Investors are ignoring the parallels between stocks today and ‘heady’ years of 1929, 1999 and 2007. Do this next, says strategist.
Post Labor Day sees investors returning to the S&P 500 SPX,
Supply chain problems being created by the coronavirus and its variants does raise that stagflation possibility, Matt Maley, chief market strategist at Miller Tabak + Co, told clients in a weekend note. “If/when it does, both the stock market and the bond market are going to react in a very negative way (and probably very quickly),” he cautions.
Maley has another warning for investors in our call of the day, as he ticks off a list of “strong similarities” between stocks now and the heady markets of 1999, 2007 and 1929. He’s not saying we’re going to see a bear market such as what transpired around those years, but thinks an “inevitable deep correction,” is more likely than most of Wall Street expects.
Here’s that list of similarities:
- The S&P 500 is trading at a lofty 22.5 times forward earnings and its price-to-sales ratio of 3.1 times is far costlier than in 2000. The Nasdaq-100 tracking QQQ exchange-traded fund QQQ,
+0.31% is trading at a 70% premium to its 200-week moving average, the biggest since 1999/2000. - “Blank-check” or special-purpose acquisition companies where investors have no idea what the investment will be. “The last time SPACs were as big as they are today? That’s right 1928/1929,” said the strategist.
- Leverage highs. Similar to 1920 and 2000, margin debt has shot to new highs, which is fine until it starts heading the other way. It has recently started to unwind and if that keeps going, markets have a problem.
4. Cryptocurrencies. Maley said he’s bullish longer-term on cryptos, but is concerned about “froth,” given a 1,000% gain for bitcoin since the Federal Reserve’s massive quantitative easing program began in 2020, with Ethereum up 3,400%.
5. Individual investors make up 20% of average daily volume for stocks, twice the level of two years ago. Many big market tops of the past — 1929, 1999/2000 — were marked by big jumps in investor activity.
6. From 1998 to 2000, lots of companies with zero earnings saw shares shoot higher and investors pile in, and Maley sees parallels with `so-called “meme” stocks of today.
Maley said he’s not predicting a pullback similar to those big years, and timing of any pullback is obvious tough. “However, it is our opinion that the risk side of the risk/reward equation has grown substantially over the past several months…and therefore, we believe that investors should raise a little cash at these levels,” he said.
“If/when this ‘everything rally’ ends, most everything will decline. Therefore, (at least) some cash will be one of the few hedges that investors will find successful if/when the market corrects,” said Maley.
Soros warns on China and Match headed to the S&P 500
Barclays strategists lifted their S&P 500 price target to 4,600 from 4,400, as they don’t see any Federal Reserve tapering triggering a “significant market selloff.”
Storied investor George Soros blasted BlackRock BLK,
Columbia Property Trust shares CXP,
Deutsche Telekom DTE,
Shares of Match.com MTCH,
Goldman Sachs GS,
Facing fierce social media backlash, videogame developer Tripwire Interactive has replaced its CEO who voiced support for a Texas abortion law in a tweet Sunday.
The markets
Stocks look set to hold near record highs, judging by futures ES00,
The chart
Goldman Sachs is worried that the delta variant of coronavirus, fading fiscal stimulus and a slower service sector recovery will weigh on consumer spending over the next few quarters. Their GDP view for 2021 has been trimmed to 5.7% from 6.2%, but to 4.6% from 4.3% for 2022.
Random reads
Tributes pour in for the late Michael K. Williams of “The Wire” and “Boardwalk Empire” fame.
“You bloody fool,” said the duck raised in captivity.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.
