Stocks are expensive. That is why they are falling this week. This pullback in equity values is just a correction after last week's mania took the S&P 500's forward P/E to 19.2x on FactSet's consensus estimate, a level that hadn't been reached since May 2002. Pretty simple, isn't it?
No, it is not.
Investing requires a broad range of skill sets that most of the folks you have seen on TV this week simply do not possess. They do well when the market does well. They do poorly when it does poorly. When individual stocks rise they advise buying more. When individual stocks fall, they advise "caution."
To survive weeks like this one with your sanity -- and portfolio value -- intact, just put a little effort into it. Three tips:
- Pay attention to the rest of the world. I read the South China Morning Post every day, and I was seeing articles on the novel coronavirus before it had a name -- COVID-19 -- or a lethality that is really unprecedented. That kept me from jumping on the Dow 30,000 bandwagon.
- Read company filings: Tesla's (TSLA) enormous share price rise was spurred further by the company's January 29th conference call on which analysts failed to raise a single pertinent question. Eventually, though, the truth will come out. In Tesla's case, the belated release of their 10-K showed that the company's revenues in the U.S. fell 34% year-on-year in the fourth quarter after a 39% decline in the third quarter. This is a growth company? Not in its home market it is not, and that is why the shares were wildly overvalued at above $900 and remain so at $727.
- Do your own numbers. My EPS estimates for the S&P 500 are significantly lower than FactSet's consensus, and thus I believe the "real" P/E in the market was above 20x last week, a level that hasn't been maintained for 20 years. Why am I pessimistic? Well, the world's largest populace and second largest economy came to a dead stop in late January, and I am not seeing any evidence that China's economy is "back to normal."
Finally, always use your history. This week's bloodbath has taken the S&P 500 to the brink of 3,100. Oh, goodness! That is a level that was first breached in the long-ago, halcyon days of NOVEMBER 2019. Seriously, it was three months ago. So, if anyone is saying buy the dip, or this an opportunity, please pull that person aside and drop some knowledge on them.
In the bad days of March 2009, the S&P reached the low of 666. That figure was first breached in March 1964. Yes, the market was trading at a 45-year low. Amazing, so for these people to claim that a three-month retracement is some form of huge opportunity is jaw-dropping. Ignore please.
If you have individual stocks that you have thoroughly researched, I can't advise you against continuing to hold them. I am advising you not to buy more. The problem with selling is that, for taxable accounts, you likely have sizable capital gains in your holdings of (AAPL) , (MSFT) , (GOOGL) , (CRM) , etc., and would generate a tax liability by selling now. That's the point. In March 2009 virtually nobody had capital gains in any of their stocks, and that's why it was a buying opportunity. The situation is totally different after a decade of decadence in the U.S. equity markets, and this is far from a "generational" opportunity to throw even more money at stocks.
So, bye-bye and buy bonds.