ALINE Market Roadmap: Good to Be Home

By Aline Wealth Management on September 30, 2021

Irene and I are just back from a trip down California’s central coast—a lovely time. But no matter how nice it was to finally get away, upon setting foot at home we both said, “good to be home”. That started me thinking—when it comes to investing what is “home”? That is, what are the tenets that a professional advisor/investor/steward should hold dear? What makes us tick? What’s our DNA when it comes to allocating (and exposing) other people’s money to the capital markets?

For us at ALINE Wealth, our “home”, as it relates to investment management, is always assessing what could go wrong. What is our “margin of safety” with this particular investment? This type of investing—owing more to the dividend-generating, free cash flow yielding, and lower relative valuations, is typically found in the value-style vs the high growth segment of the equity markets. That does not mean that we don’t find exciting opportunities that meet our strict guidelines in the growth sector—we do—but, given the higher valuations, we typically deploy a bit more skepticism and risk mitigation.

Ok, so allow me to unpack this for you. I will be long on charts and short on words—I have heard this called a “charticle” —like that:

Point 1: The US stock market is extended and overdue for a correction; frothiness begets frothiness only to a point. Couple that with the amount of investor complacency that one would not expect to have given what the globe has gone through in the last 18 months, what we still must do, and the bull run which we have had—you would expect some sort of skepticism, concern, worry, etc. Yet why don’t we see that? Frothiness begets frothiness which provides complacency which reinforces this feedback loop. But the music can’t stay on forever—sometimes, as our ballroom dancing teacher Olga tells us: “Need to take a break now!”

What me worry?

Worry? Heck with that, let’s margin our growth-inspired portfolio to the hilt…what can go wrong? Stocks don’t go down—the Fed has our backs (moral hazard).    

Source: FINRA

Have investors become dull—even immune—to the risks posed by COVID (longer-term risks and costs)?

Point 2: Valuations are stretched—and I mean really stretched. To the point that you realize after a corrective action takes place and washes away these excesses, you will say: “What was I thinking buying that at X multiple”. Today that “X” is up there—caveat emptor land.

This one really gets me—10x to SALES! Off the charts. Literally.

And from a historical perspective:

Source: Capital Economics

Finally, looking at valuations, P/E multiples are a 3-sigma effect—rare and prescient levels. For P/E to simply return to what was “normal” over the last ten years will take a 36% loss. But past bear markets didn’t stop there. Long periods of overvaluation get balanced by subsequent undervaluation. So, it’s entirely reasonable to think the next bear market, whenever it comes, will chop prices in half. That’s not crazy.

Point 3:  Economic conditions are not so robust.

Consumer confidence fell in September for the 3^rd straight month (Delta variant concerns likely the fuel to this) and higher prices are also dampening sentiment. The largest manufacturer of memory chips forecasted lackluster demand for its computer and phone semiconductor chips.

Here we see the disconnect between earnings (the Mother’s milk for stock prices) and stock prices—OUT OF SYNC:

Source: MacroMavens

And with persistent/sticky inflation profit margins, which have been high for some time, will be under pressure:

Source: MacroMavens

Point 4: Sectors that look attractive from a valuation lens (hence, NOT as bid up as most everything else; relative pockets of value):

Source: Brandes

Source: Brandes

So, summing it all up, where are market conditions today?

Stocks are very expensive (except when one looks at stocks relative to the Fed’s artificially managed fixed income or interest rates). Mutual fund and ETF flows seem to be decreasingly responsive to buying opportunities. Fewer stocks and fewer sectors are contributing much to the performance of the index. There is a lot of margin debt in the system, waiting to be unwound. And the news on corporate profits, though good, looks ready to plateau. One more piece of key context: everyone has made a boatload of money in stocks over the past decade. After a great run, and with inflation fears subsiding a bit, doesn’t a little more cash sound OK? So, we can possibly expect increased selling pressure as investors perceive these issues and act in the short-term rather than the longer-term (which of course is easier to do when prices are going up). But remaining balanced—maintaining a core position of high-conviction investments—be they themes, funds, stocks, or other securities—and then deploying cash (affectionately known at ALINE Wealth as “Dry Powder”) at attractive prices to add to these and other “on-sale” investments has been shown to be a winning long-term strategy.

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ALINE Wealth is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. ALINE Wealth and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. ALINE Wealth and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.