Portfolio Prepping

This past Friday was the largest Nasdaq selloff in history (by points).

But Monday was surprisingly calm. Stocks rebounded and traders breathed a sigh of relief.

Then today, chaos returned. At least for a few hours.

As of 2:40pm, the Nasdaq 100 is down 1.2%. At one point it was down a more shocking 3.5%. The S&P 500 is off by less than 1%, but was down 2% around noon. Gold, silver, and miners are down as well.

It was a nasty move at one point, but stocks have regained ground since.

The question is – are we approaching a market top, or is this another fakeout before new all-time highs?

The Guy Who Called Bear

Over the past year, I’ve said we’re likely near a market top a few times. Most recently near the start of the Iran war.

I was wrong. This bull has gored anyone who got in his way.

Eventually we are due for a major pullback, and possibly even a “lost decade”. But we don’t know when the peak will come. Or how much further stocks can run before they collapse from exhaustion.

One thing I can say clearly is that stocks are historically expensive. Priced for perfection. The chart below shows the S&P 500’s CAPE ratio (cyclically-adjusted price-to-earnings). This is a measure of how expensive the S&P is over a 10-year period, adjusted for inflation.

Source: Multpl.com

As you can see, we’ve only been more expensive during the 2000 dotcom bubble peak. According to this metric, anyway. But note how much bigger the 2000 peak was than 1929. Maybe this time will be even bigger. Who knows?

Once a bubble of this magnitude pops, it takes a long time to get back to even. Following the 2000 bubble pop, it took around 13 years for the S&P 500 to fully recover (accounting for both inflation and dividends being reinvested).

Using the same rules, it took the Nasdaq 100 about 18 years to reach its previous highs. That’s a long time to wait.

This is what happens after stocks become extremely overpriced. They underperform for many years to come. And that’s where we are today.

Personally, I’m preparing for the party ending relatively soon. But not by shorting the market. Over the past few years, I’ve been shifting a portion of assets out of broad U.S. stocks and into specific areas which should outperform going forward.

So I’m not saying you should sell everything, or even get rid of all your tech exposure. Or all your U.S. stocks. But if you’ve made good money already, it’d be smart to take some profits and rotate them into less popular (and expensive) assets.

Where to Hide Out

During an actual crash, the only truly “safe” place to hideout may be cash. And there’s nothing wrong with having a decent chunk of cash today. As long as you’re getting a decent yield on it, either from your bank or a money market fund.

U.S. government debt (Treasuries) may work for a while, but for a few reasons, I don’t want too much exposure there for the long-term. However, if you want to earn some yield in a relatively safe way, there are certainly worse options than U.S. Treasury bills and notes.

Even hard assets like gold, miners, and oil can fall during a crash. But these investments should outperform dramatically once the market bottoms out.

We saw this after the 2000 bubble. Gold, silver, and miners soared for more than a decade, outperforming the market hugely. This is why I’m still holding my precious metal investments. And I have cash to buy more if we do see a major selloff.

I continue to hold my emerging market investments, especially Brazil (EWZ). My favorite South American country’s stock market has pulled back, and this is an attractive entry point for long-term investors.

The other area I’m interested in, which we covered yesterday, is beaten-down consumer staples like Campbell’s (CPD). It’s worth noting that as the market sold off today, Campbell’s gained as much as 2.3%. General Mills (GIS) also outperformed.

These stocks have been slashed in half (or more) over the past few years. IF the market reverses, it will be the cheap and hated sectors which are likely to outperform.

With all of that said, I’m not downright bearish. I have a few tiny puts which represent well under 1% of my portfolio. This is still a market that could absolutely “rip faces off” bears, as they say.

I prefer to buy assets that have significant upside, limited downside, and the ability to withstand crashes better than the hot stocks.

The SpaceX Complication

This is one of the most important weeks in market history. The biggest IPO in history, by far, goes live on Friday.

If the market continues to sell off, chances of a failure to launch (pun intended) rise. If we rebound and the IPO soars, that will likely set a positive tone for the market for at least another few weeks.

I don’t pretend to know for sure what’s going to happen. But the market (once again) feels toppy. If the SpaceX IPO doesn’t perform well, it would set a rather negative tone for the market going forward.

Then again, if SpaceX soars 30% on day one, there will be even more liquidity and profits sloshing around. I hate to be so ambivalent, but this one could truly go either way.

The Iran Situation

Just after noon today, President Trump posted the following message on Truth Social.

So on top of everything else, a deal to re-open the Strait of Hormuz remains highly unlikely anytime soon.

There’s an increasing risk we return to all-out war. This remains a major risk to markets. One that has been ignored so far.

For the past few months, we’ve been running on optimism, hope, and rainbows. Not the cold hard reality of draining oil inventories and reserves, while hitting consumers’ wallets hard with higher prices.

If the war starts back up in earnest, and oil infrastructure once again becomes a target, oil prices would soar and markets would (probably) crash. But who knows, this market is a bit manic. So maybe we’ll recover just fine, and keep running to new all-time highs. Despite the wall of worry.

Tomorrow we have a special Daily Reckoning by Jim Rickards dedicated to the Iran situation. It’s going to be a good one. Nobody has called this conflict better than Jim so far. So look for that in your inbox at 6:00pm ET.