It seems like no one knows what to think about AI stocks these days.

For every expert screaming “full speed ahead!”, there’s another one warning investors to pump the brakes.

Last week, our friends at MarketBeat invited Chief Income Strategist Marc Lichtenfeld onto their YouTube channel for an interview on this very topic.

Was the recent shakiness in the sector just a blip on the radar… or something more?

How concerned should investors be about buying stocks at 52-week highs?

And most importantly, is AI in a “bubble”… and if so, when will it pop?

Marc answers all these questions during the interview and even provides two free stock picks:

• A growth play that operates in an AI hotbed and counts Microsoft (Nasdaq: MSFT) and Meta Platforms (Nasdaq: META) among its customers
• A defensive agriculture play that gives investors the best of both worlds: a hedge against AI while still maintaining exposure to it.

To watch the interview and get Marc’s two free picks, click here or on the image above.

The post Will the AI Bubble Burst in 2026? appeared first on Wealthy Retirement.

In the article below, Alex reveals why these Next Magnificent Seven tech stocks are crushing the market… beating the original Mag 7 by 304% and the S&P 500 by 450% so far this year.

Alex and Chief Income Strategist Marc Lichtenfeld also just unveiled a brand-new list of “Micro Mag 7” stocks – tiny companies poised to soar as America builds out its AI future.

Click here before Monday to watch the replay of their special Micro Mag 7 Summit.

– James Ogletree, Senior Managing Editor

Forty years ago, I took my first job on Wall Street, working as a stockbroker at an international investment firm.

Some of our stock recommendations worked out well. And some of them didn’t work out at all.

That is always the case, no matter where you get your investment advice.

However, I’ve never forgotten a conversation I had with one of my early clients.

I had recommended a tech stock that quickly tripled in value, although he took a pass on it when I originally recommended it.

In hindsight, he sincerely believed that it was my fault.

“Alex, when you find something this good, you really have to emphasize the upside potential. If I had understood that, I would have taken a big position.”

Some will hear this and say it’s just sour grapes. (Another “coulda-woulda-shoulda.”)

But I took his message to heart.

Whenever I thoroughly research a company and have great conviction in its potential, I try to make that clear when I recommend it.

I do that – in part – because our hundreds of thousands of Members of The Oxford Club are a smart bunch.

They understand that no one truly knows what the economy will do… or what inflation will be… or whether interest rates will rise or fall.

No one has a crystal ball. And I waste no time pretending that I do.

I talk about the positives and negatives in the market, the headwinds… and the tailwinds.

But with a few exceptions – on those rare occasions when investors are seized by abject pessimism or unbridled optimism – my market approach is consistent: “short-term neutral and long-term bullish.”

Why? Any investor worth his salt knows that we can always get a bolt out of the blue in the short term. (Consider 9/11 or COVID-19.)

But take a look at any long-term chart of the market. You’ll see that the line goes up, and to the right.

That’s why we’re long-term bullish.

Over time, successful companies increase their sales and profits. And their share prices rise to reflect that.

That’s why investing in an S&P 500 fund has been rewarding for patient investors.

It’s been so rewarding, in fact, that the only reason to invest in individual stocks is if you sincerely believe you can do substantially better.

That’s not easy. But the facts show that The Oxford Club has done this for more than two decades now.

Last year, for example, we invited new Members to join us by offering them a new portfolio called “The Next Magnificent Seven.”

At the time, the tech stocks in the original Magnificent Seven – Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla – had become wildly popular.

So popular, in fact, that I called this “the most crowded trade on the planet.”

Traders and investors everywhere felt they had to own these seven stocks.

Why? Because those were precisely the ones they wish they’d owned earlier.

I said last year – and I’ll repeat it now – that those are dominant companies that should prosper for years to come.

But it is not just unlikely that they will do as well in the future as they have in the past.

It is completely impossible. Trust me: That will not happen in your lifetime or mine.

How can I be so confident? Well, let’s use reason – rather than emotion – to view the potential here. As I write…

• Apple is up over 80,000% since 2004
• Alphabet (formerly Google) is up over 12,000% since 2004
• Amazon is up 8,000% since 2004
• Meta Platforms (formerly Facebook) is up over 1,800% since 2012
• Microsoft is up over 2,900% since 2004
• Tesla is up over 38,000% since 2010
• Nvidia is up over 103,000% since 2004.

Spectacular returns… all of them.

