Will The Market Crash?
Some Thoughts Before Election Day
If you like this article, please do share it with a friend & click the ❤️ above. Thanks :)
If you’re new here, I share “buy-and-hold portfolios” that I believe can double in 3-5 years. You can see my Live Investment Scorecard here.
Performance of our 2 currently active portfolios:
To receive Realtime Notifications of my buys/sells, join the waitlist here
Will The Market Crash?
Market declines are common.
(Source: Link)
However, no one knows when they will happen.
The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent.
This is now known as Black Monday.
But did it matter?
Of course, in the short term it may have been scary. But it’s important to remind ourselves that if we focus on owning good businesses for the long term, then near term drawdowns are likely to be temporary. Good businesses adapt and continue to thrive in all types of economic environments.
Look at the 1, 5, and 10 year forward returns post Black Monday drawdown (and for every other major bear market).
Also, take a look at the chart of historical market prices…I bet you can’t even spot Black Monday…It’s barely noticeable.
That said, with the election coming up tomorrow, I find that some of my friends have anxiety about the market.
So I wanted to review a good framework I like about that conditions that need to be in place for a prolonged downturn. This is something I picked up from Leon Cooperman, former CEO Goldman Sachs Asset Management.
He says that markets go down for four reasons:
A Hostile Fed
A Weak Economy
Speculative Valuations
An Unexpected Geopolitical Event
First, we can ignore number 4, because it isn’t something we can’t predict. Life’s just simpler that way. Let’s look at the other three.
1. Do We Have a Hostile Fed?
On the contrary: The Fed isn’t raising rates, it has started cutting rates.
2. Is the US Economy Weak?
It’s hard to argue this is the case.
This is what Google’s Gemini had to say about the US economy:
The US economy is generally considered to be strong.
Job market
The job market is strong, with a decline in unemployment and more people joining the workforce. The labor force participation rate is at its highest in over 20 years.
GDP
The economy is expanding, with GDP growing faster than expected in the second quarter of 2024.
Inflation
Inflation is slowing from its peak, with the consumer price index (CPI) at 3.4% higher than a year earlier in December 2023.
Consumer Spending
Consumer spending is stronger than expected and is projected to increase in 2024.
Real Wages
Adjusted for inflation, workers' earnings are higher than in February 2020, especially for those in low-paying jobs.
3. Are Current Valuations Speculative?
Below is a chart of the S&P500 historical valuation.
Mean PE: 16.10
Median PE: 15.03
Max: 123.73 (May 2009)
The market is clearly not cheap.
However, there is a dichotomy in the market. The top 10 stocks are very expensive while the rest of the market’s valuation doesn’t seem crazy (though not cheap).
Let's take a closer look at the top stocks, aka, the Mag 7. Specifically, let’s look at the 2025 PEG ratio (the expected 2025 PE divided by the expected Growth).
A simple heuristic to analyze this number is:
If <1 ⇒ stock is cheap
If between 1 and 2 ⇒ fair value
If > 2 ⇒ stock is expensive
Results:
$NVDA: 0.78
$GOOGL: 1.63
$AMZN: 1.64
$MSFT: 1.71
$META: 2.07
$TSLA: 2.32
$AAPL: 2.32
The average is 1.78.
So as a group the stocks are valued at the high-end of “fair value.” But that’s not surprising. These are literally the best businesses in the world.
Although starting to get expensive, these definitely don’t seem to be bubble valuations.
Based on the above framework, it doesn’t seem like we are headed for a prolonged down market (no matter what happens in the election).
In Conclusion
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
— Sir John Templeton:
I don't see euphoria in the market.
Instead I see tremendous skepticism.
Which likely means we still have upside to come.
=> Do you agree or disagree?
Of course, none of the above should be considered financial advice.
If you like this article, please do share it with a friend & click the ❤️. Thanks :)