If you have not been living under a rock lately, you probably know that the stock market has been going up for the past eight years, or so. The market has been going up ever since the recovery of the 2008 Financial Crisis, starting in 2009, until this very day. In fact, the market continues to hit newer highs ever since Trump won the Presidential Election. Here is what’s so worrisome about the current state of the market.
Majority of the Gains Come from Only 8 Stocks
They include APPL, GOOG, MSFT, AMZN, FB, NVDA, TSLA, and NFLX. These are all great tech companies with amazing prospects, but their stock prices have just gone up too much, too fast. I surmise that once when the market turns around, which it will one day, these stocks will be the first to go, along with small caps. Gains concentrated on just these companies create the illusion that the overall stock market is booming, when it is actually not. People have to be aware of this.
I have ownership in all of these companies in my investment accounts, in one form/shape or another, and quite frankly I feel MSFT is the only company in the group that still “deserves” more upside. All the other companies seem somewhat overvalued. Furthermore, there are three of them which I feel are speculatively overvalued. There’s just not enough in the companies’ financial situation, operations, or firm prospects that would warrant such high prices for their stock.
Buoyed by ETF’s
Approximately, one quarter of a trillion dollars in money flowed into stock ETF’s from Trump’s Election victory until this very day. Most of these ETF purchases were mainly focused on the major stock indexes, such as the S&P 500 (SPY) and the Nasdaq 100 (QQQ). Of course, there’s nothing wrong with investing in ETF’s. However, investors have to be aware that a lot of the individual stock increases are a result of cash infusions into ETF’s, meaning that there’s not a lot of institutions holding stock in any specific company. So, once when the market changes direction, you can expect stocks from all over the board to tank along with the market. If you thought that your “special” or “safe” company would be little affected by an overall market downturn, think again.
Based on Geopolitical Expectations
A lot of the post Election market rally is based on the expectations that our new President, along with a Republican Congress, would be able to fix healthcare, reform taxation, and increase infrastructure spending. While all these policies are pro-growth, we have yet to see any substantive action toward making these expectations a reality. The last stint with the healthcare bill was less than optimal…to say the least. The Senate is currently attempting to rewrite a more desirable Healthcare Bill because let’s be honest…regardless if you are a Republican, Democrat, or Independent…the last Healthcare Bill passed by the House of Representatives was just horrible. I understand the ACA is less than desirable and needs major improvement; however the most recent proposed replacement bill was worse than the ACA.
President Trump is currently working with the Private Sector to create an infrastructure bill that would help fix our roads, bridges, tunnels, and municipal buildings…which I feel is a good thing. Besides the job creation, a lot of our bridges, roads, and tunnels just need to be fixed and modernized.
Trump is currently proposing deals, which involves toll imposition, to entice Private Equity firms to put up capital for revamping our country’s infrastructure. Tolls are definitely in the conversation because Private Equity firms are not going to put up any money unless they see a return. We do not know the extent how high these tolls may be, or how much these tolls will add to the consumers’ expense. But, I believe that a combination of a toll system AND generous tax breaks will help these Private Equity firms make their decision to the affirmative. Tax breaks would help these Private Equity firms improve cash flows, which in turn, reduce toll costs passed on to the consumer.
Finally, we have tax reform. This is probably the biggest driver for the current market upturn. As of now, all we have is a one page outline of what the administration plans to do regarding this big topic. There are no specifics, and we have yet to hear anything concrete about what’s being written behind closed doors, or how likely a bill is going to be passed by the end of this year. Everything seems to be up in the air without confirmation of what’s going to happen with tax reform. Again, this is all an expectations game without any solid specifics to support what’s going to happen.