So who’s to say this can’t possibly happen to these stocks all over again? Me, for one.

Nvidia has a market cap of approximately $4.4 trillion. It is a fast-growing company that makes the super-powerful chips that the burgeoning AI industry depends on. It’s a great firm.

However, it’s worth noting that there has never in the history of the world been a company worth $5 trillion, although I have no doubt that one day several will exceed that number.

Let’s set aside the 80,000% that Apple and 103,000% Nvidia have returned over the past two decades.

What are the chances of either stock rising even 10-fold from here to a market cap of $40 trillion?

Bear in mind, the entire U.S. economy last year was less than $30 trillion.

For a single company’s shares to be worth 133% of the nation’s total annual output would be not just “quite a feat.”

It would be impossible.

Yet there are many smaller companies that could rise 10-fold or more. And no doubt many of them will.

Some, in fact, will even match or exceed the past returns of The Magnificent Seven.

Given this reality, I told Oxford Club Members – and prospective Members – that they would be far better off investing in “The Next Mag Seven” rather than the current seven.

The same way Wayne Gretzky insisted that he became the NHL’s all-time leading scorer not by chasing after the puck but rather by skating “to where the puck is going to be.”

How has this strategy worked out? You can be the judge.

All told, so far this year they’ve beaten the original Mag 7 by 304% and the S&P 500 by 450%.

But now, there’s an entirely new presentation that I hosted with Marc Lichtenfeld to inform Members on seven tiny stocks that we believe could soar.

It’s called the Micro Mag 7 Summit, and you can tune in right here.

The post Can the Magnificent Seven Continue to Dominate the Market? appeared first on Wealthy Retirement.

And today, Shah Gilani, the new Chief Investment Strategist at Manward Press, is hammering that point home. Be sure to read below to get his favorite artificial intelligence (AI) pick-and-shovel play right now.

– Rachel Gearhart, Publisher

Unless you’ve been living under a rock, you’ve at least heard about generative AI products such as ChatGPT.

These programs have a lot of uses. They can serve as brainstorming partners or catalysts for the discussion of new ideas… generate first drafts for writing projects… process and summarize documents… repurpose content so it can be used for different audiences… accelerate your learning in areas you’re not familiar with… guide business processes… accelerate coding… and develop conversational support bots… to name just a few.

Looking at those examples, you can see that the uses of generative AI are far wider – and much more beneficial – than just having ChatGPT finish a school paper or write your friends funny emails in the voice of a famous author.

To give you an idea of how widespread AI already is and how much room it still has to expand, consider that while 9 out of 10 leading businesses are already invested in AI technologies, only 14.6% have deployed AI capabilities in their operations.

That means there is still enormous potential for growth and widespread adoption – and that’s creating a huge opportunity.

But here’s the problem…

Nearly every company in the S&P 500 is talking about AI.

And not all of them will hit the bull’s-eye.

There are specific plays that will pay off… if you know where to look.

Gold Rush

I like to think of AI as being similar to the California gold rush. Most prospectors never struck it rich, but they did spend a lot of money on tools, supplies and clothing – and that generated huge profits for companies like Levi Strauss.

So what are the pick-and-shovel companies of AI?

Your first guess would likely be the semiconductor chip manufacturers that provide the processing power for generating results. You can’t have AI without them. I’m talking about names like Nvidia (Nasdaq: NVDA), Advanced Micro Devices (Nasdaq: AMD) and Intel (Nasdaq: INTC).

But there’s an even better AI pick-and-shovel play…

Semiconductor chips are of no use on their own until they are deployed in a machine that can put them to work.

The most basic “tools” of the whole AI revolution are the large-scale data centers that are the physical epicenters of the AI ecosystem.

Purpose-built AI data centers are facilities composed of networked computers, computing infrastructure and storage systems that leverage AI chips. They can run multiple computations at once as AI applications sift through enormous stores of data.

These AI-specific data centers require massive investments in terms of capital and time. So the companies that have already begun transitioning their infrastructure to meet the demands of AI have a huge first-mover advantage over their competitors – and a large moat.

Spending in the global AI infrastructure market (which includes data centers) is expected to reach $422.55 billion by 2029 to meet the growing demand. That equates to a compound annual growth rate of 44% over the next six years, according to research firm Data Bridge Market Research.

Very nice.

