cracks appear. It is the same in the stock market, and various cracks have recently become more prominent in the US stock market, these being a sample:
- The percentage of US household assets in equities is the highest ever (i.e. over-commitment by those least prepared for, and least able to cope with, a collapse)
- The total value of the US stock market relative to the US economy (GDP) is the most expensive ever (what Warren Buffet calls “probably the best single measure of where valuations stand at any given time”)
- Junk bonds are their most expensive relative to risk-free US Treasuries since May 2007 (a superb indicator of the complacency which typically appears just prior to markets tumbling)
These cracks appear in markets fuelled by emotional investors. And it has been very emotional since the Trump clean sweep! A consensus quickly emerged that Trump is good for stocks. Consensus views have a tendency to unravel when reality bites.
In my experience one of the best short term timing indicators has undoubtedly been investor herding, and the rush for Tesla shares is a great example. They rose 69% in just 13 days after the Trump triumph. Stop and think….
…Tesla shares are valued at 100 times earnings (the so-called PE ratio). General Motors is valued at just 5.3 times earnings. Even Nvidia, the beating heart of Artificial Intelligence, is “only” valued at 36 times next years forecast earnings.
More starkly, the Nvidia valuation can be justified by explosive growth. In contrast, Tesla’s sales growth is slowing. As Fortune put it:
“Growing debts and shrinking revenues is a dangerous situation for any company,
especially one in as competitive a market as electric vehicles.”
But surely a flourish of Trump’s tariff wand will disappear that nasty Chinese competition? In the US, yes. But Tesla manufactures more than half of its global fleet in China, and relies heavily on China for a range of parts and materials.
Aha. Once you see this context, it reveals a more rational reason for Elon Musk’s nauseating sidling up to Trump And Co. Bluntly, if Trump hits China hard, Tesla is screwed.
If you have been tempted into Tesla, or Bitcoin, or similar in recent weeks I am not trying to be argumentative, as this creates a great opportunity for you to fundamentally raise your game as an investor, as we explained in Untethering The Inner Punter, based on a deeper understanding.
With the pivotal US stock market at emotionally-charged highs on various measures, what should you do? Is it clear that you should run for cash right now? Are there opportunities beyond the US?
On the one hand, I can’t see any textbook technical indicator screaming that a top is immediately at hand. On the other hand, markets don’t always move in convenient textbook shapes, if only. That is why FundExpert advocates the use of stop-losses, and why Dennehy Wealth applies them across all portfolios.
To be clear, a stop-loss is not a timing tool. Rather it ensures that you sidestep the possibility of devastating falls in your portfolio, particularly those which might become entrenched for years. Do read and re-read “Stop-losses and Momentum Don’t Work”. Let’s Look At The Evidence. The point is not to get complacent about stock market returns. They won’t be delivered to you in a nice neat package with a ribbon, which happens to coincide with the timing of your life plans.
Looking beyond the US for opportunities:
“For the long term, scarcely anything matters other than valuation. The more expensive when you buy, the less of a return you’re likely to get over a decade or more.” (John Authers)
Cheap valuations abound outside the US, within the UK, Japan, China, Europe, and greater Asia. Nonetheless, correlation is a difficult one. Basically correlation means to what extent can these markets, however cheap they might be today, resist the downward pull of sharp US falls. It is difficult to know in advance with useful precision, and be wary of computer models which provide confident answers.
So it comes down to these 5 steps:
- For the long term, decide on how much to allocate between these different areas with attractive valuations.
- Include a proportion to cash which gives you comfort – being able to sleep at night is important!
- Use our unique Dynamic Ratings to select the funds with momentum right now, Best Funds By Sector.
- Create stop-loss alerts, My Portfolio, another unique tool.
- Create an email alert when your funds are due for review – no one else enables this.
This is your investment plan. There is not one “right” investment plan. This one has the merit of a rational, evidence-based process, supported by a unique infrastructure of tools and alerts to keep you on the straight and narrow.
It allows for your Defence and Attack. Your attack is where to invest your capital, the defence is how to protect your capital.
Having an investment plan is not a perfect solution. Stuff still goes wrong. But it massively increases the likelihood of your longer term success. To not have a plan is like going up a mountain with no means to navigate, and no preparation for bad weather or accidents – don’t do it!
Frankly this is the easy bit. As I said in Personal Insights; Failing To Predict; Learning To Win, at an individual level investing is a revelatory process, and your personality is exposed, sometimes painfully. The most difficult bit about investing isn’t the process – it is the self-discovery, and finding coping mechanisms for our very individual foibles. Don’t start trying to figure out this emotive stuff when markets are collapsing!
Back to the markets over the last week, UK and Europe were up an unexciting 0.2%. The US barely changed. China (CSI 300) was down 2.5%, and Japan was little better. India fell most, by 3%. Commodities and gold were off around 2.5%, with gold miners off by 6%, while oil was up a little over 2%. Bonds stabilised after a poor week or two on inflation fears, and emerging market bond funds had a positive tinge.
The technical picture for the FTSE 100, the main UK stock market index, is at an important juncture. Ideally it needs to turn up quickly and confidently. If it does not do so, and breaks down through 8000, the immediate outlook becomes negative.
Next week I will consider how the Trump presidency could turn into a huge historical success, for the US and the wider world. It is not an angle which is being aired, and is a possibility.