What Worries Me Most About this Market (Hint: It’s NOT Tariffs)

Wednesday, May 08, 2019

President Trump managed to send global stock markets reeling with just a couple of tweets late Sunday evening. In those commentaries, he threatened to more than double tariffs on $200 billion in Chinese goods to 25% starting this Friday.

Trump went even further, too, saying 25% tariffs on an additional $325 billion in Chinese goods would be added “shortly.” Both the hawkish U.S. Trade Representative Robert Lighthizer and more dovish Treasury Secretary Steve Mnuchin piled on late Monday, underscoring that the threat is very real. Negotiations will continue in Washington over the next 48 hours, even as Friday’s deadline looms ever larger.

But as serious as the tariff and trade battle is, it’s not the biggest worry I have. Yes, you read that right. What REALLY worries me is the rampant complacency and out-of-control risk-taking in multiple asset markets – not to mention the reckless lending/borrowing/investing behavior that’s fueling it.

I can’t think of a better illustration than the research I just completed on tech stocks. Consider these shocking stats ...

* In the first four months of 2019, the Nasdaq Composite surged 23% while the more-narrow iShares PHLX Semiconductor ETF (SOXX, Rated “B-”) jumped 33%. Those gains were greater than all but six FULL-YEAR moves seen over the past couple decades.

* But things really get nutty when you “annualize” the gains – in other words, when you look at what those four months of returns would be roughly equivalent to on a full-year basis. On that basis, the Nasdaq’s gain is on par with a stunning 87% annual surge ... while the SOXX’s rally is like a 154% explosion.

* That would be greater than EVERY SINGLE YEAR in Nasdaq history, including the 86% rise at the peak of the dot-com bubble in 1999. The index was founded in 1971.

As for semiconductor stocks, they jumped 101% in 1999. That means they’re not only on track for the best year in the history of the chip industry ... they’re also tracking to beat the biggest tech-stock bubble year by more than 50 percentage points!

Allow me to be blunt here …

This is absolutely, positively nuts!

And it comes at the same time we’re seeing the greatest proliferation of money-losing tech and biotech Initial Public Offerings in market history ... as well as the greatest herd-like move into growth over value stocks since the peak of the dot-com bubble.

Even the Federal Reserve is being forced to acknowledge (belatedly, and not aggressively enough) the risks evident in asset markets. In its second Financial Stability Report issued Monday, the Fed admitted “Valuation pressures remain elevated in a number of markets, with investors continuing to exhibit high appetite for risk.”

My advice? Don’t chase wildly inflated, high-risk, money-losing garbage stocks. Stick with “Safe Money” names that are less volatile, higher yielding, more defensive, higher-rated, and otherwise better long-term options for your hard-earned wealth. And carry higher levels of cash than you did from March 2009 through January 2018.

I keep hearing claims from some quarters that there are no similarities between what we’re seeing in sectors like tech now and what we saw in the late 1990s. They are flat-out wrong, as I’ve explained for several months and proven again today. Make sure your portfolio is as insulated as possible against the risk that this manic behavior comes back to haunt the markets now, just like it did two decades ago.

Until next time,

Mike Larson

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