My favorite way to play data centers is Equinix (Nasdaq: EQIX), one of the largest data center operators in the world. It has 251 data centers… across 70 metro areas… in 32 countries… on six continents.

Its portfolio of data center assets includes…

• Network dense: 2,000-plus networks, 100% of Tier 1 network routes
• Cloud dense: 3,000-plus cloud and IT service providers
• Interconnected ecosystems: 460,000-plus total interconnections.

That’s an impressive portfolio… and it’s boosting the company’s financials.

Going back to 2000, the company has increased its annual revenue every single year. It went from just $13.02 million in 2000 to $7.26 billion in 2022. And over the past 12 months, revenue has increased once again, coming in at $7.95 billion.

Most recently, the company reported third quarter results that included revenue of $2.06 billion, of which $1.96 billion was reoccurring revenue.

On the bottom line, net income for the third quarter was $276 million, which represented a year-over-year increase of 30%.

And here’s the best part…

Not only is Equinix tied to one of the fastest-growing industries in the world and generating consistently increasing revenue… but it has also posted eight years of cash dividend growth since becoming a real estate investment trust (REIT) in 2015.

Speaking of the dividend, the company recently increased its fourth quarter dividend to $4.26 per share, a 25% increase from the third quarter.

On an annual basis, the company will pay out $14.49 per share in 2023, a 19% year-over-year increase.

I like Equinix’s prospects as a solid AI pick-and-shovel play with plenty of growth and income ahead of it.

The post The Best Ways to Play the Artificial Intelligence “Gold Rush” appeared first on Wealthy Retirement.

Investor sentiment is extremely bullish. Not just bullish, mind you – unearned overconfidence is off the charts.

I’ve been involved in the markets for 31 years, 25 of them as a professional. It may shock you to know that I am never extremely confident. Do I believe in my convictions? Absolutely. Do I believe that the market could prove me wrong at any moment? Absolutely.

I’ve seen too many really smart people get their heads handed to them because they not only were wrong but also invested too much in their position or refused to sell when it was clear they were wrong.

I was reminded of this investor overconfidence the other day on Twitter (you can follow me @stocksnboxing).

CNBC posted an article about mutual fund manager and fund family founder Ron Baron. He said he doesn’t invest in Bitcoin because he doesn’t understand it despite being a “fairly sophisticated investor.”

Someone replied, “Enjoy staying poor.”

Ron Baron is worth $3 billion.

Maybe Bitcoin will skyrocket and he will miss out on further riches.

But the hubris of an average Joe to tell a multibillionaire to “enjoy staying poor” because he doesn’t invest in Bitcoin is not something you see at the bottom of a cycle.

Then there’s an article I read about young workers putting all of their retirement money in Bitcoin. One 30-year-old stated, “It’s the best long-term asset to hold.”

Maybe he’s right. But you still don’t put all of your money in one asset. That is extreme optimism.

It’s not just in Bitcoin where sentiment is through the roof. Special purpose acquisition companies (SPACs), tech stocks and heavily shorted stocks have all caught investors’ attention, and those investors have driven the stocks higher.

Bank of America recently said bullishness among sell-side analysts is so high it’s about to trigger a sell signal. (To get a better understanding of what the sell side is, click here to see my recent video about it.)

In other words, Bank of America is saying its peers are too bullish.

Why shouldn’t people feel bullish?

The COVID-19 vaccines are giving millions of people hope that they can begin to resume their normal lives in the very near future. That optimism will surely spill over into the economy.

Low interest rates mean cheap money is available, and a new stimulus package means free money is coming for many people.

And with spring around the corner, it makes sense that people are feeling hopeful – perhaps for the first time in a year. And that good cheer is reflected in their bullishness.

Above is a well-known chart that shows the emotions associated with investing.

Where do you think Bitcoin investors are right now on this chart? How about stock investors?

I’d say Bitcoin investors are between “thrill” and “euphoria.” If Friday hadn’t been so strong, I’d have said stock investors may be tipping toward “anxiety,” but the rally likely kept them on the top of the hill rather than on the downslope.

In my 30 years in the market, I’ve seen this movie several times. I know how it ends.

In his iconic song “1999,” Prince sings, “2000, zero zero, party over, oops – out of time. So tonight I’m gonna party like it’s 1999.”

Little did he know back in 1982 when he released the song, Prince was singing about the dot-com boom and bust.

Sentiment today feels awfully similar to sentiment in 1999. I’m not saying we’re out of time. I don’t try to time the markets.

