We Only Like All-Time Highs Here

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Why you should ONLY buy at all-time highs (no, seriously)… Inflation numbers hit hot, but consumers expect worse… Biden throws down the tax gauntlet… One stock to benefit from a generational wealth transfer (click here and you’ll automatically sign up to learn its ticker)…

By Michael Salvatore, Editor, TradeSmith Daily

I recently read a fascinating piece of research from Meb Faber, CEO of Cambria Investment Management.

It throws cold water on one incredibly common, but damaging assumption traders hold. One that, I’m finding, is especially prevalent right now.

See, most assume that if stocks are at all-time highs, they are “expensive” and investors should wait for a pullback before getting in. I hear this from my not-so-market-savvy friends all the time.

On the contrary, there’s a strong case that you should ONLY invest in stocks when they’re near or at all-time highs. Here’s how Meb Faber proved it…

For the study, Faber assumes you would own the U.S. stock market when it’s at or as much as 5% below an all-time high. Otherwise, you “switch” and stick all your money in 10-year Treasurys. If stocks rally again to within 5% of all-time highs, you switch back to stocks. Simple as that.

The result? From 1925 to today, you would’ve earned 9.6% per year… where a traditional buy-and-hold method earns you 10%.

Slightly lower returns, but get this… Your portfolio volatility falls by almost half, from 18.6% to 10.8%. And the maximum loss on your portfolio fades significantly. You go from a portfolio trough of 83.6% to just 29.1%.

Source: Cambria Investments

So you give up half a percent a year for much greater stability… I’ll take it.

And when you take the investment mix out to foreign stocks, you actually outperform a traditional buy-and-hold method both on returns and stability. Same with commodities, gold, real estate, and more.

With stocks, gold, and bitcoin all at new highs, sharing this idea with you seemed prudent.

❖ Zooming in, the inflation numbers are out…

The consumer price index (CPI) report hit yesterday, and while inflation came in slightly hotter than expected, nobody really seemed to mind. Probably because many, at least in the consumer sphere, were expecting worse.

While the CPI rose 0.4% over the last month, in line with analyst expectations, it rose 3.2% year-over-year against expectations of 3.1%. Core prices (sans food and energy) rose 0.4% month-over-month against expectations of 0.3%, and 3.8% year-over-year against forecasts of 3.7%.

Prior hot inflation readings were met with volatility, as investors interpret them as having to go longer without rate cuts. But this time, folks didn’t much care. Stocks largely held their premarket gains before the Tuesday open, and as I write the S&P 500 is up almost 1%.

Are we getting used to inflation? Too used to it? Ahead of the report, the New York Federal Reserve’s consumer inflation expectations survey provided a clue.

Three years from now, consumers expect inflation will be 2.7%, an increase of 0.3 percentage points from the last survey… and in five years, consumers still expect inflation at 2.9%, an increase of 0.4 points. Both of these are well above the Fed’s stated 2%-ish goal.

With the way the numbers have been coming in, it’s hard to fault the survey. Inflation may prove a long-lasting phenomenon, even if the worst of it is already behind us.

How to combat that? As ever, buy assets that will outpace the rate of inflation – aka capital-efficient and high-quality stocks at reasonable valuations… with a sprinkle of higher-risk growth assets like tech stocks and bitcoin.

As for when to sell them… well, keep an eye on Washington.

❖ Biden’s new tax policy is a mirror image of a Trump win…

If you make more than $1 million a year, you probably won’t like President Biden’s new tax policy.

And if you’re among the rare class of super-wealthy Americans, you might even consider selling your stocks before it goes into effect…

To attempt to pay for Biden’s proposed $7.3 trillion budget for 2025, capital gains taxes will almost double, from 20% to 39.6%, for anyone above the $1 million income level.

If that sounds like it won’t affect most Americans, you’re right. The Census Bureau found that less than 0.5% of Americans make that much. Even fewer will be affected by the 25% so-called “billionaire tax,” which we should really call the “centimillionaire tax,” as it affects not just billionaires but anyone with assets over $100 million. For context, a 2023 report found just under 10,000 people with that level of wealth live in the U.S.

Still, such a large increase in capital gains taxes is sure to cause some long-term profit-taking among the upper crust of the wealthy… and potentially, in turn, causing stock market volatility. (Remember, the top 1% of American earners owns more than half of the stock market.)

Apart from some smaller raises to Medicare and income tax to those making $400,000 a year, Biden’s next biggest move is to raise the corporate tax rate from 21% to 28%… and double foreign-earned taxes from 10.5% to 21%.

Okay, there’s all the numbers. Except for the biggest, scariest one: $45 trillion – the projected public U.S. debt over the next 10 years… even with these tax raises.

Emphasis on projected. Despite 2014 estimates of U.S. debt around $18.6 trillion by 2024, the U.S. currently holds $34 trillion. (What’s $15 trillion among friends?)

In other words, projections aren’t worth much. So let’s zoom out and think about what this really implies.

Plainly, President Trump’s tax cuts were a huge driver of U.S. stock market gains during his presidency. From the day Trump’s tax changes passed to the peak value of his presidency, the S&P 500 returned nearly 34%.

The tax cuts lit a fire under corporate profits… and if those laws reverse, the whole of earnings arithmetic will need a makeover.

As we’ve observed in the past here in TradeSmith Daily, continued optimism about stocks for the rest of this year may signal much of what the recent polls do – a Republican win.

And if the Real Clear Politics betting odds are anything to go by, that’s what we should expect to happen. (Though, Biden did get a post-State of the Union speech bump.):

If Trump wins another term, we’re likely to get even more aggressive tax cuts, which could keep the party in stocks going even longer. But if not… buckle your seatbelt.

However, here’s something we can count on regardless of who wins the election…

❖ Louis Navellier is preparing his readers for an $8.8 trillion wealth transfer (sign up for today’s 1 p.m. Eastern event with one click here)…

There’s a little-known dynamic lurking in the corner, away from all this… ready to make a huge impact on financial markets regardless of who runs the country, where inflation goes, or anything else.

A record $8.8 trillion has been hiding out in money market funds and CDs, with that pile growing over the past year, even as stocks soared.

Investors who’ve been traumatized by the 2022 bear market have seen higher interest rates as a safe haven. As rates have stayed high, these investors have yet to emerge. But soon, they’ll be forced out.

The Fed’s belated, but inevitable interest-rate cuts will simultaneously provide a boon to stocks… and suck the wind out of safe yields folks have hidden out in for the past two years.

When that happens, a select group of stocks is set to benefit more than any other: small caps.

The same stocks Louis Navellier – senior analyst at InvestorPlace and 40-year stock-picking expert – knows like the back of his hand.

In a special webinar broadcasting today at 1 p.m., Louis will share all his research on this situation – along with the name and ticker symbol of one stock set to benefit.

You can sign up for today’s event with just one click, right here, to make sure you’re among the first to hear about this stock.

And during the event, you’ll also learn how you can start receiving Louis’ elite small-cap stock-picking research during what could be the greatest time to be an investor in years.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily