This Is The Best Investing Opportunity In 30 Years

Summary

Sasha 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

00:00

📈 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.

05:01

📉 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.

10:02

💡 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.

Keywords

💡S&P 500

The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is often used as a benchmark for the overall U.S. stock market. In the video, it is mentioned that the S&P 500 has gone up 18% so far in the year, which is a significant increase and suggests a booming market.

💡Stock Market Correction

A stock market correction refers to a decline of at least 10% in the value of a stock market index from its recent peak. In the video, there is a discussion about the possibility of a correction, with some predicting an imminent downturn due to the market's rapid growth and high valuations.

💡Buffett Indicator

The Buffett Indicator is a measure of the total market capitalization of publicly traded stocks divided by a country's GDP. It is named after Warren Buffett, who has used it as a tool to assess whether the stock market is overvalued or undervalued. The video mentions that the Buffett Indicator is at an all-time high, suggesting that the market might be overvalued and due for a correction.

💡Shiller PE Ratio

The Shiller PE Ratio, or Cyclically Adjusted Price-to-Earnings Ratio, is a valuation measure calculated by dividing the price of the S&P 500 by the average of the company's earnings for the last 10 years, adjusted for inflation. It is used to assess the valuation of the stock market. The video discusses the Shiller PE Ratio being at 36.2, which is significantly above average, indicating high valuations.

💡Nonlinear Trends

Nonlinear trends refer to patterns that do not follow a straight line, often involving complex relationships or variables. In the video, the speaker argues that people are bad at interpreting nonlinear trends, which is relevant when analyzing stock market data and predicting future movements.

💡Russell 2000

The Russell 2000 is an index that represents the performance of the small-cap segment of the U.S. equity universe. It is mentioned in the video to illustrate the performance disparity between small-cap stocks and the broader market, particularly during the 2020 pandemic when small-cap stocks were hit hard.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses current inflation rates and how they are expected to decrease, which could impact interest rates and the stock market.

💡Interest Rates

Interest rates are the cost of borrowing money and are set by central banks. They have a significant impact on the economy and the stock market. The video talks about the likelihood of a rate cut by the Federal Open Market Committee (FOMC), which could stimulate economic growth and affect stock valuations.

💡Bull Market

A bull market is a market condition in which prices are rising or are expected to rise. The video speculates on the possibility of a bull market occurring as interest rates decrease, drawing parallels to historical trends.

💡Diversification

Diversification is a risk management strategy that involves spreading investments across various financial instruments, sectors, or asset classes to mitigate risk. The video highlights the importance of looking beyond just the biggest tech stocks and considering other sectors that may be undervalued.

💡AI Applications

AI applications refer to the practical uses of artificial intelligence in various industries. The video suggests that the next wave of AI applications could be transformative and potentially impact the stock market, though it also humorously notes the current limitations of AI, such as Google's search suggestions.

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