By Matt McCallAug 31, 2019
I want to do something a little different this weekend. I love writing to you about the big trends and investment themes giving us the opportunity to multiply our money many times over. But today, I’ll give you something else to chat about over the Labor Day weekend:
Costly market myths you should ignore.
We talked this week about all of the doomsday headlines out there – that “Lehman-like disaster” that never happened is Exhibit A. I get so mad when I see these because a lot of good people are scared by irresponsible “analysts.”
Don’t let these myths stop you. There are too many good opportunities out there to grow your wealth.
Market Myth #1: The stock market is overvalued.
I am sure you have heard this over and over in the financial media. It has been the number one talking point for bears over the last five years. That’s a long time to be wrong over and over again. They point to valuation metrics that are either bogus or backward-looking. The forward P/E ratio on the S&P 500 is currently 16.5. The reading is only slightly above the market’s long-term average and nowhere near overbought.
Stocks are fairly valued, and more importantly, they are set to continue growing earnings the rest of this year and even throughout 2020.
The next time you hear a talking head say the market is overbought, turn off the TV and call a loved one. OR… buy your favorite stock!
Market Myth #2: A global recession is imminent.
A recent survey by The Wall Street Journal showed a high number of economists expecting a recession in the next 12 months. About one-third of economists predict a recession in the next year.
A quick reminder… a recession is two consecutive quarters of a contracting economy measured by negative GDP growth. The latest GDP reading from the second quarter shows 2.1% growth. There has to be a big and sudden drop for a recession to occur.
Let me see if I can put this nicely. Economists are some of the absolute worst predictors of recessions – or really anything to do with the economy. Think of them like your local meteorologists. When you turn on the television and the forecasters tell you it will rain today – and it is already raining outside! – it’s pretty obvious. Crazy enough, economists CANNOT even do that.
A 2018 study by Prakah Loungani and two others looked at 153 recessions in 63 countries from 1992 to 2014. Only five – just 3% – were predicted by April of the preceding year. Since 1998, the International Monetary Fund (IMF) has never predicted a recession in a developed country with a lead of anything more than a few months.
I love visuals and had to share the chart below with you to calm your recession fears. Or at a minimum, I hope it helps you stop making investment decisions based on anything an economist preaches.
Market Myth #3: The Federal Reserve has to go OR the Federal Reserve has to lower interest rates more.
Whether you are for or against the Fed, the overwhelming view of the central bank is negative. Some will argue that the Fed should ignore calls from President Trump to lower rates right now – by a lot. Others will argue that the Fed needs to do more to help the economy and lower interest rates by 50 basis points in the September meeting.
This myth is not necessarily incorrect, it is more of an opinion. My opinion is that the Fed is doing the right thing this year. Yes, I have bashed Fed Chairman Powell in the past, and I believe rightfully so. But by only lowering interest rates by 25 basis points this year, it leaves the door open for several more cuts if the economy needs it.
Either way, the likelihood of the Fed lowering rates at least two more times this year is high, and that will be positive for stocks. That’s just one more catalyst for my bullish expectation that stocks will rally into next year and the November presidential election.
Low rates are also great for housing stocks, which look great right now. I will have at least one new recommendation in the new Investment Opportunities issue on Thursday.
Market Myth #4: The inverted yield curve is a sign that a recession and bear market are imminent.
This could not be any further from the truth! The financial media has been giddy over the yield two-year Treasury bond yielding more than the 10-year Treasury bond. Typically, the longer the maturity of a bond, the higher the interest rate. When this flips, it creates an inverted yield curve. And yes, the media is partially correct in saying that when the yield curve inverts, the odds of a recession increase.
But that is only half the story. Since 1978, a recession historically will not occur after an inversion for another 21.3 months – nearly two years. The more important stat the media overlooks — either due to lack of knowledge or intentionally — is that one year after the reversion occurs, the market is almost always higher. And by a big margin! Over the last four decades, the stock market has been up 20% on average one year after the 2/10 yield curve inverts.
If this trend continues, that would put the S&P 500 near 3,500!
I hope today’s discussion calms any fears that have been caused by myths in the media and helps you enjoy the holiday. It should also give you some good fodder to think about over the long weekend. And as a bonus, maybe you got a few good nuggets to use at your BBQs so you are the smartest one in the neighborhood.
Most importantly, I want to make sure you avoid the trap that so many other investors fall into when they get paralyzed by the misguided fears you hear in the media. Not only do I expect a sizable market rally in the next 12-18 months, but the massive trends we focus on will continue to explode and change our world in the coming months and years.
Markets will always zig and zag, but that is when we will make life-changing profits over time.
Have a fun and safe Labor Day!
P.S. I’m looking forward to the last part of the year and what the market will bring. September can be bumpy, but dips are good buying opportunities. And speaking of buying opportunities, I will release my latest recommendation next Thursday in the new issue of Investment Opportunities. If you’re not a member, click here now to learn how you can join today and invest with us in those explosive like the legalization of marijuana, which is coming sooner than most people think. I’ll tell you why I think that.
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