Experts have been sounding the alarm about a stock market bubble for almost four years.
Once the Dow Jones Industrial Average broke 20,000 for the first time in early 2017, most experts were convinced we were in bubble territory. Did it burst then? Nope.
Then came early 2018, when the Dow crossed 25,000. Experts were shouting from the rooftops even louder. Did the bubble burst then? Not exactly. 2018 was a down year, with the Dow down 5.97% for the year, but not something you would categorize as a bubble bursting.
In 2019, the Dow came roaring back – up 22.34% from 2019, with momentum continuing into 2020 when it hit a record high of 29,551.42 on February 12, 2020. The bubble was sure to burst then right? Right, but not for the reason the experts had predicted.
In March, COVID-19 happened and the stock market shed almost a third of its value.
No expert had predicted a crash from a pandemic, but a curious thing happened. Instead of taking the typical 5+ years to recover from a crash of the magnitude suffered in March, it took the stock market only 5 months to return to near-record levels pre-COVID.
The experts are certain this time that we’re in bubble territory and that the bubble may already be deflating.
Why are they so certain?
Check out the warning from one of Wall Street’s own. In a letter to investors dated October 27, from Greenlight Capital, to paraphrase in Marketwatch, founder David Einhorn had the following to say:
“The top is in for the U.S. stock market after an “enormous” bubble in technology stocks popped last month.”
“Our working hypothesis, which might be disproven, is that September 2, 2020, was the top and the bubble has already popped.”
After all the alarm sounding done by the experts before September 2nd about a stock market bubble, what makes experts like Einhorn so certain now that we’re in bubble territory?
Before giving his reasons, Einhorn gave a little background about how bubbles work.
“Bubbles tend to topple under their own weight as all investors finally hop in, short-sellers cover, and the last buyer has bought (or bought massive amounts of weekly calls. The decline starts and the psychology shifts from greed to complacency to worry to panic,” Einhorn wrote.
Why should we be worried right now?
Here are Einhorn’s 10 signs leading up to why he thinks the bubble may have already burst:
- An IPO mania.
- Extraordinary valuations and new metrics for valuations.
- A huge market concentration in a single sector and a few stocks (Tech).
- A second tier of stocks that most people haven’t heard of at S&P 500-type market capitalizations.
- The more fanciful and distant the narrative, it seems the better the stock performs (Hertz filing for bankruptcy yet stock continues to climb).
- The outperformance of companies suspected of fraud based on the consensus belief that there is no enforcement risk, without which crime pays.
- Outsized reaction to economically irrelevant stock splits.
- Increased participation of retail investors, who appear focused on the best-performing names.
- Incredible trading volumes in speculative instruments like weekly call options and worthless common stock.
- A parabolic ascent toward a top.
What is the bottom line of all of this? Investors are insane… Get the hell out of the stock market!!!
Investors have shifted from greed to panic and if you don’t want your portfolio to sink with the boat, abandon ship. This isn’t the first analyst that has been sounding the alarm about the RMS Stock Market Titanic.
So once you abandon ship, where do you go?
You can’t stay out at sea forever. You’ll run out of supplies – the metaphor being your portfolio will be eroded by inflation.
Where to put your money?
Zig when others zag. Those who jump the stock market ship will likely put their money in something even more volatile like gold or Bitcoin. There’s evidence this migration is already happening. It will be the case of bursting one bubble only to start another one – this time involving gold or Bitcoin.
Put Your Money Where The Smart Money Is Putting Their Money…
The smart money is doubling down on tangible assets that are always in demand – assets that address a basic need.
Even during the Great Depression, there were companies that thrived because they catered to essential – goods and services people would always need. Even in bad times, people are always going to need food, shelter, household products, healthcare, communications, and security. Investing in a basic need is a sure proof way to withstand a downturn.
- Be fearful of the stock market.
- Be fearful when others are greedy.
Right now the greedy are either on Wall Street or if they’ve started to listen to the experts and jumped ship, they’re jumping into gold or Bitcoin. You should be just as afraid of gold and Bitcoin, which have both demonstrated to be even more volatile than the stock market in recent years.
Being fearful doesn’t mean staying adrift indefinitely. Follow the smart money that is investing in essential products and services that thrive in any economic condition.
That’s why we’re invested in affordable housing, specifically mobile home communities, a market segment that is already undersupplied in good times, but that is even more in demand in a downturn – making it a solid investment in any environment.