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The Scariest Chart In The World.

The positive “bull” market moved into never before seen territory in the third quarter, reaching its longest duration and one of its strongest up-cycle performances on record. Investors continue to believe this is good news. The U.S. economy is booming and Wall Street is reporting increased earnings and rising stock prices. While completely ignoring danger signs such as high stock prices, rising interest rates, inflation, crazy amounts of debt and trade wars. 

Right now, there appears to be little regard for safety and downside protection.

If you invest based on what you see and not on what you know, it is no different than jumping of a bridge because everyone else is doing it.

In this article, I will describe some of my biggest concerns with the current stock market. My hope is that this information empowers you to make better decisions with your investments today and in the future. 

I want to make sure you know I am not writing this article to scare you. I believe in the stock market over the long term as long as your assets are diversified, are not needed in less than 3 years and are invested in a way that reflects your risk appetite. 

Earnings Growth Skepticism

Much has been made of the strong earnings performance in recent quarters. My skepticism meter is blinking yellow as Wall Street reports earnings growth is 20%, while the economy growth is 3% and sales growth is even less. I understand we are experiencing a onetime positive event due to corporate tax cuts, but my concern is what happens to the stock market when that is no longer part of the equation. 

Scariest Chart in the World

Using the long-term valuations provided by The Leuthold Group, stocks today are in the 9th decile on a median basis, 10th being the most expensive. However, Wall Street’s version of valuations are “reasonable” as proponents like to say. 

Stock Market TopSomeone is wrong. Using much harder-to-manipulate data, price-to-sales, tells a different story. The Leuthold Group recently called this chart “the scariest chart in the world” as it shows a couple of indicators are as high as they were before the great recession in the 2000s.

In my opinion, the way investors feel about the market often reflects current trajectory with little regard to where the stock market might be heading. This way of thinking is what gets investors in trouble time and time again. 

This is very ironic to me, given how fresh the crisis is still in my mind. Many of the same mistakes are being repeated by investors today. A decade ago, most investors laughed at the idea of home prices falling. A house was a bullet proof investment and banks would back that up by lending up to 95% of the value of the home value. The economy seemed healthy and the market saw little reason to pay attention to high valuations. 

I believe investors today, have that same lofty confidence as they did in the early 2000s but this time it’s in high flying social media stocks and tech stocks. 

It is important now more than ever for investors to pay close attention to how much risk they are taking. 

Overuse of Index Funds and ETFs

Many people assume index funds and exchange traded funds (ETFs) carry not only low fees, but low risk. This may seem like a good thing but it’s important to know that these methods of investing are not as diversified as they may seem. For example, when investing in iShares U.S. Energy ETF (IYE) or iShares Technology (IYW), half of the money invested in these EFT’s is concentrated in only five stocks. 

Rising Wages

Wages continue to increase which lowers company profits and ultimately can affect the stock market. 

Warning Signs

Home sales are beginning to slow down and houses are staying on the market longer. While auto sales continue to decrease as evident in the recent news that GM is cutting 15,000 jobs. Overseas economies and buyers of U.S. products have softened, particularly in emerging markets. These are all warning signs that our economy might be taking a turn. 

Crazy Amounts of Debt

Excessive debt was at the root of the last financial crisis and today, across the world, debt levels are rising significantly. Government debt loads around the world has approximately doubled! Debt of all kind is up 75% over the past decade.

In general, what I have seen as an unsustainable market has persisted for longer than I thought possible. That may make me wrong on one level, but that does not change the reality of what I have shared with you. I would rather give up some potential growth than put my client’s financial future at risk. There are a few things that can keep this positive market growing, but at this moment a lot must go right and very little can go wrong for this market to continue to expand. 

Ready to review your current investment plan?

As a financial planner, I help individuals and families develop a financial plan that supports their definition of an ideal life. At Green Mountain Planning we do this in a no product sales or minimum environment and would love to have the opportunity to partner with you.

All of our engagements begin with a free no obligation introduction or second opinion review.

Call me at 970-620-8688

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About the Author

Nestor Vargas, CFP®For more than a decade, Nestor has helped his oil and gas professionals define their personal financial values to help build a plan that centers on rewarding outcomes. The journey, he believes, is every bit as important as the destination. He established Green Mountain Planning as a fee-only financial firm to avoid the pitfalls and conflicts of interest found in other agency settings. “I work for you, not any company or product.”