Everybody Is Making the Same Mistake

Out of touch... The market concentration issue... Where markets do the most damage... First Solar vs. ExxonMobil... Two trouble spots for investors... Singing my song until the end...

I don't know if I've ever felt this out of touch with the zeitgeist...

On Tuesday, the world waited with bated breath to see which U.S. presidential candidate would get elected. Everyone seemed to think it was really important.

I didn't think so and said so many times in these pages.

Still, the market seems to think it's great that Donald Trump won. The S&P 500 Index was up more than 2.5% on Wednesday, and it's up more than 3.5% overall since Tuesday's closing bell.

But ultimately, I don't think his victory means anything for investors.

Even worse, I doubt that a guy with a track record of borrowing big (bigger than Joe Biden) and spending big is anything for financial markets to be thrilled about. Trump didn't "drain the swamp" during his first term, and I doubt he'll do any such thing in his second.

In fact, it's unlikely much will change in the government. It'll keep spending, borrowing, and trying to infringe on your civil liberties wherever and whenever it can. That's what the government has done during every presidential administration in my lifetime.

Overall, investors should view the election as a nonevent for their portfolios. Folks said, "If so-and-so wins, I'll sell it all!" in 2016, 2020, and now again in 2024. It was dumb all three times.

So is the belief that Trump winning means there's less risk in one of the most expensive stock markets in U.S. history. It's a huge mistake to believe that the market's short-term action in the wake of the election is some kind of signal telling you, "All is clear for the next four years"... or even four months.

The past three days of trading are as insignificant as any other three days. The market isn't talking to you. If you understand that, you'll have an advantage over anyone trying to trade around the election, or worse, totally reallocate their portfolios based on who won.

The overwhelming majority of the time, doing nothing with the stocks you already own – given that they're decent businesses – is better than doing anything.

Most of the time, investors seem content with keeping their heads down and focusing on whether a particular stock is a sound investment or not. But every now and then, the market gets a little too bubbly.

Stocks get expensive and investors become breathtakingly confident about making "easy" money... which is happening right now.

Given how thrilled everyone seems to be with the election results, it seems more important than ever to remind you of how expensive the market is right now.

There's also the troubling issue of market concentration...

Right now, for every $1 you're putting into the S&P 500, about $0.35 of it goes into the top 10 stocks: Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), Alphabet (GOOGL), Berkshire Hathaway (BRK-B), Broadcom (AVGO), and Tesla (TSLA). That's nine names because Alphabet has two classes of stock.

If you take out Berkshire and Broadcom, you're left with the "Magnificent Seven," which account for nearly 32% of the index. Investors have fallen in love with these stocks and believe they can do no wrong. And they believe these companies' huge investments in artificial intelligence ("AI") will make them even more valuable. Folks take it for granted that AI will become as important as the Internet itself. We've seen this story play out with other technologies and trends at the top of every bubble in history.

According to the Solactive Magnificent 7 Index, these stocks are now underperforming the overall market. Both the S&P 500 and Mag Seven peaked in July. In September, the S&P 500 started hitting new all-time highs again. But the Mag Seven didn't hit their first new high until this Wednesday. Since the Mag Seven Index peaked on July 10, it's up about 3.5%, while the S&P 500 is up about 6.5%, nearly twice as much.

But investors prefer the longer view when they're looking at the Mag Seven. They're up more than 2,000% over the past decade, compared with 193% for the S&P 500 during the same period. Investors would prefer to make 2,000% over the next decade than 193%, so they keep buying what has worked.

This is setting many folks up for massive disappointment. As asset management firm Fielder Capital's founder and managing partner Frank Byrd pointed out in June:

Markets have a tendency to go wherever they can do the most damage.

What could be worse than everybody in the market convinced that buying index funds is the safest thing they can do... at a time when it's virtually guaranteed to garner the most mediocre returns for years to come?

Byrd makes the problems with investing in a market-capitalization weighted index like the S&P 500 clear by asking a set of simple questions:

Do you believe that Wal-Mart is 4x more compelling an investment than Target? If you owned an S&P 500 index fund, that's the bet you'd be making. The index is weighted by the market size of each company. Since Wal-Mart is quadruple the size of Target, you'd own four-times as much of it in your index fund.

