It is not a secret the market is overvalued, it has been so for a while. Despite that, it kept rising, so what gives? Is the fundamental value not relevant anymore?
It is, but you have to consider the overall economic conditions. The market was artificially pushed up by large institutions and the FED pumping so much money into the economy and killing any bond yields that these large institutions were held hostage and had to put their money somewhere. Well, it was the stock market.
So what’s different now?
Before, inflation was low and economy strong. Now, inflation is skyrocketing and economy is lagging (this is called a stagflation), which is one of the worst scenarios one can have. In such conditions, nothing really performs well (except for commodities maybe).
The worst thing is, the FED (and other CBs) don’t really have the possibility to raise interest rates to combat inflation, because the debt level are simply too high – they cannot afford to get more expensive debt. So now, a lose-lose situation presents itself; either we suffer high inflation and kill any real return and keep inflating the bubble until it bursts or hike the rates, possibly see some defaults and have a financial crisis.
Long-story short
As mentioned, the valuations are crazy high, even if you adjust for the low interest rates and cyclicality (CAPE). Tapering talks and new COVID-19 variants are the perfect catalyst for a massive drop, combined with razor thin cash-ratios of large institutions (2%).
Except for this, lots of signals are firing up, signalling possible downturns:
- narrowing of the term spread
- worsening economic conditions
- heavy put option buying activity and call selling
- buying activity in safe havens such as the Swiss Francs and Gold
Am I predicting a market crash?
No, but I wouldn’t be at all surprised if that happened. If I had to bet, I would say a correction will come. It of course might not – but I’m okay on missing out the returns if the stock market goes higher. Put simply, I am not willing to take the (for me massive) risk for the (in my opinion low expected) return.
That is why sold most of my stocks and went into cash for the coming 1-2 months.
If no crash happens
Then, I will simply rebalance, buy back and resume the stock ride. As mentioned, I am fine with missing out on the returns. If the crash happens though, I will be positioned perfectly with lots of cash for a market begging for it, buying the same great value stocks for even a better price.
Have I become a market timer?
The line is fine and I see how this might seem like market timing. And fair enough, to some degree it is (I explained in one of my articles why that is a bad idea). However, I am not trying to predict highs and lows and profits off of them – I am simply unwillig to take the risks, which are too high for me. If I miss returns because of that, I am fine with it.
Conclusion
In this rather short and practical article, I did not explain any value-investing topic and did not go too much into depth (because of time reasons at the moment). Rather, I tried to share why my portfolio changed rapidly to those who follow it and provide a brief update on my outlook on the market (which is not at all positive).
Invest safely!