But 30-year-olds putting all their eggs in one speculative basket or believing anyone who thinks differently is a moron – including those with decades more experience and successful track records – doesn’t happen at the beginning of rallies. It happens near the end.

Watch sentiment closely. If it gets any more extreme, it may be time to get very cautious.

Good investing,

Marc

P.S. Speculative investments like Bitcoin haven’t proven their worth and resilience over both up and down markets – but dividend stocks have.

That’s why I’m presenting on a special class of dividend stocks called “Dividend Disruptors” at the MoneyShow March Virtual Expo on March 17. Click here to register for free.

The post Can You Use Sentiment as a Gauge? appeared first on Wealthy Retirement.

That sign was a job application from someone looking to join his Greenlight Capital hedge fund.

As Einhorn explained in his third quarter letter to Greenlight’s investors, the job application came in an email with the subject line, “I am young, but good at investments…”

It was sent by a 13-year-old boy who claimed to have quadrupled his money since February.

I recently told you how Joe Kennedy avoided the 1929 stock market crash after receiving a stock tip from a shoeshine boy.

Kennedy decided that when shoeshine boys start giving stock tips, it is time to get out of the market.

Einhorn’s story sounds similar…

When teenagers start crushing the market and applying for jobs at hedge funds, it may be time to sell.

The Warning Signs of a Tech Bubble

Like Einhorn, I’ve been warning about Big Tech names, special purpose acquisition companies (SPACs), electric vehicle companies and profitless momentum stocks recently.

And in his third quarter letter to Greenlight Capital investors, Einhorn lays out a list of new warning signs…

1. Initial public offering mania
2. High valuations and new metrics for valuation
3. Market concentration in a single sector and a few stocks
4. S&P 500-type market capitalizations for second-tier stocks that most people haven’t heard of
5. A situation where the more fanciful and distant the narrative, the better the stock performs
6. Outperformance of companies suspected of fraud based on the belief that there is no enforcement risk, without which “crime pays”
7. Outsized reaction to economically irrelevant stock splits
8. Increased participation of retail investors, who appear focused on the best-performing names
9. Incredible trading volumes in speculative instruments, like weekly call options and worthless common stocks
10. A parabolic ascent toward a top.

Like Einhorn, I have my eyes wide open to the risk that the bubbly areas of the market present.

We also know that opportunities exist in other areas of the market…

When You Hear From Me Next

I am an avid reader of the quarterly letters from the top investors like Einhorn. I watch what these super-smart folks are buying and selling.

After I read Einhorn’s third quarter letter, I read a letter from another elite investor who is sounding the same warning signal.

When these smart guys start cautioning the same things, we should pay attention.

This other investor, however, is also pounding the table on a sector of the market that he believes represents a generational buying opportunity.

As is often the case, risk in one area of the market opens up opportunity in another.

When you next hear from me, I’ll name that other investor and lay out exactly which sector he thinks is appealing and why.

Until then…

Good investing,

Jody

The post Beware These 10 Signs of a Market Top appeared first on Wealthy Retirement.

Though the company reinvented itself recently with its acquisition of software company Symantec, Broadcom is a part of the old guard when it comes to Silicon Valley tech companies.

The company has been around for more than 50 years. So it’s no surprise that, while still innovative, it generates plenty of earnings and cash flow and pays a dividend as a result.

And it pays a nice dividend, particularly for a technology company. With a $3.25 per share quarterly payout, Broadcom’s yield comes out to 3.5%.

Can this high-tech giant continue to reward shareholders with $3.25 in cash per quarter?

Loads of Free Cash Flow

Free cash flow is rising even during this pandemic year and is projected to do so again in 2021.

Last year, while generating $9.3 billion in free cash flow, Broadcom paid shareholders $4.2 billion in dividends.

This year, free cash flow is forecast to rise to $10.9 billion while Broadcom pays out $5.3 billion in dividends.

That’s a payout ratio below 50%, which gives me a lot of confidence in the company’s ability to continue to pay dividends – even if free cash flow drops next year.

Fortunately, that shouldn’t be the case, as free cash flow is forecast to rise to $11.8 billion.

Broadcom has a solid dividend-paying history. It has raised its payout to shareholders every year for 10 years.

Broadcom’s free cash flow has steadily increased over the years and is expected to grow further, its payout ratio is low, and it has a track record of raising its dividend every year.

