Should We Worry About an Asset Bubble?
Back in 2008, global capitalism came within a whisker of collapsing. That year, the S&P 500 fell about 40%. I had a child in college and a home mortgage. I managed to stay employed, but millions of my fellow Americans weren’t so fortunate.
Observing the current bubble in the prices of homes and other assets, I’m getting flashbacks to that traumatic time. I don’t think we face another market crash of that magnitude. However, stocks are priced for perfection and particularly vulnerable to headline risk. Bad news, e.g. a sustained surge of inflation, a COVID setback, or central bank tightening, could send stocks tumbling.
For protection as well as growth, there are certain resilient, all-weather stocks that you should consider. I’ll get to them in a minute. But first, the good news.
According to research firm FactSet (the data provider for Investing Daily), Wall Street analysts on average predict the S&P 500 will generate price appreciation of 11.2% over the next 12 months.
The energy (+17.1%) and materials (+15.9%) sectors are expected to see the largest price increases over the next 12 months. The real estate (+4.2%) sector is expected to see the smallest price increase (see chart).
The estimated net profit margin for the S&P 500 for Q2 is 11.8%, which is above the five-year average of 10.6% and the year-ago net profit margin of 8.6%.
Stock valuations remain historically high. The forward price-to-earnings (P/E) ratio of the S&P 500 currently hovers at 22.22, compared to the 10-year average P/E ratio of 14.6.
To justify significant stock price appreciation, we’ll need to see a big improvement in corporate earnings. It appears that we’ll get it. So far, Q2 earnings are shaping up to be exceptionally strong, especially from the financial services sector.
On Wednesday in a choppy session, the Dow Jones Industrial Average rose 44.44 points (+0.13%), the S&P 500 climbed 5.09 points (+0.12%), and the tech-oriented NASDAQ slipped 32.70 points (-0.22%). The major indices continue to hover near all-time highs.
In pre-market futures trading Thursday, the indices were mixed ahead of Federal Reserve Chair Jerome Powell’s second day of congressional testimony.
In testimony Wednesday before Congress, Powell said that inflation would remain elevated for the rest of the year but would eventually calm down as supply chain bottlenecks caused by the pandemic are sorted out. Powell also cheered investors by reiterating to Congress the central bank’s vow to keep interest rates low.
The Federal Reserve operates under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.” It’s often referred to as the Fed’s “dual mandate.” Powell and his colleagues have been conducting a balancing act, by pursuing stimulus with only moderate inflation. We’ll see how long they can pull it off.
An ostensible positive that could become a liability? Soaring home prices. More than half of the homes in the U.S. are selling above list price, up from one in four a year ago.
Existing homeowners are feeling wealthier, but rents are skyrocketing and would-be homebuyers are getting priced out of the market. In a little notice development, private pension funds are gobbling up homes across the country, outbidding home buyers, and then jacking up prices for consumers.
Bubbles are more than just a dramatic surge in prices. There’s also an accompanying speculative sensibility that’s inherent to the definition.
Social media “meme” plays, multi-billion-dollar cryptocurrency initial public offerings (IPOs), special purpose acquisition companies (SPACs), non-fungible tokens (NFTs), and other faddish behaviors seem to indicate a market top.
Beware of FOMO…
There’s seemingly no end to Wall Street’s crazy investing fads. When the “Fear Of Missing Out” (FOMO) dynamic rears its head, you should get nervous.
I suggest that you forget meme stocks, crypto, SPACs, NFTs, and other exotic assets. Keep it simple, with these five safe, high-yielding stocks. These “bulletproof buys” have weathered every dip and crash over the last 20 years and still hand out massive gains. One of these companies hasn’t missed a single dividend since Richard Nixon was in office…and it’s still a buy! Click here for details.