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Is History Set to Repeat Itself?

Investor euphoria is reaching dangerous heights, with anecdotal tales of magical gains and methods once again growing in their frequency and scale. We discuss how to avoid letting such talk wreck your plan or mindset.


  1. Equity Markets – fell this week with U.S. stocks (S&P 500) down -1.47% while international stocks (EAFE) declined -1.77%.

  2. Fixed Income Markets – were mixed with investment grade bonds (AGG) up 0.18% while high yield bonds (JNK) fell -0.31%

  3. More Stimulus? – President-elect Joe Biden announced this week his $1.9 trillion “rescue package” to help further combat the economic downturn as a result of Covid-19. As of now the proposal plans to allocate $400 billion to combat the pandemic directly (expediting the vaccine rollout among the major goals), another $350 billion to help local and state governments bridge budget shortfalls, and up to an additional $1400 in direct payments to individuals. While many elements of the plan could pass the Senate with a simple 50-50 split, others such as state aid and money for health care could require 60 votes, a task that would require bipartisan cooperation.

  4. FED Not Hiking Anytime Soon – This week Fed Chairman Powell addressed a range of issues at a Princeton Q&A, with the most notable surrounding the Fed’s outlook on future interest rate hikes. Powell stated “when the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon.” The Fed leader also reiterated his stance that rates will remain low until the economy can recover.

  5. Key Insight – [VIDEO] Investor euphoria is reaching dangerous heights, with anecdotal tales of magical gains and methods once again growing in their frequency and scale. We discuss how to avoid letting such talk wreck your plan or mindset. [ARTICLE] In addition, to anecdotal tales from family and friends that usually hint at a market top, actually hard data is signaling warning signs for a number of parts of the stock market.



As I’ve stated before, I view one of the primary missions of these weekly commentaries to help address the greatest threats at any given moment to either our clients plans or even just their psyches – our clients’ peace of mind is as much a part of our job as the numbers within their plan or portfolio. No two investors are exactly the same, but we all share some hard-wired similarities in terms of how we approach money. At times that means addressing market risk (fear), while at other times its addressing market euphoria (greed).

There is no question right now where the greatest threat is coming from.

While it should go without saying that most people we talk to, whether they are clients or not, do maintain a healthy perspective we all can struggle doing so from time to whether due to a friend or family member that is in our ear with stories of all their success or the sensational news story that one may come across.

Today’s “hot advice” is usually coming in the form of hot stock tips and amazing tales of miraculous returns that oddly enough always seem to begin with “since last March I’m up …”

Strong markets make anyone look and feel like a genius. Ask to see their statements from 2008 or the before the recovery began last year.

Just how crazy is it getting out there? I pulled some data together to show you, and for you to have at your disposal next time some well-intentioned but half-informed friend is trying to wreck your day.

The Junkier the Better

You can explain and/or show an investor the mountains of historical data that demonstrates that most prudent way to build and maintain wealth is through fundamental analysis and diversification, but when the “fear of missing out” and emotions take over such talk can quickly go in one ear and out the other. During such periods, the tempting investment “theses” have little to do with real analysis and instead usually consist of little more than quoting a few months of past performance.

Commentator Fundamental Capital highlighted the current phenomenon of chasing the riskiest parts of the market with the following quote/chart, “The riskier an asset is and the less intrinsic value it has, the better the asset has performed since November. Moreover, this “wall of money” is not infinite, and is flowing into assets with smaller market caps.”

It never ceases to amaze me how people fall with for this type of emotional illogic over and over again, but emotions, greed, and jealousy are powerful forces that cause many to fall prey to the classic investing cautionary tale of telling themselves “this time it’s different.”

Hint: No, it’s not. It’s true, that market gravity can be suspended for longer than you think, but it will eventually manifest and timing it’s “arrival” is no more possible than believing in a fool proof process for a game of musical chairs.

Just how Stretched is the Stock Market?

