The last few months I’ve been feeling a sense of déjà vu in terms of what I’ve been seeing in the markets. I am now in my third decade in this industry, so I’ve had the opportunity to witness a lot of interesting happenings. One thing I’ve learned is that history may not repeat itself, but it does tend to rhyme.
I clip various articles (my age is showing here!) that I find noteworthy and that may be useful in the future. Recently, I came across an article that was titled, “Valuations don’t matter – it’s different this time.” This article was dated early 1999, and it asserts that the fundamental valuations that finance folks come up with are wrong. It goes on to say that you can’t value a company based on its expected cash flow and profits; rather, with internet companies, you have to value them based on the “eyeballs matrix,” which refers to how many people look at the site. This “expert” was saying that a company’s current and future profitability make no difference; as long as it has investor appetite and interest, the stocks will go up. Of course, when you think about that statement, it makes no sense.
I learned in business school (and through common sense) that the fundamental reason a corporation/company exists is to enhance shareholder value—in other words, make money. I know other factors contribute as well, but this is the one factor that is quantifiable. Investments are valued based on their cash flow, profits, expected market share (again pertaining to profits), etc.
Today, however, the markets are feeling like the above-referenced article. Combined with free-trading apps, endless talking heads on TV, and Reddit boards, investors are gambling on stocks like its 1999. As some people make money on a trade, they feel empowered (as though they have the “formula”), and they keep doing it. The more people keep trading the same stocks, the more those stocks go up. But that only lasts for so long—valuations ALWAYS matter. This bubble-burst cycle has been going on for hundreds of years, and it continues today.
This “bubble” is in a pocket of the market, and that’s where the risk and dangers lie. This pocket includes large tech stocks, bitcoin/cryptocurrencies, SPACs, and the like. However, outside of this bubble, you’ll still find some very good values that are worthy of investment. Areas like international stocks, US value stocks (non-tech, basically), and emerging markets have companies that are a screaming buy. As a firm that diversifies, we will always have money in all asset classes, but we are clearly tilted away from the insanity. Our strategy may have sounded crazy in 1999, when internet stocks were making 100% in a few months, but when you fast-forward a year or two, it was clearly the right strategy.
With a COVID vaccine on the horizon for everyone, low interest rates, and huge amounts of stimulus, the sails are behind investors that appreciate valuations. Remember, Rome wasn’t built in a day. A value-tilted, diversified portfolio is boring, but it’s unequivocally the right approach, and we continue to maintain that strategy, as we have for the past decades.
On another note, as of the writing of this article, the third major stimulus program has passed Congress and will be signed by the President. This stimulus plan has a lot of provisions, but it’s similar to the other plans. Here are some quick highlights:
- Stimulus checks – $1,400 checks for individual taxpayers earning less than $75,000 a year and less than $150,000 as married couples. The $1,400 is per person, so a married couple with two children will receive $5,600.
- Unemployment benefit expansion – An additional $300 per week will be given to the unemployed, on top of their state benefit. This expansion expires in September. Up to $10,200 of benefits would be tax free for households with income under $150,000.
- State and local aid – States and local governments will receive funds to bridge their budgetary shortfalls.
- Rent relief/forbearance relief for renters
- Child tax credit – This credit has expanded to $3,600 per child up to age 6 and $3,000 per child over age 6, but under age 18. The credit is for 2021 only.
- Small business – Emergency loans and grants have been expanded, and more funding is available for the PPP program.
As more information becomes available, we will let you know! Be safe!