Do you think the outlook for Home Depot is twice as strong as for Lowe's? Hope so, considering your index fund owns twice as much of it.

Is Exxon a better investment than First Solar? Maybe you think so. But is it 19x better? That's the relative size of the bet you'd be making in your index fund.

I can't imagine putting 19 times more money into First Solar than in ExxonMobil, which is by far the greatest capital allocator in the oil and gas industry.

Likewise, do you want to put 35% of your money into the top 10 S&P 500 stocks and just 65% of it in the remaining 490? At least 10 of those 490 stocks will dramatically outperform the top 10 S&P 500 stocks over the next decade.

According to Fielder Capital, from 1991 to 2023, the top 10 stocks in the S&P 500 returned an average of 7.7% per year before reaching top 10 status and lost 2.5% per year after reaching it.

I suspect some of you are thinking that today's businesses are amazing compared with the top 10 names of the past. There's no way Nvidia, Microsoft, or any of the others will lose 2.5% per year for the next decade. I'm sure lots of folks have thought that about the top 10 stocks throughout history. But history has proved them wrong.

There are two issues facing long-term investors today...

One is the likelihood of a big bear market over the next few years measured against how soon you'd like to retire.

A bear market probably isn't a disaster if you're not planning to retire for 10 years or more. You could just ride it out, keep investing, and be happy when the market recovers and you're even richer than before it started falling.

In 2022, the S&P 500 fell 25%. A little more than two years later, it hit its first new all-time high. In the grand scheme of things, it was just another dip to buy.

But what if the decline had been 50%, 60%, or more? That hasn't happened since the 2008 financial crisis. The S&P 500 peaked in October 2007, fell 56%, and bottomed out in March 2009. It hit its next all-time high in 2013.

Still, for most investors, this was just another buyable dip. And for a bonus, the Federal Reserve showed it had investors' backs and would send interest rates to zero to save them.

In other words, investors are highly confident that the stock market is safe. If it tanks, the Fed will save them. There's no way to lose, except by selling at the wrong time.

The second big issue is seeing mediocre returns for a decade or more...

The U.S. and Japanese stock markets have both experienced long periods (as many as three decades) where the market returned zero from the last peak. Each of those periods started out with stocks about as expensive as they are today.

Last month, Goldman Sachs reported that it expects U.S. stocks to return about 3% per year over the next decade. Adjusted for inflation, it expects 1% per year.

That seems optimistic. Goldman Sachs is saying it expects inflation to average the Fed's 2% target, which I consider highly unlikely. The Fed has never hit its target. It has always overshot or undershot it. Undershooting it has turned out to be more dangerous, because it was followed by a dramatic 40-year-plus rise in inflation.

Today, prices are rising at about 2.7%, according to the Fed's favored inflation gauge, and 2.4%, according to the consumer price index ("CPI"). We all know those gauges don't correspond to Americans' daily reality. The CPI is up 21% since before the pandemic.

Prices will never stop rising because the government will never stop borrowing and adding new dollars into existence, diluting the value of existing dollars. It's not a bug of the system. It's a feature. The system is designed so it hurts the people who earn the least and benefits the folks who earn the most.

So I doubt that Goldman's forecast proves accurate. I think there's a big risk that you'll lose money on U.S. stocks in inflation-adjusted terms over the next several years.

Still, that's not what worries me the most...

Investors are only human...

In a steep bear market, it's very hard to watch your retirement fund lose half or more of its value without stepping in to stop the bleeding. And the only way to do that is to sell all your stocks and lock in the losses.

It's similar with a sideways market. A decadelong sideways market could prove just as frustrating as a large drawdown, leading many investors to dramatically reduce or even entirely sell their retirement funds because they can't tolerate watching them go nowhere year after year.

We've seen these types of bear and sideways markets before in the U.S. All the big U.S. bubbles of the past century have ended with steep bear markets followed by sideways markets. The 1929 bubble ended with the Dow Jones Industrial Average falling 89%. Then it went sideways for 25 years. The 1960s" "Go-Go" bubble ended in February 1966 with the S&P 500 falling around 22%. It was followed by a 16-year sideways market featuring multiple declines of 26% to 45%. The dot-com bubble peaked in March 2000, followed by a 78% drop in the Nasdaq Composite Index, after which it went sideways until 2015.

