This Is The Best Investing Opportunity In 30 Years
Summary
TLDRSasha discusses the S&P 500's impressive 18% growth this year, countering fears of a market crash by analyzing data trends, such as the Shiller PE ratio and Buffett indicator, and suggesting that historical economic models may not apply to current market conditions. She highlights the potential for a bull run as interest rates are expected to drop.
Takeaways
- 📈 The S&P 500 has seen an 18% increase this year, outperforming its historical average annual return, indicating a highly unusual performance for just half a year.
- 🚨 There are warnings of an imminent stock market correction from various sources, including Forbes, Business Insider, and renowned financial analysts like Mike Wilson from Morgan Stanley.
- 🤔 The speaker challenges the common belief of an 'overdue' market crash by arguing that people often misinterpret nonlinear trends and historical data in the context of stock market valuations.
- 📊 The Shiller PE ratio, a key indicator of market valuation, is at an all-time high, which some interpret as a sign of an impending downturn, similar to conditions before previous market crashes.
- 🧐 The speaker suggests that the historical context of economic indicators like the Shiller PE ratio and the Buffett Indicator may not be directly applicable to the current market conditions due to changes in economic maturity and global stability.
- 💡 The script points out that small-cap stocks, as represented by the Russell 2000 index, have been significantly underperforming compared to the S&P 500, especially since the 2020 financial turmoil.
- 💰 The undervaluation of small-cap stocks and certain sectors within the S&P 500, such as airlines and banks, presents potential investment opportunities according to the speaker.
- 📉 The U.S. inflation rate has dropped to 3%, and there is a high likelihood of a rate cut by the Federal Reserve in the coming months, which historically has had a positive impact on the stock market.
- 📈 The speaker anticipates that a decrease in interest rates could lead to a significant recovery and growth in the stock market, contrary to the panic seen in 2022 when rates were rising.
- 🚀 The potential for transformative applications of AI and other technological advancements could contribute to a new wave of growth and innovation in the market.
- 🔮 Drawing parallels to the 1990s, the script speculates on the possibility of another bull run in the stock market as interest rates are expected to decrease, despite skepticism from some quarters.
Q & A
What is the current performance of the S&P 500 in 2024?
-The S&P 500 has gone up by 18% so far in 2024, which is double the average annual return of the stock market.
Why do some people believe that a major stock market crash is imminent?
-Some people believe a crash is imminent due to the market growing four times faster than average, high values of the Buffett Indicator and Shiller PE ratio, and warnings from economists and financial analysts.
What does the speaker mean by 'nonlinear trends' in the context of stock market data?
-Nonlinear trends refer to patterns that do not follow a straight line or a simple relationship. The speaker suggests that people often misinterpret these trends, expecting a linear relationship where there might be a more complex one.
What is the Shiller PE ratio and why is it significant?
-The Shiller PE ratio is a measure of the cyclically adjusted earnings from the previous 10 years. It is significant because it is often used to assess whether the stock market is overvalued or undervalued. Currently, it is at 36.2, which is considered high.
What is the Buffett Indicator and why is it considered a warning sign for a stock market crash?
-The Buffett Indicator is the ratio of the value of publicly traded stocks to GDP. It is considered a warning sign because high values have historically preceded stock market crashes, as it suggests that stocks are overvalued relative to the economy.
How does the speaker challenge the conventional wisdom about stock market valuations?
-The speaker challenges the conventional wisdom by suggesting that as markets and economies mature, it is natural for stock market valuations to gradually trend to higher multiples, rather than following a flat or linear trend.
What is the current state of small cap stocks compared to the S&P 500?
-Small cap stocks, as measured by the Russell 2000, have been underperforming compared to the S&P 500. Many small cap companies are unprofitable and have seen their valuations plummet, especially in contrast to the large tech companies in the S&P 500.
Why have small cap stocks been undervalued relative to large cap companies?
-Small cap stocks have been undervalued due to factors such as higher interest rates affecting their debt obligations, less profitability, and a focus on growth funded by venture capital rather than immediate profits.
What is the current inflation rate in the US and what is expected to happen in the coming months?
-The current inflation rate in the US is 3%, but it is expected to decrease towards 2% in the coming months, which could lead to a rate cut by the Federal Reserve.
What is the speaker's outlook on the potential impact of a rate cut on the stock market?
-The speaker is optimistic that a rate cut could lead to an increase in stock valuations, especially for companies that have seen their stock prices collapse in recent years, and could stimulate a bull run similar to what happened in the 1990s.
What historical precedent does the speaker mention for a potential stock market bull run?
