TIP217: Current Market Conditions & Analysis (Investing Podcast)

Episode Summary

Executive Summary: Preston and Stig argue that late-2018 markets look overvalued and increasingly vulnerable as the Fed keeps raising rates and begins quantitative tightening, while volatility rises. They see a topping process rather than an immediate crash, prefer cash, select equities, and non-U.S. diversification, and expect commodities to benefit if the Fed pauses in 2019. They also review prior stock picks to show how valuation, momentum, and macro context affected outcomes.

Main Topics: Late-cycle market outlook and Fed tightening (Priority: 5/5): The hosts compare the current market to prior cycles and conclude that continued Fed rate hikes plus quantitative tightening may be setting up a topping process, though timing remains uncertain. Volatility, corrections, and overvaluation (Priority: 5/5): They frame recent swings as normal within broader market volatility but note the S&P 500’s pullback exceeded its typical range, reinforcing concerns that the market is expensive and late-cycle. Positioning for 2019: commodities, cash, and diversification (Priority: 5/5): Preston and Stig explain how they are positioning defensively: holding some cash, diversifying outside the U.S., and expecting a potential commodities rally if the Fed stops tightening. Review of past stock picks and performance vs. the S&P 500 (Priority: 4/5): They revisit prior recommendations such as Foot Locker, Bed Bath & Beyond, Fiat Chrysler, and Apple, comparing returns to the S&P 500 and extracting lessons about fundamentals, momentum, and macro forces. Value investing with momentum awareness (Priority: 4/5): A key takeaway is that cheap stocks can remain cheap or deteriorate further, so the hosts increasingly combine value analysis with momentum and trend confirmation before acting. Bonds, duration, and rebalancing (Priority: 4/5): In response to a listener question, they argue bonds are unattractive because real yields are poor and rising rates hurt duration-heavy holdings, though they acknowledge rebalancing and tax considerations.

Key Arguments: The market appears to be in a topping process because the Fed is still hiking rates and conducting quantitative tightening, which may reverse the support that quantitative easing provided. An 11% correction is not unusual in historical context; corrections happen about once a year on average, so volatility alone does not imply a crash. Expected value analysis favors downside over upside in equities from current levels because potential losses appear larger than realistic gains. A change in the Fed’s stance in 2019 could trigger a commodities upswing, weaker dollar, higher inflation, and pressure on bonds and equities. Great businesses bought at fair valuations are preferred over fair businesses at great valuations, especially late in the cycle. Momentum matters: if a stock is in a long-term downtrend, valuation alone may not be enough to justify buying it. Bonds look unattractive because yields are low after inflation and rising rates can reduce bond prices, especially for long-duration debt. The U.S. market is expensive relative to history, prompting partial rotation into rental property and international stocks. Historical analogies are useful, but they must be treated carefully because quantitative tightening makes this cycle different from prior ones.

Data Points: S&P 500 YTD performance: Up 1% - Described as the year’s performance as of early November 2018. Market correction magnitude: About 11% - Late-September to October 2018 pullback referenced as a recent correction. Average historical correction: 13.5% - Average correction size since 1900. Frequency of correction: Once a year on average - Tony Robbins’ correction statistics cited by the hosts. Average time to recover correction: 54 days - Historical average recovery period after a 10%+ decline. S&P 500 volatility: 9% - Referenced via TradeStops as typical volatility for the index. Potential upside from current market levels: 10% to 20% - Preston’s estimated upside range, with 20% called a stretch. Potential downside from current market levels: 30% to 50% - Preston’s estimated downside range for the market. Fed funds rate in prior cycle: Raised until end of Q1 2006, then held steady for over a year - Used as an analogy to the late-2018 cycle. Foot Locker return since recommendation: 52% - Performance from Sept. 23, 2017 to recording date. Foot Locker vs. S&P 500: Outperformed by 42 percentage points - Foot Locker returned 52% versus S&P 500’s 10%. Bed Bath & Beyond price change: From $35 to less than $15 - Price move since the 2017 recommendation. Bed Bath & Beyond performance vs. S&P 500: Down about 65% while S&P 500 up 22% - Illustrates underperformance of the pick. Fiat Chrysler valuation: EV/EBIT around 5 - Used as evidence of being very cheap. Fiat Chrysler expected operating earnings return: Around 20% - Approximate implied return from buying the company outright. Fiat Chrysler special dividend: $1.50 per share - Paid after selling Magneti Marelli. Fiat Chrysler stock price: A little less than $17 - Current price at time of discussion. Apple return since 2016 thesis: About 83% - Return since Buffett’s purchase and the hosts’ valuation work. Apple vs. S&P 500: About 3x outperformance - Apple versus roughly 30% market gain. 10-year Treasury yield: 3.2% - Used to compare with Shiller P/E earnings yield. Shiller P/E earnings yield: 3.2% - Matched the 10-year Treasury yield in the discussion. 10-year Treasury yield at start of year: 2.46% - Shows rates had risen by the time of the episode. U.S. market rank by valuation: 3rd most expensive stock market in the world - Stig’s comment on relative valuation. Commodity outlook: Big jump expected in 2019 - Preston’s forecast if the Fed pauses tightening.

Pivotal Quotes: "I personally believe, my personal opinion is that we are seeing a topping process right now." — Preston Pisch: Summarizing his macro view of late-2018 equities. "I would definitely consider the tax piece here if that's what you're doing." — Stig Brodersen: On rebalancing stocks and bonds and the cost of trading/tax impacts. "Great companies with very little debt and fair valuations." — Stig Brodersen: Describing how he wants to position in an expensive market.

Implications: Listeners should expect a cautious, late-cycle playbook: prioritize quality, valuation, and momentum confirmation; diversify beyond U.S. equities; keep dry powder; and be wary of long-duration bonds if rates rise further.