Welcome to the “Wile E. Coyote” Stock Market
Among the most pleasant memories of my Baby Boomer childhood are the Warner Brothers cartoons that played on television every Saturday morning.
Particularly beloved was Wile E. Coyote. In frantic pursuit of the Road Runner, the hapless predator would run straight off a cliff and continue to pump his legs in midair … until he glanced around, gulped, and plummeted into the canyon.
Likewise, the overbought stock market, which has been running on fumes, continues to defy gravity. How long can it stay aloft?
As it enters its eighth year, the aging bull market is overdue for a correction. While stocks typically have a trailing 12-month price-to-earnings ratio (P/E) of 15, they now hover at a trailing P/E of about 25. The forward P/E is 17.1, above the 10-year average of 14.4.
Last week, the monetary mandarins in the Marriner S. Eccles building finally saw fit to increase interest rates. The economy certainly is resilient enough to withstand higher rates. To be sure, inflation has yet to reach the Fed’s target of 2%, but it’s inching closer. Excluding food and energy, prices are 1.7% higher than a year ago. If Donald Trump fulfills his ambitious promises on federal spending, inflation should gather even more momentum.
The Fed spent 2016 deferring interest rate hikes; it’s now on course to accelerate them. Tighter monetary policy next year could pave the way for a bear market.
We’ll get further clues today about the Fed’s intentions, when Fed Chair Janet Yellen gives her scheduled speech on the state of the job market.
Regardless, Jim Pearce, chief investment strategist of our flagship publication Personal Finance, puts it bluntly: “I think the chances of a stock market correction happening in [early 2017] are between 25% and 50%.”
Wile E. Coyote is starting to sweat.
The “Next Apple” of Virtual Reality?
Richard P. writes: “The kids in my family all want virtual reality goggles for Christmas. How big an investment trend is this technology?”
Our Breakthrough Tech Profits team answers that question in a recent briefing:
“VR represents an entirely new tech ecosystem. Using a VR headset, it’s an immersive experience for users providing ‘presence’ in a virtual world. TV shows usually broadcast at 30 frames per second (fps), while moving images in VR are at 90 to 120 fps, creating a very lifelike 3D experience. There is huge market potential when it comes to supplying the semiconductors, infrastructure and equipment to support VR in both the consumer and business segments.”
They went on to say: “Over the next few years, the total VR market for hardware (including headgear displays), software content (paid downloads, subscriptions and in-app purchases) and advertising is expected to quickly ramp up.”
If you’re worried about a market decline but you’re unwilling to sit on the sidelines, the right technology stocks can be well-timed “defensive growth” plays. Among all S&P 500 sectors, technology has posted the largest increase in expected earnings growth since the start of the fourth quarter, to 5.8% from 4.3%.
An appealing small-cap opportunity in the tech sector is Vuzix (NSDQ: VUZI), which specializes in virtual reality products for business and defense applications.
The company’s products are worn like goggles that allow the user to view video and digital content, such as movies, computer data, the Internet, or video games through various mobile devices and gaming systems.
Instead of superimposing Pokemon characters onto your everyday life, Vuzix’s technology performs more practical functions such as guiding airline pilots and facilitating business meetings.
The company has already signed a contract with cloud and business mobility infrastructure giant VMware (NYSE: VMW) to incorporate its “smart glasses” into VMware’s productivity software.
With a market cap of $139 million, Vuzix is small enough to confer outsized potential for capital appreciation but large enough to withstand the inevitable shake out that is likely to occur among the thinly capitalized start-ups in the exploding VR sector.
It’s much easier to generate market-thumping gains from the thousands of investments outside the S&P 500 than by attempting to eke out a few modest gains from the overvalued big boys. Just ask the investors who became millionaires because they bought Apple (NSDQ: AAPL) stock in the 1980s.
Got questions or feedback? Send me an email: firstname.lastname@example.org — John Persinos
Plug into The Matrix…
I’m not referring to the famous movie, but to a radical new investing system our team recently released to the public.
For the past five years, Jim Pearce has worked on a secret investing project with a well-known MIT engineer. Together, they developed a proprietary trading method we’ve called the Rapid Profits Matrix. To date, this artificial-intelligence-driven algorithmic system has produced over 788 winning trades and counting.