-The speaker mentions the bull run in the 1990s following a decrease in interest rates from 9.75% to 3%, suggesting that a similar scenario could occur if rates are cut again.
Outlines
📈 Stock Market Boom and Crash Predictions
The paragraph discusses the significant growth of the S&P 500, which has risen by 18% in the year, surpassing the average annual return. Despite predictions of an imminent crash by various sources, including Forbes and Business Insider, the speaker expresses excitement about the stock market. They challenge the common belief that the market is overdue for a correction by arguing that people often misinterpret nonlinear trends. The speaker also critiques the use of the Buffett Indicator and the Shiller PE ratio, suggesting that these traditional measures may not accurately reflect the current market dynamics due to changes in technology, economy, and global stability.
📉 Small Cap Stocks and Market Valuations
This paragraph delves into the performance disparity between the S&P 500 and the Russell 2000, which tracks small cap US stocks. The speaker notes that small cap stocks have been severely impacted by the financial challenges of the pandemic, leading to a significant undervaluation compared to large cap companies. The speaker also highlights the contrast between the soaring valuations of big tech companies and the struggling sectors like airlines and banks. They suggest that there are bargains to be found in sectors that have been overlooked by retail investors, who are primarily focused on a few high-profile tech stocks. The paragraph concludes with a discussion of the current inflation rate and the likelihood of a rate cut by the Federal Open Market Committee, which could potentially boost the market.
💡 Interest Rates and Market Recovery
The final paragraph addresses the historical context of interest rates and their impact on the stock market. The speaker refutes the assumption that rates must revert to a historical norm of 5%, arguing that a more stable and mature market might require lower rates. They predict that as rates are expected to decrease, this could lead to a recovery in the valuations of companies that have been negatively affected by high interest rates. The speaker also speculates on the potential for a bull run similar to the one experienced in the 1990s following a decrease in interest rates. They conclude by questioning whether the current economic conditions will lead to a repeat of historical patterns or if this time will be different.
Mindmap
Keywords
💡S&P 500
💡Stock Market Correction
💡Buffett Indicator
💡Shiller PE Ratio
💡Nonlinear Trends
💡Russell 2000
💡Inflation
💡Interest Rates
💡Bull Market
💡Diversification
💡AI Applications
Highlights
The S&P 500 has seen an 18% increase this year, doubling the average annual return of the stock market.
2024 is already one of the best performing years in recent stock market history.
Some predict a major crash due to the market growing four times faster than average.
Forbes and Business Insider report on warnings of an imminent stock market correction.
Morgan Stanley's Chief Strategist Mike Wilson warns of a 10% stock market correction.
The speaker expresses excitement about the stock market despite contrary opinions.
Investment decisions are based on data science rather than superstition.
The stock market's performance is often misinterpreted due to poor understanding of nonlinear trends.
The Shiller PE ratio is at 36.2, historically high, suggesting an imminent crash according to some.
The speaker argues that market valuations naturally trend higher as economies and technology mature.
Warren Buffett has reservations about the Buffett Indicator, despite it being named after him.
Small cap stocks have been undervalued relative to large cap companies since the peak of the dotcom bubble.
US inflation is now at 3% and is expected to decrease, affecting market valuations.
There is a 94% likelihood of a rate cut by the Federal Open Market Committee in September.
Interest rates are not expected to revert to a historic norm of 5% due to market maturity and stability.
The speaker anticipates a potential bull run in the stock market as interest rates are expected to decrease.
The speaker questions whether the current economic conditions will lead to a repeat of historical bull markets.
