The Terrifying Reality of the Economy Right Now

[00:00:00] Speaker 1: are we in a stock market bubble that's about to crash should you sell all your stocks and put your money under the mattress well bank of america seems to think so i'm going to discuss the details of what bank of america thinks and then provide you my opinion on this process of overvaluation and when to sell when to take profits i want to thank the motley fool for [00:00:21] Speaker 2: sponsoring this video visit fool.com slash parkev for the 10 best stocks to buy now so bank of [00:00:27] Speaker 1: america warns it's time to take profits as red flags are multiplying the large bank saying that investors should exercise caution regarding u.s stocks as an increasing number of bear market signposts point to an approaching market top according to bank of america securities they go on to say there are too many red flags take profits the advice so one of the evidence and signposts they allude to is the benchmark s p 500 index was statistically expensive on 17 of the 20 metrics that they follow and trades richly versus its tech bubble metrics on eight you know those measures include consumer confidence data growth expectations mna scores credit stress as well as tightening conditions like the senior loan officer opinion survey they say that consumer demand continues to soften additionally stocks with high price to earnings ratio were leading those with low multiples by a wide margin which is a sign of excessive speculation according to the strategist so let me discuss and offer my opinions on some of the things that bank of america is saying let me start with the last thing first which is stocks with high price to earnings ratios were leading those with low multiples by a wide margin and i have been seeing that right if you've been watching my videos you've noticed that those value stocks those that are trading at relatively cheap valuations have stayed at relatively cheap valuations they've struggled to gain momentum they've struggled to bounce back as investor enthusiasm follow the momentum stocks the stocks that have been performing well and there are pockets of extreme enthusiasm stocks that have no business trading at super premium valuations or still indeed trading at super premium valuations and i'll give you one example it's the most popular example and that's tesla which right now is trading at a forward price to earnings of a hundred and eighty one in my opinion this business has no business trading at this kind of premium valuation when its primary category of business selling electric vehicles which is still 80 of the business right now is in decline as competition is increasing the whole business is trading on hope and enthusiasm for something the company is going to deliver to investors in i don't know what right the primary reason why tesla stock is trading at this super expensive valuation is because of hope and enthusiasm right and that's a sign of market exuberance of irrational exuberance investors piling into speculative investments with the hopes that sometime in the future will result in something positive earlier in the article they said that consumer confidence data and growth expectations credit stress are all worsening and i've seen those data points in several various ways first of all consumer confidence understandably is worsening right for the past several years and more customers are seeing more recently consumers are seeing a higher cost of living while job growth has focused in areas with low wages and those higher paying jobs like in the technology industry and in other categories companies are using ai more and more and hiring fewer and fewer people so a lot of the job growth we've been seeing in recent months this has been in lower wage categories outside of health care health care has been performing really well and some of the health care jobs can be very good paying jobs but outside of health care a lot of the jobs that are being created are in low wage categories that are not delivering the kind of income to keep up with inflation so people's purchasing power has been either being flat or declining and that's lowering consumer confidence and of course the war in iran higher oil prices made the situation worse before that you had tariffs that increased your cost of living even more before that you had the covid 19 and the reopening which caused another round of inflation and worsened your living standards further and further and so you've had one thing after another that's been worsening people's purchasing power and it's piling up and it's making people feel less and less confident and the data shows that and consumer spending shows that as well i mean there's a couple of factors at play here but if you look at the restaurant industry it's been in decline for nearly two years now the restaurant industry people are visiting restaurants less frequently and when they're visiting they're spending less money additionally you have other categories that are also seeing similar trends companies like procter and gamble clorox kimberly clark and others are reporting that consumers are trading down from their branded products to the store branded products which sell at lower prices for similar product categories finally the senior loan officer survey highlighted uh worsening credit conditions as people are defaulting on their recurring payment streams more so than at any time since the pandemic so defaults are increasing incomes are declining you've got this situation that's worsening but it's all been propped up by the massive spending on artificial intelligence if it weren't for the hundreds of billions if not trillions of dollars in spending on artificial intelligence i think the u.s economy would have been in a recession by now and so all of these factors are happening simultaneously while the stock market is soaring doesn't seem to make sense for bank of america and i would say that overall it does look speculative and it does look like it doesn't make sense but i would be more specific here i wouldn't group everything all together because i see some pockets of irrational exuberance uh things like tesla stock and the enthusiasm for the spacex ipo and cryptocurrencies and anything related to speculative uh categories i think those seem to be approaching bubble territory if not well beyond bubble territory but then there are pockets of the market where i'm still finding a lot of undervalued stocks that are trading at attractive valuations even though they're delivering great results and their fundamentals are supporting the valuation so it's been one of those markets where it's uh a stock pickers market really because you have some really really overvalued stuff and then you also have some great businesses selling at very attractive prices so do i agree with bank of america's statement that you should take profits and you should sell some of your stocks i wouldn't make a general blanket statement like that but i will say that if you own some of these very speculative stocks the ones that have run up significantly before the business has supported the valuation in anticipation of something that's going to come sometime in the future it could be a good opportunity to take profits in those type of names things like tesla would be one of the first stocks i would sell if i had tesla in my portfolio intel is another one that seems overvalued it's gotten ahead of the business performance as investors anticipate something great is on coming and they just announced another big deal this morning with google that will have the company sell nearly 3 million tpus to google but the stock price has already rallied well ahead of the company actually delivering some of these products and services that investors are expecting the company to deliver and then there are categories uh that are really speculative i know cryptocurrencies have crashed recently but still even at these levels i wouldn't want to own a you know anything more than five percent of crypto in my portfolio would seem excessive especially in the current environment which seems interesting to me so despite these piling risks i'm surprised that the volatility index which is a measure of the volatility in the stock market is at near record low levels when looking back over the the previous five years it's near the lowest level it's been and you've got ongoing wars multiple ongoing wars the russia in ukraine the united states and israel in iran the houthis threatening to close on the red sea shipping lane in addition to the strait of hormuz being effectively closed and you've got china and the geopolitical tension between china and the united states and taiwan you've got all of these risks piling up and yet the volatility index is near the lowest it's been in the previous five years that doesn't make sense to me for me the volatility index should be at the minimum at around 25 right now it should be at least at about the average level it's been over the previous five years at the very least i wouldn't i wouldn't feel like it's above its uh level even if it were above 30 approaching 35 you've got ongoing multiple wars you've got geopolitical tension between some of the biggest leaders on the world i wouldn't be comfortable holding speculative stocks or speculative investments amid this backdrop with so much complacency in the market that's really what concerns me is so much complacency the investors that are holding some of these speculative stocks feel so confident that you know these things are going to happen the companies are going to deliver these fantastic things and they seem to have no fear of the downside of holding these speculative stocks and that's really what concerns me is that level of complacency that i'm seeing in the marketplace amid all of these risks that are piling up so in conclusion i wouldn't be selling all my stocks and putting my money under the mattress because you're guaranteed to lose if you do that inflation is you know out of control and every year you'll lose purchasing power if you put your money under the mattress but what i would be doing is taking a look at my portfolio looking at the allocation of my portfolio where have i seen my portfolio have too much because of price increases uh seeing areas where i can reduce risk and allocate more to more favorable valuation opportunities and allocate away from some of the more speculative stuff that may have grown in value as investor enthusiasm has increased substantially