I recognize that we're talking about rare events, and that the biggest losses will be on the capital allocated within a year or two of the top. As long as you kept buying the big indexes after they plunged 50% or more from their bubbly peaks, you did OK over the course of a few years. You could do OK throughout the course of a sideways market, too, as long as you didn't need the money before it was over. But, of course, you don't get to know when it'll end.

I'll keep singing this song until I don't need to anymore...

If we were deep in a bear market right now, I'd be reminding you that the world never ends. But since we're deep into one of the biggest mega bubbles in recorded history, it's my job to point out that trees don't grow to the sky – especially since you'll see an endlessly hyper-bullish message from almost everywhere else.

And with the mainstream financial media and market bullishly overreacting to something as meaningless as an election, I'm turning up the volume on my alternative message. (I even recorded a brand-new presentation about it earlier this week. Be on the lookout for that in a few weeks.)

I'm trying to warn you that markets don't always go up... and every decade or two, they punch you in the gut. Our last gut punch was the 2007-to-2009 bear market. History suggests the next one could start any day now.

Now is not the time to be overly confident in the most popular stocks. Beware of whatever stocks everybody on Earth thinks are the best ones to own right now. Right now, that's the biggest market-cap stocks in the biggest market indexes. They're the ones everybody thinks are easy money.

But in the stock market, there is no easy money.

New 52-week highs (as of 11/7/24): Amazon (AMZN), Alpha Architect 1-3 Month Box Fund (BOXX), Maplebear (CART), Consol Energy (CEIX), Ciena (CIEN), Compass (COMP), Cencora (COR), Pacer U.S. Cash Cows 100 Fund (COWZ), Cisco Systems (CSCO), Cintas (CTAS), Electronic Arts (EA), Enterprise Products Partners (EPD), Expedia (EXPE), Fair Isaac (FICO), Comfort Systems USA (FIX), GEO Group (GEO), Gilead Sciences (GILD), Generac (GNRC), iShares Convertible Bond Fund (ICVT), Illumina (ILMN), Intuitive Surgical (ISRG), Kinder Morgan (KMI), Lumentum (LITE), Cheniere Energy (LNG), ONEOK (OKE), Oracle (ORCL), Palo Alto Networks (PANW), Planet Fitness (PLNT), ProShares Ultra QQQ (QLD), RadNet (RDNT), Construction Partners (ROAD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Spotify Technology (SPOT), ProShares Ultra S&P 500 (SSO), Toast (TOST), Texas Pacific Land (TPL), The Trade Desk (TTD), Twilio (TWLO), Texas Instruments (TXN), Tyler Technologies (TYL), Vanguard S&P 500 Fund (VOO), Vertiv (VRT), Zebra Technologies (ZBRA), and Zoom Video Communications (ZM).

In today's mailbag, more of your thoughts on the presidential-election outcome... Do you have a comment or question? As always, e-mail us at [email protected].

"With the exception of the natural gas, electricity, and the water you get out of the faucets in your homes, there is little or nothing that American consumers eat, drink, wear or use in any form that did not spend some significant time on a truck. And all of those trucks require energy, the vast majority of which is fossil fuels. In the area of energy policy alone the Biden-Harris administration has contributed massively to the national inflation over the last four years." – Subscriber Robert H.

"I made money in the market [on Wednesday], but I fear for our country's demise when Trump initiates tariffs. We'll be back to high prices, and it will hurt our lower economic group... Trump doesn't seem to understand that almost every decision he makes increases the national debt." – Subscriber Carol C.

"[Kamala] Harris hid from everything and everybody to avoid having to speak to anyone about issues, experience, her track record. When she ran herself in [the 2020 campaign], she dropped out [in December 2019]. Trump was all over the place talking to everyone doing press conferences and actually running for the office. People were better off under him and that was the difference." – Subscriber Thomas W.

"The people are tired of being deceived and want honesty back in our government." – Subscriber James L.

Good investing,

Dan Ferris
Eagle Point, Oregon
November 8, 2024

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Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

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