Transcripts
hey guys it's Sasha the S&P 500 has gone
up 18% so far this year that's doubled
the average annual return of the stock
market in just half a year so the stock
market right now is growing four times
faster than average 2024 is already one
of the best performing years in recent
stock market history and a lot of people
will say that we're long overdue a major
crash according to these people right
now is the worst time to invest your
money an imminent stock market
correction warning suddenly flashed red
says Forbes a famed Economist who called
the 2008 recession shares five signs the
US is on the brink of a downturn says
Business Insider Morgan Stanley's Chief
strategist Mike Wilson Wars the stock
market faces a 10% correction says
fortune and then there's a random guy on
YouTube who seems to be saying the
opposite well I don't own a crystal ball
but I have not been this excited about
the stock market in a very long time and
I want to share the data that gets me
very excited with you and I apologize
some of this will get a bit nerdy
because I prefer to make my investing
decisions based on actual data science
instead of studying te Leaf patterns or
tarot cards now first before we go into
the serious data I want to address the
points that I he being made over and
over and over including no doubt in the
comments of this very video people say
look at the data see how the stock
market has had these big red years on
the left and we haven't had a few really
big red years on the right more recently
well it means that the stock market is
overheated it means we are overdue a big
correction or a crash or whatever people
say look at the buffet indicator it is
sitting at an all-time high this is the
ratio of the value of publicly traded
stocks to GDP and you can see that it is
way above the historical average so
we're probably on the cusp of the stock
market crashing back down and then
there's the Shiller PE ratio it's at
36.2 way above average and look the last
time it spiked like this was just before
the Doom crash and the time before that
it spiked just before the Wall Street
crash of 1929 and look it is spiking
again so you know crash is imminent go
home hug your loved ones this is a
disaster it's going to be really bad
except the problem with all of this data
is that people are really bad at
interpreting and understanding nonlinear
Trends humans are naturally very bad at
processing nonlinear relationships
because our brains just weren't wired
like that by biology you plant 10
potatoes you get 10 potato plants you
plant 100 potatoes you get 100 potato
plants but it takes you 10 times as long
to do it if you do it manually with a
sharp Rog to dig the holes all of this
supplies now if you look at these charts
again here is the shil ratio chart this
chart shows the cyclically adjusted
earnings from the previous 10 years so
what it does is it takes the company's
current stock price and divides it by
the average of the company's earnings
for the last 10 years adjusted for
inflation and according to all of these
economists it must follow that there is
a linear a flat Trend there is a median
value here that makes sense over time
and if you go above that then the market
is too hot because the multiple is too
high but is that accurate well the first
ever standard and pause index of us
companies was made in 1923 company
valuation and trading Data before this
point is extrapolated and massaged to a
point where it is highly unreliable and
if you consider all the available data
since
1923 would you say that a flatline is
the best trend line for the data in this
chart or could it possibly look a bit
more like this because as markets and
Technology mature as the economy matures
as global economy matures as life
expectancy things like that increased
from 58 in the 1920s to 78 today as
there is more stability could it be
possible that it is completely natural
for stock market valuations to gradually
Trend to higher multiples now I would
say yes but the overwhelming Economist
consensus is that company valuations
today for some reason have to work in
exactly the same way as they worked a
100 years ago same exact point for the
Buffett indicator Warren Buffett himself
has said that he doesn't like this
measure despite it being named after him
but do you think that this gry line is
the best fit curve through this data or
could it maybe look a bit more like this
and looking back at stock market crashes
is it possible that all this greater
stability longer Financial outlooks
longer investor timelines less risk
fewer Wars with extremely high
casualties much longer life expectancies
and therefore longer term financial
planning could all of that lead to fewer
years where the stock market collapses
as we go through time because if you
were to employ that logic it is very
possible that we are for example in year
two out of I don't know maybe 8 to 10
year streak of winning years as these
red bars become more and more rare but
now let's look at all of this data in a
bit more detail here is a chart of the
S&P 500 compared to Russell 2000 Russell
2000 is an index of small cap US stocks
and historically the two indices have
performed very similarly actually the
small cap stocks have on average
outperformed the S&P 500 but then came
2020 and suddenly small cap stocks got
completely obliterated because smaller
companies were less able to navigate the
financial storms of the pandemic they
weren't as flexible that didn't have the
same kind of cash reserves or well at
least that's what the stock market
thought and that's what's reflected in
the valuations of those companies now
40% of the companies in the Russell 2000
do not make a profit at all they're
unprofitable a lot of these companies
are early stage companies many of them
just haven't reached profitability yet
some of them maybe are reinvesting money
into growth funded by venture capital
and all that but being consistently
profitable is literally one of the
requirements of being in the S&P 500 and
it's perhaps not surprising that while
many of the biggest companies in the S&P
500 have giant enormous piles of cash
you know tens of billions of dollars
sitting around on the balance sheet many
small caps instead have a big pile of
debt and so when inflation hit the
interest rates went up the big S&P 500
companies started earning a lot of
interest on all of that cash which
increased their profits but small cap
companies started paying a lot more
interest on their debt which had the
exact opposite effect so valuations on
