Driven by a worldwide pandemic, U.S. Stock Markets have been insanely volatile with a bear and bull market cycle that typically takes years crammed into weeks and months. What a ride!
In the first quarter, the S&P 500 had the bottom fall-out trading 34% lower in in what’s been tagged the “Coronavirus Pandemic Crash.” From there, prices recovered to end the year 13% higher.
Irrational Exuberance Returns to High Tech
Technology stocks exploded in 2020. All logic, reason, and rationality went out the window as NASDAQ had a replay from the Dot Com era of high tech Stocks zooming to insane price levels. We feel many of these high flyers may be poised for a 20% to 30% correction— if anything, anything at all goes wrong in coming months.
Extreme 2020 Winners
The FANG Stocks have evaluations that just beg for a 2021 correction. AdvisorPerspectives.Com reports the S&P 500 average P/E ratio since the 1870’s has been about 16.8. Here’s what it’s been over the last 50 years. Notice how the S&P 500 is trading in AN EXTREME BUBBLE ZONE as we closed out 2020.
Here’s the risk in high tech Stocks as we see it. The heroes of 2021 are trading in the twilight zone and may correct at any time taking the major indexes down with them. Facebook, Amazon, Netflix and Google (Alphabet) have been trading at 40X, 50X, 60X and even 70X forward PE light years beyond a 16 average or even the market’s 37 times earnings.
We detail the FANG Stocks because they are so closely watched and any correction that begins here would echo to the downside through all the markets— in a hurry!
Our Biggest Stock Crash Worries
It’s great to see U.S. Stocks riding a wave of success in 2020, but we remind you that we are in the middle of a recession and pandemic damage to the world economy unlike anything we’ve ever seen. It’s far from over as the Covid cases and deaths are peaking in early 2021 and the outcome for the economy remains totally unknown.
2021 Stock Market Fears Continue
Here’s a list of what worries us the most.
Covid Vaccines— Unexpected delays in vaccinations, disappointment in efficacy, or unknown side effects emerge.
Herd Immunity Fails— Dr. Fauci now says 75% to 90% of the U.S. population needs the vaccine to develop herd immunity. Surveys have shown 50% to 70% of Americans plan to get the vaccine leaving us far below herd immunity necessary for the economy to recover in 2021.
Covid 19 New Variations– Verified cases pass 21 million Americans with 359,447 deaths and expectations to soar in weeks after holiday travel and visitations. But the newly identified virus mutations threaten with a rapidly spreading variation.
Politics, Stimulus, Delays— Washington worries us a lot. A new President and Congressional stalemates threaten our health and livelihood. The inability to build a cohesive and effective stimulus plan could lead to the worse case condition— delayed recovery beyond the third or fourth quarter into 2022.
Debt, Bankruptcies Domino Across Economy—Business loan failures, credit card debt, personal loan problems, unpaid rents and mortgage delinquencies in 2021 could spell bad news for financial stocks, mall owners, and apartment ETFs. Bankruptcies tend to be delayed and create a domino effect in a recession.
Stock Buybacks— Yardeni Research shows S&P 500 share buybacks fell to $407.2 billion in the third quarter down from $800 billion annualized. A major driver in 2020 Stock increases has been companies bidding up their own Stocks. Buyback declines will result in falling Stock prices.
Stocks Twice As Expensive— At year end, the Shiller price-to-earnings ratio for the S&P 500 hit nearly 34, more than double its mean and median over the past 150 years. The 34 level is highly inflated second only to the dot-com boom (and bust) in late 1990s, early 2000s.
Overpriced Markets Revert to Mean— Crazy, wild, unjustifiable bull markets always revert to the mean. Between 1995 and its peak in March 2000, the Nasdaq rose 400%. Peak to trough, NASDAQ investors lost 78% giving up all its gains during the bubble.
Inexperienced Traders Could Trigger Selloffs— Today, short-term traders can overreact to any news event and selloff in a panic as we saw in March. It’s not just possible, but likely to happen again in 2021 hopefully with a less severe crash.
Our Opinion: Once again hopes, dreams, and unreasonable expectations by investors may end poorly. The false promises that somehow technology will save mankind and make us all rich have ended in disastrous Stock Market Crashes three times in the 21st Century. While you’re making lots of money now, locking in some of your profits may be the best approach.
Only with massive levels of Federal Reserve interference were the U.S. Stock and Bond markets saved in the March 2020 Coronavirus Crash. This has left market participants with the false believe that “markets” always come back.
In the Dot Com Crash, investors in the NASDAQ index lost 78% peak to trough. It was years before the NASDAQ reached that same level again.
Many investors lost everything as many high tech and Dot Com companies went bankrupt and disappeared. The present level in hype about high tech feels very much the same— especially in new IPO Stocks that have never made a dime of profit.
Pandemic Far From Over
In a year when the Covid 19 Pandemic and government officials closed down businesses, travel, restaurants, churches, live events and normal life, it’s hard to digest why U.S. Stocks could possibly sustain record levels.
We hope and pray we don’t have a second wave of market selloffs following the New Year’s rising waves of Covid infections, deaths, and lockdowns. However, we recommend everyone plan for the worse and protect their health and wealth.
We recommend a core holding of Gold to protect your portfolio. During the March Coronavirus Crash, Gold never traded lower than a few percentage points lower. By comparison the DOW Industrials fell 36%. In a flight to safety, Gold remains an excellent choice.
Gold for Insurance, Gold for Profits
We haven’t changed our beliefs or confidence in Gold. Before the year 2000, we first warned of a coming Dot Com Crash. Back then, we mailed thousands of emails to readers and urged them to buy up Gold while it was $258 to $300– before it was too late.
We gave the same warning of an imminent crash a year before the 2008 Financial Crisis and Stock Market Crash.
Here’s how things have worked out for our friends and Gold investors through the three U.S. Stock Market Crashes of the 21st Century. $COMPQ = NASDAQ and $INDU = DOW Industrial.