Market commentator Lance Roberts put out some great graphs (see below) and info this week showing just how overvalued some parts of the market are (hint: they tend to be the most popular and well known). In the chart below you can see how stretched many parts of the S&P 500 have become during its epic run of the last few years. The size of the box is each stocks relative size in terms of its market cap, while its color corresponds to its valuation level (the valuation key is in the bottom right, with red being a P/E over 30)

I am NOT sharing this chart/info in order to tell you to sell something like Apple (AAPL) and buy Verizon (VZ), but rather just to arm you with some data about where today’s markets actually are and where they may be headed that is more useful than your buddy’s tales of all the money he’s made on Tesla (TSLA).

Just How Stretched are Investors?

In a different piece Roberts noted that investors currently hold the highest levels of equity exposure on record (first chart) as well as the highest levels of leverage via call options (second chart). Why are such point important? Market prices are at the end of the day a simple function of supply and demand and what those facts/charts tell you is demand (e.g. dry powder in the form of cash or conservative holdings) may be drying up.

Furthermore, as the following chart shows, the euphoria among many investors is quite literally off the charts as they cheer on the more speculative parts of the market.

Yes, the Fed is printing money, and yes such extreme market behavior can continue for quite some time which is why I am NOT telling you to sell out of your stock positions. What I am saying is stick to your process and your true risk tolerance, stay disciplined and diversified and consider trimming your winners if they’ve run to extreme levels.

Where Do you Hide?

Investors can take some heart from the fact that not all of the market is trading at crazy levels. In fact, one of the other historical extremes in today’s market is the level of dispersion in valuations within the S&P 500 as the following chart from JPMorgan shows.

The good news is that there are stocks trading at attractive valuations still to be found that also have genuine future catalysts that could propel them higher. The “bad news”/hard part is that taking advantage of that news means buying parts of the market that aren’t yet brag worthy and have who’s recent “past performance” wouldn’t look compelling … then again that’s what “buying low” has and will always mean.

Where you likely want to give some more thought to as a viable “hiding place” for a sizable part of your wealth are treasury and investment grade bonds. As Bespoke noted, “(Monday) was an interesting day as even though the VIX jumped more than two points, the yield on the 10-year US Treasury was also up by 2 basis points (bps). Normally, on days when the VIX has a big gain, investors are rotating into treasuries and pushing yields lower. The chart below shows the S&P 500 over the last ten years, and each dot represents days where the VIX was up at least two points and the yield on the 10-year also jumped more than two bps. In the last decade, there have only been 14 other days where we saw similar moves with the most recent occurring back in March 2020, but looking through the chart they have occurred at all different points of the market cycle.” What they are alluding to, is that the catalyst that was the Fed printing money that pushed both stocks and treasuries to all-time highs simultaneously despite their historic inverse correlation may be unwinding moving forward.

Goldman Sachs also highlighted the dilemma for fixed income markets this week noting that “Real yields on US investment grade corporate bonds have turned negative for the first time in history, reflecting the combined effects of accommodative monetary policy and a firming in inflation expectations. Against a simultaneous backdrop of all-time high duration, we believe fixed income investors need to be selective as ever.”

Again, to be clear we are NOT saying abandon your bonds, what we are telling you (and really what Goldman Sachs is saying too) is to be thoughtful and selective in your allocations.

The Path Forward

The path forward will almost inevitably have some bumps, as volatility is the norm not the exception, but the depth of any near-term pullbacks will largely be determined by the effectiveness of JNJ’s vaccine and thus the speed of the nationwide vaccine rollout and re-opening. The second key factor will be the passage of another round of stimulus which quite honestly looks like a troubled proposition given the ongoing dysfunction in D.C.

Being disciplined is rarely fun, exciting or cause to brag on social media – but then again the good news is I haven’t found too many examples of sustained investing success that would define their process that way either nor too many clients that have ever stated those as their actual financial goals.

Have a wonderful weekend and stay the course,

Tim and the team at TEN Capital

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