I don’t mean to alarm you, but I’m starting to get worried about the markets.
Now, let me remind you, I’m not a financial guru. And I certainly have no crystal ball. But as CEO of an investment software company, I can’t help but be plugged in to what’s going on in the investment markets.
I’m also not a permabear. In fact, longtime Money Talks readers may recall I shared my market outlook for 2021 back in January. And it was generally bullish — and correct, I might add!
For example, I told you I expected the Federal Reserve and the U.S. government to continue to flood the markets and economy with stimulus. (They have.)
I told you I expected this would continue to create a strong bullish tailwind for stocks, and I wouldn’t be surprised to see stocks greatly exceed their 2020 highs. (It has, and they have.)
And I told you that I expected the housing market would continue to benefit from this tailwind as well. (It has.)
But I also told you I saw some reasons for caution as well.
While the average American was doing well financially, the overall economy wasn’t as healthy as it appeared.
The divide between the “haves” and “have nots” had grown bigger than ever following COVID-19. And it was generally those who earned the least who suffered the most from the shutdowns.
I showed you that the stock market was getting pretty expensive on a historical basis. And a lot of money had become concentrated in a handful of mega-cap stocks.
Even more concerning, we were starting to see signs of excessive speculation and risk-taking among mom-and-pop investors that can lead to serious trouble.
And finally, I told you that it was probably a great time to buy (or refinance) a home.
But I also urged you to be conservative if you were considering a large investment in real estate. Prices in some areas were rising at a pace that was likely unsustainable for the long run.
Today, each of those reasons has become even more worrisome.
The broad market is now up more than 100% since the March 2020 bottom. And it’s now even more expensive than it was back in January.
In fact, according to some important metrics, the overall market is now wildly more expensive than it was at the peak of the record-breaking dot-com bubble in 2000.
The housing market became incredibly expensive in many areas as well. Prices now appear to be cooling off, but we’re already seeing potential signs of financial stress among homeowners.
According to financial news network CNBC, more than 30% of households missed their mortgage or rental payments in May, June, and July.
What happens to these numbers if home prices fall significantly, and some of these folks — many of whom presumably “paid up” to purchase a home in the last couple of years — suddenly find themselves underwater on a home they’re already struggling to afford?
Or what happens to landlords — many of whom already haven’t been paid for more than a year due to forced government forbearance — if their renters decide to walk away?
That is the same dynamic — though on a smaller scale — that fueled the housing crash last decade.
And to make matters worse, inflation has been soaring this year. The cost of everything from food and energy to used cars has surged. And again, these costs have mostly fallen on the folks who have already been struggling to make ends meet.
Finally, in addition to these market excesses, there are now new concerns around COVID-19.
Namely, the prevalent mutation of the novel coronavirus — known as the “delta variant” — has been sweeping the U.S. and the world.
This variant is more virulent than the original “alpha” variant that emerged in late 2019. And the latest data suggests that the existing vaccines are not as effective against it.
In addition, in just the last few weeks, several friends and acquaintances of mine have contracted COVID-19 despite being fully vaccinated. And unfortunately, two of those folks — including one otherwise healthy man in his early 40s with no known preexisting conditions — have since passed away from complications of the disease.
Of course, it would be foolish to place too much weight on a small sample like this. But it is concerning.
What if data starts to show that vaccine efficacy is even lower than we realize now? What if many folks get worried and start staying home again? Or worse, what if some governments begin to panic and decide to shut down nonessential businesses all over again?
Now, let me be clear. I’m NOT suggesting I want any of these things to happen. I understand that COVID-19 has become a divisive political issue, and I don’t believe politics has any place in a financial publication like this.
My point is simply that we could be facing new headwinds at a time when markets are more expensive than ever, and the economy is already looking a little shaky.
So, what do I think you should do with this information? Do I think you should sell all your stocks and stuff the cash under your mattress?
Well, if you’ve been reading Money Talks for long, I hope you can guess that my answer is a resounding “NO!”
That’s because here at TradeSmith, we like to keep opinions and emotions out of our investing. While it’s important to be aware of potential risks, we prefer to let our proprietary tools tell us when to sell any investment.
And right now, most of the stocks I track — including virtually all the stocks in my own portfolios — are still solidly in the TradeSmith Health Indicator Green Zone.
In other words, despite the worries I mentioned earlier, most stocks are healthy and performing just fine.
So, there’s certainly no reason to panic today.
However, this is a great time to take a good, hard look at your portfolio and make sure you’re properly managing your risk.
For those of you who aren’t TradeSmith subscribers — and especially those who are relatively new to Money Talks — there are three key ways to do this.
First, we recommend having a clearly defined exit strategy for every investment you own. You want to know, in advance, exactly when and why you’ll sell.
We prefer trailing stop losses. You can read more about them here and here.
Next, you want to make sure you’re investing an appropriate amount of money in each position. You can learn about proper position sizing here.
And finally, you want to make sure you’ve spread your money across a reasonable number of different investments like stocks, bonds, real estate, commodities, and alternative assets. You can learn about good asset allocation here.
If you do nothing else but follow these three simple ideas, you’ll be better off than 99% of investors. But there is one more trick we have up our sleeve.
You see, our powerful TradeSmith tools aren’t just useful for telling us when to sell an individual investment. They can also give us an early warning of broad market trouble before it arrives.
These “market health” tools allowed me — and thousands of our TradeSmith subscribers — to avoid the worst of the March 2020 crash entirely.
These tools personally saved me a fortune. And next week, I’ll explain how they work… and share exactly what they’re saying about the markets now.
In the meantime, if you have any questions or comments on what we covered today — or in recent Money Talks editorials — I’d love to hear from you.
You can reach me directly at [email protected]. As always, I can’t necessarily respond to every email, but I personally read them all.