Mature tech companies are often secure dividend payers, and Broadcom is no different.

Dividend Safety Rating: A

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Good investing,

Marc

The post Is This Tech Giant’s Dividend Safe? appeared first on Wealthy Retirement.

– Prince

I recently remarked to a colleague that this market feels like 1999’s to me.

Back then, tech stocks could do no wrong. They went up seemingly every day. Everybody talked about the market.

Doctors and lawyers were more interested in stocks than in their practices, some even quitting to become day traders.

Last week, I spoke with someone whose son decided not to go to medical school this fall because he was making so much money trading stocks – mostly Tesla (Nasdaq: TSLA).

Robinhood, the trading startup popular with younger traders for its app that has video game-like features, added 3 million accounts in the beginning of 2020. And in June, its customers traded more than customers of any other broker.

And, of course, there are the stocks – Tesla, Amazon (Nasdaq: AMZN), Facebook (Nasdaq: FB) and others – that have been going gangbusters.

Tesla’s valuation is more than the valuations of Ford (NYSE: F), General Motors (NYSE: GM), Honda (NYSE: HMC), Toyota (NYSE: TM), Nissan (OTC: NSANY) and Mercedes combined.

If you know my work at all, you know I’m a big believer in the power of dividends to grow your income and wealth.

I literally wrote the book on dividends – Get Rich with Dividends, which was an international bestseller and won the Book of the Year Award from the Institute for Financial Literacy.

But this year, dividend growth – my preferred dividend strategy – has underperformed. As of September 2, year to date, the Dividend Aristocrats lost 1.2% while the S&P 500 gained 9.7%.

(Dividend Aristocrats are members of the S&P 500 that have raised their dividends every year for 25 years or more.)

The last time these stocks (which historically outperform the market by 2% a year) underperformed so badly was in – you guessed it – 1999.

That makes sense. In 1999, the internet bubble was nearly at its peak. Who wanted to own shares of Exxon Mobil (NYSE: XOM) when you could buy shares of Ariba or Global Crossing, which were going up dozens of points a day?

If you’re a dividend investor, you’re likely a long-term investor. In that case, you have nothing to worry about. I suspect dividend growth will continue to outperform the market over the long term.

If you’re an active trader, get it while the gettin’s good. Tech stocks are on fire, and third quarter earnings are likely to be big catalysts. And perhaps the biggest movers will come from the biotech sector.

These stocks tend to jump more than any others. Last week, Aimmune Therapeutics (Nasdaq: AIMT) skyrocketed 171% in one day. On their best days, Tesla and Facebook never came close to that number.

Healthcare stocks tend to outperform the broad market in the last quarter of the year, and a lot of attention turned to biotech recently – for obvious reasons and nonobvious ones.

Any company working on a vaccine or therapy for COVID-19 has an opportunity to not only help society but also make a lot of money for itself and investors.

But there is plenty of important non-COVID-19 work being done in the space. Clinical trials on heart disease, Alzheimer’s, cystic fibrosis, rare genetic diseases and many other conditions are being conducted and will have data readouts in the coming months.

Strong clinical trial data often shoots biotech stocks higher…

I expect biotech stocks to be the leaders in the fourth quarter.

So traders should consider biotechs for the rest of the year (and probably longer), stick to their discipline and take advantage of this rich trading environment.

We don’t yet know whether 2021 will emulate 2000. In the meantime, trade like it’s 1999.

Good investing,

Marc

The post Will 2021 Bring a Repeat of the Dot-Com Bubble? appeared first on Wealthy Retirement.

Each Friday, Marc publishes an urgent video digest of the week’s news and what it means for the market. And this time, he covered the far-reaching implications of the recent crash in oil prices.

Click here to watch his latest update. Then, read on below to discover why Jody believes opportunity knocks for today’s most beaten-up sectors.

– Mable Buchanan, Assistant Managing Editor

I always pay very close attention to what the top investors in the world are saying…

But I pay even closer attention to what they are doing.

You see, I’ve got this crazy idea that the best investors make the best investing decisions. Therefore, the most likely place to find great investment ideas is in the portfolios of great investors.

How do I define the “best” or “great” investors? I’m referring to the top handful of pros who have put up superior investing track records for decades.

These are the investors who have proven that they are exceptional over the long term. They aren’t lucky – they are good.

