"You usually get a bubble out of that, and you get inflation out of that. Frankly, we now have both. This is the biggest bubble I've seen in my career. What are we going to get out of this? You're going to get a sugar high, then higher inflation, then an economic bust," Stanley Druckenmiller warned.

THE EVERYTHING BUBBLE

The argument, regarding whether or not we are in an ‘everything bubble’ is pretty straight forward.  Prognosticators argue that the Federal Reserve has created a bubble in the stock market, the bond market, and the housing market due to excessive money printing and artificially holding interest rates very low.

We can look at the data and you as the reader can make up your own mind regarding whether or not the prognosticators are correct.  We will focus on the following stock market valuations since most investors have a considerable amount of their investment capital in the stock market. 

STOCK MARKET BUBBLE

MARKET CAP TO GDP: The ‘market cap to GDP ratio’ is often pointed to as a gauge for stock market valuation.  In fact, it is reputed to be Warren Buffet’s favorite valuation gauge.  When dividing stock market capitalization by U.S. GDP we are at the highest level going back to 1870.  (chart source: The Gold Observer)

PRICE/EARNINGS RATIO: Another gauge for stock market valuation is the Price/Earnings Ratio.  FactSet outlines in the chart below that the Trailing 12-Month P/E Ratio for the S&P 500 is at a ten year high.

PRICE/SALES RATIO: Finally the price to sales ratio is considered by many as a good way to compare different types of industries, putting them on a level playing field.  The S&P 500 Price to Sales ratio is at a 30 year high by a considerable margin.

MARGIN ACCOUNT BALANCES: Investors can borrow against their securities, it’s called margin.  It creates leverage and can really increase the risk in an investors accounts (gains are accentuated and so are the losses).  Investors can wipe themselves out using margin.  The Federal Reserve tracks this data, the levels of using margin debt to speculate on the future returns of stocks has far surpassed the previous highs and is at a generational high.  We have never seen this high of a level of speculation (in my opinion).

WHERE DO WE GO FROM HERE?  COMPREHENSIVE CAPITAL PRESERVATION PLAN

Notable investors have been commenting on the market bubble for the past few years.

Above we reviewed some of the basic stock market valuation metrics.  These metrics are widely considered to be the standard approach for stock market valuation.

During his July 2021 interview with Bloomberg, Stanley Druckenmiller is quoted as saying "You usually get a bubble out of that, and you get inflation out of that. Frankly, we now have both. This is the biggest bubble I've seen in my career."   He went on to say "What are we going to get out of this? You're going to get a sugar high, then higher inflation, then an economic bust," Mr. Druckenmiller warned.

There are dozens of these examples, throughout 2020 and 2021, so investors and advisors have had many opportunities to put together their capital preservation plans.  We believe that it will be important to have a comprehensive capital preservation discipline in place, particularly if you are close to or in retirement.  A plan that matches up with your income needs.  If properly executed an investor would then be positioned to take advantage of lower prices on the other side of the (possible) recession. 

In our office we have a capital preservation discipline, Wealth Shield, that we utilize for our fee based, tactically managed accounts. 

Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.  Stanley Druckenmiller is not affiliated with LPL Financial, Highcroft Investment Advisors, or Gerald Asplund. 

LPL 1-05244176 

DEFINITIONS

Bloomberg - Bloomberg provides financial software tools and enterprise applications such as analytics and equity trading platform, data services, and news to financial companies and organizations through the Bloomberg Terminal (via its Bloomberg Professional Service), its core revenue-generating product.  Bloomberg L.P. also includes a wire service (Bloomberg News), a global television network (Bloomberg Television), websites, radio stations (Bloomberg Radio), subscription-only newsletters, and two magazines: Bloomberg Businessweek and Bloomberg Markets.

Dow Jones Transportation Average Index - The Dow Jones Transportation Average is a price-weighted average of 20 transportation stocks traded in the United States. The Dow Jones Transportation Average (DJTA) is the oldest U.S. stock index, first compiled in 1884 by Charles Dow, co-founder of Dow Jones & Company. The index initially consisted of nine railroad companies, a testament to their dominance of the U.S. transportation sector in the late 19th and early 20th centuries, and two non-railroad companies. In addition to railroads, the index now includes airlines, trucking, marine transportation, delivery services and logistics companies.

FACTSET – FactSet provides financial information and analytical applications to global buy and sell-side professionals, including portfolio managers, market research and performance analysts, risk managers, sell-side equity researchers, investment bankers, and fixed income professionals. FactSet's software platform, also called FactSet, includes real-time news and quotes, company and portfolio analysis, multi-company comparisons, industry analysis, company screening, portfolio optimization and simulation, predictive risk measurements, alpha testing and tools to value and analyze fixed income securities and portfolios.

FRED: Federal Reserve Economic Data – a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 500,000 economic time series from 87 sources.  The data can be viewed in graphical and text form or downloaded for import to a database or spreadsheet and viewed on mobile devices.  They cover banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, monetary aggregates, producer price indexes, reserves and monetary base, U.S. trade and international transactions, and U.S. financial data.  The time series are compiled by the Federal Reserve and many are collected from government agencies such as the U.S. Census and the Bureau of Labor Statistics.

