The following article is based on our June 16, 2023 Big Picture podcast segment, Bubble Up – Wall Street Selling Tulips, with Financial Sense Wealth Management President and Founder Jim Puplava.
Dueling Markets and the Tulip Narrative
Investors today find themselves in the midst of a peculiar dance between the S&P 500 weighted and unweighted index, the discordance of which might just be spelling out a financial narrative we need to grasp.
A deeper look reveals a dance in two different directions: SPW (unweighted) sporting a PE of 16.15 with a total return of 3.13% year-to-date, while SPX (heavily weighted towards large cap tech) at a PE of 19.36 and a total return of 12.74% year-to-date.
The unpredictable Nasdaq followed a rather dramatic arc, dipping by a remarkable 33% in 2022 before bouncing back to a 27.4% gain so far in 2023, the unweighted staying steady at 16.98%.
Yet, we must remember the tried and true wisdom: there has never been a market bottom before a recession. As we navigate these treacherous financial waters, we must keep our bearings and recall the tulip tale. This time, it's no different.
A Glimpse into the Rearview Mirror: 1999
As we moved into the new millennium, the Internet announced the advent of the "New Economy," redefining the rules of stock valuation, leaving sales and earnings behind. The memories of my decision to turn all cash mid-December 1999 after liquidating all stocks still lingers strong.
During this time, we witnessed oil hitting rock-bottom at $10 in 1998 before it catapulted to $38 and then astonishingly climbed to $150 years later. It was then, in 1999, that I took a strategic detour towards foreign bonds, aware of the gathering storm clouds of recession and anticipating the bursting of a tech bubble, which took the NASDAQ 17 years to recover from before definitively breaking to new all-time highs.
Today, the deja vu is palpable as AI seems to take the position once held by the Internet. The market tells us that traditional metrics like PE ratios or price-to-sales ratios no longer apply to AI-related tech stocks, echoing the narrative of 1999.
A Course in Bubblenomics
Like a boomerang, economics often returns to where it started. The onset of a new idea spurs the imagination, inviting an influx of capital, escalating prices. Ignoring earnings and sales becomes the norm as we're dazzled by the novelty of the trend.
Evaluating three tech titans—Amazon, Apple, and Microsoft—I assessed whether AI significantly contributed to sales and earnings. The discoveries were not surprising: all metrics trending down, indicating a decelerating economy inching towards recession.
While the current excitement suggests a few companies may emerge as temporary winners in the AI sphere, I predict the most significant rewards and productivity enhancements to overall growth will be felt, but likely take a bit longer than what investors are currently pricing into many of these stocks.
The Shadow of Recession and the Bear Market Abyss
The Federal Reserve's recent commitment to more rate hikes seems like a careful ploy to keep the market under control. However, falling government tax receipts and tightened bank lending serve as distress signals, hinting at an economy in turmoil.
Despite persistent inflation, both headline and core, and low unemployment rates advocating for rate increases, the skyrocketing debt crossing the $32 trillion mark this month puts the Fed in a predicament. They're caught in a dilemma—Tame inflation and risk the banking system, or lower rates and establish yield curve control.
Navigating the Investment Landscape
Bracing ourselves for the potential economic downturn, the logical strategy I believe is maintaining a high cash position in T-bills. Concurrently, investment channels in gold, silver, and oil seem promising, particularly with peak oil on the horizon.
My overall emphasis is to invest in companies that not only produce tangible goods and services we all need but also to focus on companies with strong balance sheets that offer an attractive dividend. This is one of the most reliable ways, I believe, to be a successful investor over the long-term, especially in a longer-term inflationary environment as we see today.
The Curtain Call — Of Growth as We Know It
My upcoming e-book, "The Beginning of the End — Of Growth as We Know It," seeks to delve into these emerging economic narratives. A deep-dive exploration of our financial reality, potential future landscapes, and how to chart a course through this challenging path lies within its pages. Stay tuned.
See The Beginning of the End – Of Growth as We Know It (part 1)
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Copyright © 2023 Jim Puplava
