What's going on with the stock market

It’s really been an amazing first half of June. I can hardly believe how much my portfolio has risen. At the end of May my portfolio was up 55.8% and just 2 weeks later it’s now up 76.9%! I have people asking me if I’m going to cash out. Hmmm. What’s going on?

The “market” (S&P500) is up less than 4% YTD. This is after 40 year low unemployment, subdued inflation, very strong economic growth and growth projections, very high EPS growth in the S&P500, and earnings projections point toward continued EPS growth. Looking ahead to the 2nd half of 2018, I think the results could be even better.

  1. The tax cuts have yet to drive the overall “market” higher.

  2. Companies have yet to take advantage of the opportunity to immediately expense 100% of CapEx spending. I believe that companies are going to strive to spend as much as possible in 2018 because they will want those instant tax deduction (immediate recognition of the CapEx in year 1 with no depreciation spread out over multiple years).

  3. FOMO is not yet back. People are still afraid of stocks. 2000 and 2018/9 are still front and center in the minds of people. They fear a crash more than they fear the FOMO. FOMO will return, and when it does we will see an explosion in the stock market similar to what we saw in 1998-2000.

  4. Technology is growing exponentially and most people can’t see it. Being invested in companies that will benefit from this is important. Being investing in mega trends and secular growth companies is key. Even if the “market” drops, the companies that are growing revenue 50-70% cannot be held back because the stocks must eventually reflect this success.

So when someone asks me if I’m going to cash out, I think I’d be a fool to do so. You can’t look at your increase to make that decision; that would be looking back. You must look forward. Are the companies that I’m invested in going to continue to growth this fast? Are the companies that I’m invested in overvalued?

Now there’s alway the possibility of a big shock. It would be a big geopolitical shock, it could be an unforeseen war, it could be another financial crisis. But if one worries too much about such things one would never invest and miss the great bull market that we are in. Yes, there’s a bull market but the overall “market” has not yet shown the growth in 2018 that we saw in 2017. Will our stocks continue to rise once the market takes off higher. I tend to think so. Below is a link to my portfolio update from January 3. I had some thoughts about the 2017 and what I thought was likely for 2018. Those thoughts still hold true for me today:

http://discussion.fool.com/gauchochris-portfolio-132018-32941011…

2017 was a phenomenal year. Some people say this can’t be repeated in 2018. I wouldn’t go so far to make that statement. Will 2018 be a repeat performance for the stocks that we have picked? I really have no idea. But I think it’s feasible and I think it’s certainly possible. It might even be somewhat likely. I know that I tend to be optimistic, but here are some things to consider:

1) If you look at my stock picks, you will see that 9 of 11 are in tech (or at least related to tech). The other 2 are biotechs that have some pretty interesting pivot events likely in 2018. Techs were sold off in December 2017. I think that a bunch of institutional investors rotated out of tech. I think it’s highly likely that there will be (maybe it’s already started in the first 2 trading days of 2018) a rotation back into tech. Investors will look for growth and growth is in these companies.

2) Tax reform has passed and the analysts (and the companies) have not yet have time to revise their earnings forecasts. This will happen soon. Cramer also said this today, and I agree with him. I think it’s highly likely that we will see a rally into earnings and during the earnings reports (late January through February).

3) The Fed raised rates in December. Will they raise 3-4 times in 2018? The real question is whether there will be evidence of inflation. Maybe we will see some movement there or maybe it will be less than the Fed and economists think (due to the deflationary pressure of technology). I’ve posted about my view of inflation and how people over estimate inflation and underestimate the speed with which technology advances. Technology advancement is happening faster and faster every day and it continues to accelerate. This is difficult to observe. Yes, the Fed has increased rates a few times….the pressure on the gas pedal has been lighted but with current rates the gas is still being pressed and the brakes have not been applied. Monetary policy is still VERY favorable to stocks and to growth stocks specifically. Now, with tax reform, fiscal policy will give stocks a very big boost in 2018.

4) Will there be additional fiscal policy that will favor large corporations? That might be infrastructure spending. I think it will be more difficult to get through than the tax reform. However, an infrastructure bill would further fuel growth.

2018 should be really interesting. I’m excited to see what happens. Good luck to everybody!

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FOMO came to CRSPR and CART. It’s not quite done yet with CRSPR. Hasn’t come yet for e-games.

I think the stock market was overlooked in exchange for Bitcoin FOMO over the last 2 years.

But overall, I think you’re right.

“So when someone asks me if I’m going to cash out, I think I’d be a fool to do so. You can’t look at your increase to make that decision; that would be looking back. You must look forward. Are the companies that I’m invested in going to continue to growth this fast? Are the companies that I’m invested in overvalued?” Chris

Thanks, Chris. Those two sentences are as precient as anything I’ve ever read on this marvelous board. A great reminder that forward looking is absolutely key to successful long term investing.

Jim

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FOMO is not yet back. People are still afraid of stocks. 2000 and 2018/9 are still front
and center in the minds of people. They fear a crash more than they fear the FOMO.

In my opinion, this is a stretch. With dividends, the S&P500 has generated positive returns
for 9 consecutive years now, and returned more than a 15% CAGR (with dividends reinvested)
since 1/1/2009.

In terms of sentiment, as of October 2017 the U of M consumer sentiment survey found that
investors were more bullish on stocks than they had been at any time during the past 17 years:

https://ei.marketwatch.com/Multimedia/2017/10/18/Photos/NS/M…

Additionally, the Wilshire5000-to-GDP valuation ratio is well above anything we have seen
since 1974:

https://fred.stlouisfed.org/graph/?g=qLC#0

Also, the Shiller CAPE ratio is at the 2nd highest level since 1890, only surpassed by the
final months of the year 2000 tech bubble (which is now considered the greatest single period
of stock market overvaluation in US history):

http://www.multpl.com/shiller-pe/

Finally, the S&P 500 price-to-sales ratio is now above anything we have seen in the last 25
years (page 5):

https://www.yardeni.com/pub/valcapsales.pdf


From where I am sitting, the above hardly screams “scared of stocks” to me.

If you made this post back in 2012, I think you would have had a much better case - remember
how things were back then? A negative headline would come out of Greece, and stocks would
immediately tank -2%. Today, a headline could hit that the entire European continent broke off
and was sinking into the ocean and stocks would barely register -.5% on the day. It’s just a
totally different environment today.

FOMO will return, and when it does we will see an explosion in the stock market similar to
what we saw in 1998-2000.

The melt-up thesis expounded by people much smarter than me such as Ray Dalio, Paul Tudor Jones,
Jeremy Grantham, and yourself is an interesting one.

But I find 2 things about this thesis to be alarming:

Firstly, I cannot recall a time in financial history where a parabolic blow-off occurred that
most investors were actually expecting. Usually, part of the reason that these melt-up events
occur is because they are once-in-a-generation moments that cause the herd to throw caution to
the wind and believe in a “new-normal” and chase prices higher.

Secondly, the year 2000 blow-off top is now regarded by most as an X standard deviation event
(or once in a generation mania). Is it wise to base one’s investment thesis around the idea
that a 2nd similar euphoria will grip investors again within a mere 20 year period? Seems risky
to me.


I’m not knocking any of the other points you made, and you may indeed be correct about a FOMO
blowoff phase happening soon. I just can’t characterize this current market as “fearful of stocks”.
Not by a long stretch.

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