Wild Markets
You ever have one of those times when you feel like you finally made it to a party, and as soon as you did, everyone starts leaving (not because of you)? That is what it seems like in the stock market today. After pulling everyone into the FOMO induced fever over the last year or so, AI has become scary. The potential imminent disruption to other former darlings of the stock market --software companies--has everyone fleeing to once boring places like staples, energy, and utilities. Companies like CAT, Delta, and John Deere are less likely to see their business disrupted due to AI and as a result are seeing crazy amounts of price growth as the pendulum swings their direction. Is Microsoft really worth ~20% less than it was 3 months ago? Are these HALO (heavy assets, low obsolescence) companies suddenly somehow better investments than a couple months ago? Are they more valuable? Maybe. Probably not. The money moves, bringing with it self-fulfilling prophecies about where you should invest. The underlying fundamentals of these companies haven’t changed, but the $ moving to them has increased their perceived value, justifying the move. It’s a dangerous game. While they may have had room to run due to being slightly ignored over the last few years as tech stole the spotlight, the price-to-earnings (p/e) ratios tell us a different story. CAT, for example, is trading at ~40x p/e compared to a historical ratio of ~22x. Hard to say if it can sustain this, and it certainly hasn’t run up due to being wildly undervalued. On the flip side, the average p/e ratio of software companies has fallen from 51x to 27x. Now, you could argue they were expensive to start with, but this is a massive move, especially for a $3 trillion company.
So, what does an investor do? Where are we headed? The economy shows some potential challenges with growth slowing considerably in Q4- expanding at 1.4%, significantly under the expected 3% range. Many point to the govt shutdown as the reason, but maybe there is a bit of a slow-down. It is expected to bounce back this quarter to the 2-3% range. Despite the average income for the consumer at all-time highs, there are all-time high debt levels as well, and much of the spending is coming from the top end of the income spectrum. But, inflation has yet to get out of control due to tariffs, and as you all likely know by now, the Supreme Court ruling against Trump’s tariffs just means he is going to go about them using a different path. So it’s a mixed bag.
As nice as it is to see clearly where we are going, I don’t think you have to in order to be successful in the market. It is also always good to remember most things are overblown, and while there is a lot of truth behind the inevitable changes coming to our world--changes that will have both negative AND positive impacts--it is not likely to happen overnight. So, we will bounce back and forth from one extreme to the other, as the people try to figure out what side they are supposed to be on in the imaginary division that is constantly pushed in our culture. It is either this or that. You seemingly have to choose. But you don’t, actually. Answers often lie in the middle, the best strategy not being on one side or the other, but perhaps a combination of positions. Diversification has been slapped with a boring label in the past, but I believe it has never been more necessary and, in fact, profitable, to be invested this way than now. The moves happen too fast now, and for too obscure and finicky of a reason to get out in front of it. While we do employ an over/underweight strategy that certainly adds nice value to your portfolios, we have never been of the mind to go to extremes, and it only seems more and more compelling to employ this strategy.
Remember the danger in uttering the words “this time is different.” While it might be true, the reaction in the marketplace is going to look similar to some other point in history. Lets not be so arrogant as to believe our time is that special😊.
If you have any questions or want to discuss this further, please let us know.
Eric & Jeremy