Forward PE – The forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) earnings per share (EPS) of that company.  For valuation purposes, a forward P/E ratio is typically considered more relevant than a historical P/E ratio.

Margin Debt – "Margin" is borrowing money from your broker to buy a stock and using your investment as collateral. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it. But margin exposes investors to the potential for higher losses.

Price-to-Earnings Ratio - The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Price-to-Sales Ratio - The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues.  The ratio can be calculated by dividing the company’s market capitalization by its total sales or on a per-share basis by dividing the stock price by sales per share.

S&P 500 Index - The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.  The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ).  The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global.  The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most followed equity indices, and many consider it one of the best representations of the U.S. stock market.

Trailing Stop - The term stop loss refers to a general strategy whereby investors desire to limit declines in their investment holdings and avoid participating in a significant drawdown.  The strategy does not eliminate the possibility of loss, it is designed rather to cut short the trend of continued losses.  The strategy can lock in gains.

Trailing Stop Order - A trailing stop order is setting a stop condition, creating a moving (i.e. trailing) activation price.  Trailing stop orders have unique risks which include but are not limited to: 

·         Trailing stop prices are not guaranteed execution prices.  The price at which a stop order ultimately is executed may be very different from the stop price.

·         Trailing stop orders may be triggered by a short-lived, dramatic price change.  During volatile market conditions the price of a stock can move significantly in a short period of time and trigger an execution of a stop order.

·         Trailing Sell stop orders my exacerbate declines during times of extreme volatility.  Activation of sell stop orders may add downward price pressure on a security.

·         Trailing stop orders face risk from mechanical malfunction, system disruptions, some types of corporate actions (e.g. cash dividends), and bad price ticks; among other factors.

·         This service may be discontinued or limited at any time and without prior notice.

Wealth Shield – A rules-based discipline that has capital preservation as its’ primary objective.  The program exits investments that have broken a bull trend, shifting those investments into cash which is then ready funds to be reinvested into those investments that have superior momentum characteristics. 

The discipline can lock in gains or minimize losses, preventing further declines.  Wealth Shield acts as a brake when investments and markets generate downward momentum.  Please note that this service is only provided on the Strategic Asset Management (SAM) accounts that Gerald Asplund manages with discretion, it does not apply to any non-discretionary accounts such as brokerage, 401k, or insurance accounts.

 

IMPORTANT DISCLOSURES

This correspondence expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts therein and may be subject to change without notice.  Neither Highcroft Investment Advisors, Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein. 

The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.  This memorandum is being made available for educational purposes only and should not be used for any other purpose.

Some of the statements may be regarded as forward-looking statements. Forward-looking statements are, by their nature, subject to uncertainty.  Forward-looking statements may include assumptions relating to future investment and economic scenarios.  When used herein, the words “anticipate”, “believe”, “could”, “estimate”, “expect”, “going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “will”, “would” and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect an opinion relating to future events and are not a guarantee of future performance or developments. Reliance on any forward-looking statements involves known and unknown risks and uncertainties. Actual results and events may differ materially from information contained in the forward-looking statemen ts as a result of a number of factors.   Accordingly, you should be prudent with your reliance on any forward-looking information or statements.

Investing involves risks including possible loss of principal.  Past performance does not guarantee future results.  Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing.  Wherever there is the potential for profit there is also the possibility of loss.  No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.  International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  The fast price swings in commodities and currencies can result in significant volatility within an investor's holdings.

To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft Investment Advisors, Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.

Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.  The economic forecasts set forth in this material may not develop as predicted. 

Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.  

The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.

This report, including the information contained herein, has been prepared exclusively for the use of Highcroft Investment Advisors clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Highcroft Investment Advisors.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.  Investing in the index would require investors purchase an investment product, which would involve fees and expenses. 

ABOUT US

The advisors at Highcroft Investment Advisors provide retirement planning, investment management, financial planning, fiduciary investment management, and lifetime income planning. Certified Financial Planner. Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428). 

The advisors at Highcroft Investment Advisors serve as a 3(21) and 3(38) Investment Fiduciary and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans.  The advisors at Highcroft work with the union's counsel, recordkeeper, administrator, and the plan's trustees.  United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters.  Serving Wisconsin and Minnesota.  401(k) investment advisory services provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.

Working with business owners, individuals, and wealthy families near Wayzata, Minnetonka, Plymouth, Orono, Minnetrista, and Minneapolis Minnesota (55402, 55391, 55447, 55364, 55428).  As independent financial advisors we are not driven by certain products or services, instead we focus on your needs as an individual.  Services include investment fiduciary fee only, retirement and divorce financial planning, life insurance, capital preservation, lifetime income planning, bonds, stocks, ETF, income, IRA, brokerage, rollover IRAs.  Financial advisor near me, financial planner near me, independent planner near me.

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Markets Losing Momentum in the midst of an Epic Bubble and a Halt to the Printing Press?