small cap stocks have plummeted while
valuations on big tech companies in the
S&P 500 absolutely exploded in the last
4 years now this chart from Wellington
management shows that small cap stocks
have not been this undervalued relative
to large cap companies since the peak of
the dotom bubble while the S&P 500 is
hitting new all-time highs every day
small cap stocks crashed 35 to 40% back
in 2022 and are still today 7 to 8% down
since before that crash even within the
S&P 500 the same exact Trend can be seen
retail investors are busy focusing on
only the biggest T tech stocks if you go
on social media if you watch YouTube
it's like there's only 10 companies that
anyone ever invests in you know Nvidia
Tesla Google Microsoft Apple Facebook
those kind of companies and the reason
everyone is obsessed with these stocks
is because they are the biggest their
products are the things that people use
and come across every single day and
their valuations are going up in a
vertical line since J GPT arrived in
November 2022 but look a little deeper
within the S&P 500 and everything else
is in exactly the same place as those
small cap stocks airlines are trading at
a p ratio of five or six with market
caps lower than they were 10 years ago
here is Delta here is United Airlines
here is American Airlines here is
Southwest banks in the financial sector
are still struggling to match their 2021
valuations here is Bank of America for
example here is Wells Fargo here is
Capital One now there are several
different sectors that have gone nowhere
some of them is trading significantly
below low where they were some roughly
in the same place but certainly trading
at much lower valuations than these big
tech stocks and I'm looking at some of
these valuations and there are some
absolute Bargains out there I've
personally been shopping in the discount
aisle but here is what's coming next US
inflation is now done it's over it is at
3% right now as of the report that came
out a couple days ago it is at 3% right
now and it is highly likely to dive down
towards the 2% Mark when we see August
and September data come in over the next
3 months the market is now saying there
is a 94% likelihood that there will be a
rate cut by the September meeting of the
fomc Because by that point the inflation
data will be overwhelming so today there
is a 94% likelihood of the rate cut in
September but just one month ago it was
a 70% likelihood and two months ago it
was only 50% and you know the election
is coming up so a September rate drop
would come in at just the right time
wink wink but rates are going to come
down now and again a lot of people in
the comments say Sasha you're way too
young to understand what interest rates
looked like before they went to zero and
you know I do appreciate the flattery I
am a little bit older than some people
here might seem to think my first
mortgage was sitting at I think around
7% and I was actually working for a big
American Bank as the financial crisis
hit in 2007 I've been there I've got the
t-shirts I was one of the ones walking
out with all my stuff in the cboard box
like everybody else anyway that's a
story for another day just like with the
data that we talked about before people
naturally presume that interest rates
must reverred back to some kind of a
historic Norm of 5% people think that
there has to be a one number Flatline
that applies historically across time
but here is the chart of interest rates
over time once again is a flatline at 5%
the most logical the most obvious way to
draw a trend line here or do you think
it could maybe look a bit more like this
because you know more maturity in the
markets more stability all that jazz and
again I would say that this kind of
trend that is not flat that is not
linear makes a whole lot more sense if
you're targeting a stable flourishing
economy with inflation sitting at 1 and
a half or 2% you really shouldn't need
to be sitting on interest rates of 5%
and in fact if inflation was kept in
check lower rates stimulate more grow
growth which is good for the economy and
from September it looks like rates are
now heading back down what do you think
is going to happen to all of these
companies that have seen their stock
price collapse in recent years what's
going to happen to small cap companies
who are paying a huge amount of Interest
right now on their debt relative to what
they were paying before what's going to
happen to stock valuations what's going
to happen to Market confidence right now
as I'm recording this video we are 2
months away from that meeting when
everyone's expecting the rates are going
to be cut remember the panic in the
stock market in 2022 at the start of
2022 in the middle of 2022 when rates
started going up I remember small cap
stocks were losing 50 60 90% of their
value because of this panic and many of
those have still not recovered well
there is every chance that we may see
the exact opposite effect happen
starting later this year what happens do
actually useful applications of AI start
turning up in the market you know
instead of Google suggesting that you
put glue on your pizza in the search
results maybe Tesla finally has a
breakthrough with full self-driving you
know an actually useful and
transformative application of AI the
last two times when interest rates came
down was a result of financial meltdown
they were the result of people trying to
save the economy but the time before
that interest rates came down without
the economy needing emergency life
support between 1989 and 1992 interest
rates slowly made their way to down from
99.75% to just 3% there was a very brief
recession in 1990 but the high inflation
of the80s was over and so the rates did
not need to stay high and after the
rates came down the US Stock Market went
on the biggest bull run in its history
in the 1990s at the time it actually
seemed highly unlikely a lot of people a
lot of Publications said that this was
an impossible situation because the
stock market had already had its
strongest decade ever in the 1980s after
going through the high inflation spike
in 1980 but despite already growing by
200% from 1982 to 1992 when the interest
rates came down the stock market went
and grew another 200% in the late 1990s
so which is it going to be is history
going to repeat itself is the stock
market going to go on one of the biggest
bull runs in history as rates come down
as data suggest suggest it could or is
this time definitely different
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