Included in my list is Oaktree Capital’s Howard Marks. He recently said something I think we should all be aware of…

“The S&P 500 Is Taking the Economic Collapse a Little Too Well…”

Last week when I wrote to you, I noted that despite the economy collapsing at a rate that we have never seen before, the S&P 500 Index is actually not even down from where it was a year ago.

Marks was just on CNBC, where he also noted the surprising strength of the S&P 500.

He is one of the most followed investors on Wall Street. His memos to investors are widely read across the financial industry.

While on CNBC last week, Marks discussed how he felt that there is a disconnect between stock market performance and the reality the world is facing amid the coronavirus outbreak.

His words…

We’re only down 15% from the all-time high of February 19, but it seems to me the world is more than 15% screwed up.

His words weren’t particularly eloquent, but I believe that they are true.

The S&P 500 has rallied more than 30% from the low set on March 23. In doing so, it has retraced more than half of its fall from the record levels it hit on February 19.

These words from Marks are a warning for investors. We need to be prepared for the fact that this bear market in the S&P 500 may not be over despite the big bounce back we have had in April.

Marks also provided some historical perspective from the two prior bear markets for us to think about:

It took seven years to get back to the 2000 highs in 2007… it took 5 1/2 years to get back to the 2007 highs in late 2012.

So is it really appropriate that, given all the bad news in the world today, we should get back to the highs in only three months? That seems inappropriately positive to me.

I agree with pretty much everything that he said – but that doesn’t mean we shouldn’t be buying stocks.

Outside the S&P 500, Market Action Has Been Very Different

Despite the economic carnage, the S&P 500 isn’t even down year on year. It is off only 15% from its all-time high reached in February.

But last week, we explored how those numbers need a closer look…

When we did, we saw how the big tech stocks – Apple (Nasdaq: AAPL), Facebook (Nasdaq: FB), Google’s parent company Alphabet (Nasdaq: GOOGL), Netflix (Nasdaq: NFLX), Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) – that now dominate the S&P 500 are the reason the index has held up so well.

But outside the big tech names, the stock market reaction has been very different. The sell-off has been much more severe.

To show you just how severe, I pulled data for four exchange-traded funds (ETFs) that tell a very different story than the S&P 500.

These four ETFs represent…

• The American banking sector
• The energy sector
• The homebuilding sector
• Small caps.

As per usual, a picture tells a thousand words…

All four ETFs have declined by at least a third this year, with American banks and energy down more than 40%.

(Remember, these big declines are not the moves of one stock. These are ETFs that are diversified across their specific sectors.)

That means that these entire sectors have been hammered.

For example, the iShares Core S&P Small-Cap ETF (NYSE: IJR) that I included in the chart is widely diversified across 600 different stocks. Those companies represent all of America’s industries.

If this 600-stock ETF is down 30%, that means there are individual stocks within it that are down much more than that.

Outside of the S&P 500, the stock market has experienced a deeper decline. That is why I believe there are excellent buying opportunities.

Like us, Howard Marks must be looking beyond the modest decline in the S&P 500 for bargains as well.

In his recent memo to his Oaktree Capital investors, Marks said that it’s time to stop “playing defense.” He is buying today when he finds good value – and his opinion is worth listening to.

To be clear, while Marks believes there is value to be had, I’m sure he would also tell you that patience will be required before that value is realized. While I believe that the worst may be behind us, it may be a while before this bear market is done.

Good investing,

Jody

The post Where to Find the Best Bargain Stocks Today appeared first on Wealthy Retirement.

One reason I listed for being bullish was merger and acquisition (M&A) activity. And since I shared that piece…

• Charles Schwab Corp. (NYSE: SCHW) reached an agreement to acquire TD Ameritrade Holding Corp. (Nasdaq: AMTD) for $26 billion.
• Louis Vuitton’s parent company, LVMH (OTC: LVMUY), raised its bid for Tiffany & Co. (NYSE: TIF) and then confirmed an agreement to buy the jewelry retailer for $16.2 million.
• Novartis (NYSE: NVS) agreed to acquire The Medicines Company (Nasdaq: MDCO) for $9.7 billion.

According to Ernst & Young’s Capital Confidence Barometer, a “massive majority” (83%) of C-suite executives expect the U.S. M&A market to improve in 2020.

At the risk of repeating myself, M&A activity is very bullish. It’s good for the shareholders of the firms being acquired, and it sparks excitement about other deals that might be coming.

