stocks

The market is off to a tough start this year, especially with stocks that did well the last 12-18 months. Prices are down, but stocks are not cheap – thus, we are in no man’s land. So what do we do now?

To illustrate what I mean, here are a couple examples of companies:

• Rivian: -85% from high, trading at 12.2 times forward SALES
• Snowflake: -60% from high, trading at 25 times forward SALES

And there are many others. These companies are down huge, but they definitely aren’t cheap. If you look at the market overall, here’s the relation between interest rates and Schiller P/E.

With rates now at 3%, the market has a higher interest rate AND P/E ratio than in 2019, which wasn’t exactly a cheap market. You can see this in the graph- we aren’t a dot all by ourselves, but we are still around the top dots at the current interest rates.

Thus, the market isn’t nearly as pricing – especially for many darling stocks – than it was just 4 months ago. But the market isn’t exactly cheap. There are still a ton of headwinds that will probably prevent a huge rally. (Earnings likely need to come in, economy slowing, rates up, aggressive Fed, inflation) So what’s my advice?

My guess is we will have a very choppy rest of the year with big rallies and likely larger declines. It’s hard to do but … sell into the rallies, buy into the dips. I’ll look to do this, but only names I’m not worried about going bankrupt in the next 3-5 years.

I’ve posted several times the last few months about the market hitting a top. (1/6, 1/25, 1/31, etc.) This is especially true of NASDAQ and Tech (see RIVN for example). Unfortunately, it seems there is probably more pain to go.

There are no good things happening. Growth is slowing. We don’t have any workers left to stimulate growth. The Fed is going to be Uber aggressive. (And you NEVER fight the Fed). There is no more stimmy money coming.

So what I am watching? I view today similar to 2000. We had a bunch of retail investors (and Cathie Wood) come into the market due to zero commissions and push up “sexy” stocks. We had everyone thinking tech growth was unlimited. And thus, the NASDAQ became unhinged to the rest of the market – just like 2000.

Here’s the updated version of the graph I’ve posted many times.

During the tech burst in 2000, the market bottomed a bit after this ratio came back to normal. Even if you view the pre-COVID number as the normal, we have a long way to go from here.

Will the market go straight down? No. But my guess is it will continue to work down until we get to a better equilibrium in this ratio.