I also argued that there’s cause for today’s investors to be bullish thanks to improving economic conditions.

That’s certainly something to be grateful for…

Recent readings on consumer confidence and U.S. manufacturing support the trend. Ernst & Young finds “near-unanimous expectations” among top executives for U.S. and global growth in 2020.

All systems go. Check and check.

But I have a confession. The cyber ink was barely dry on that prior column when I thought, “That’s it, I just called the top.”

If you’ve ever sold a stock and then it started rallying, you know the feeling.

But that’s just it. It’s a feeling. Investors are much better off focusing on facts rather than feelings.

So let’s discuss how people feel about the market. And then let’s challenge those feelings with facts.

Feeling: The market has been going up for a long time, so it’s got to fall soon.

Bull markets don’t die of old age. There’s no law stating they must end after a certain time. Historically, bull markets end because of some combination of…

• Overaggressive tightening or other policy errors, which can tip the economy into recession
• War or another geopolitical shock
• Runaway inflation, which can erode the value of corporations’ future cash flow
• Rampant speculation, such as occurred in the Roaring ’20s and late 1990s.

War is always a risk, and geopolitics look particularly unstable right now. But the Fed has been easing, inflation has subdued and the economy is improving.

Plus, this rally is nothing like the 1990s. Back then, everybody and their grandmother was trading tech stocks.

Today, the market is dominated by institutional algorithms rather than individual speculators.

Which brings us to our next misconception…

Feeling: It’s the dot-com bubble all over again!

Remember the widespread excitement about the stock market in the 1990s? Well, this rally has been characterized by an absence of faith.

J.P. Morgan recently published a list of major “doomsday calls” from the past decade.

Of course, they’ve all been proven wrong. But they also reflect fears about and disbelief in the rally.

Also, while this bull market is the longest lasting, it’s not the biggest.

The current bull market started in March 2009. In 2018, it surpassed the 1990s rally as the longest in U.S. history.

However, the 1990s bull run was larger in magnitude, rising 417% compared with the 367% we’ve seen (so far) in the current rally.

Also, the conventional definition of a bull market is one that doesn’t suffer a pullback of 20% or more.

There were downturns just below that threshold in 2011 and again in late 2018 to early 2019. And the market was effectively flat from September 2018 to October 2019.

So, yes, the market has had a great run. But it hasn’t been a straight shot higher, and it hasn’t been easy to stay invested.

A lot of people got spooked out of the market at various points – and many never got in.

Feeling: Stocks are expensive.

Based on the past 12 months of results, the price-to-earnings (P/E) ratio of the S&P 500 is 24, which is high by historical standards.

Worse, the cyclically adjusted P/E (CAPE) ratio – created by famed Yale professor Robert Shiller – is currently 32, about double its long-term average.

The “E” in a conventional P/E ratio uses earnings from the prior 12 months. The CAPE ratio looks back at 10 years of earnings. Professor Shiller’s metric looks back for a decade in order to adjust for inflation and smooth out the effect of short-term events, such as the Great Recession.

Also known as the Shiller P/E, this metric has been higher only two times in history: 1929 and 1999. (Gulp!)

But here’s the thing: Everything on Wall Street is priced on a relative basis.

Yes, stocks look “expensive” compared with history. But people investing today aren’t choosing between buying today’s stocks and stocks in (say) 1982 or 2009, when they were historically cheap.

Instead, today’s investors are comparing stocks with other options, most notably bonds. There are other things to invest in – gold, cryptocurrencies, art, real estate, etc.

But institutional investors – the folks with the REALLY big money – typically focus on stocks and bonds, and the relative value of one compared with another.

And by that comparison, stocks don’t look very expensive at all. In fact, they look downright attractive.

• The dividend yield of the S&P 500 is 1.87%, which beats the yield on a 10-year Treasury of 1.77%.(Note: The 10-year Treasury yield was close to 6% in 1999 and 2000, providing a much more compelling alternative to stocks.)
• Add stock buybacks to dividends, and the so-called shareholder yield of the S&P 500 is more than 5%, according to Yardeni Research.
• The earnings yield of the S&P 500 (which is the inverse of the P/E) is nearly 6%, based on expected earnings in 2020.

By these measures, stocks offer much better value than Treasurys (or corporate bonds).

So next time someone says, “Stocks are expensive,” you can respond as a professional investor might: Compared with what?

Good investing,

Aaron

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