EP 07: S&P 500: Are stocks in a Bubble or Rational Exuberance?
Summary
Market Outlook: The podcast discusses whether the current US stock market is in a bubble or experiencing rational exuberance, highlighting the recent performance of the NASDAQ and the S&P 500.
Federal Reserve Impact: Attention is on the upcoming Jackson Hole Symposium and potential changes in interest rates, with the Federal Reserve's actions being a key focus for market movements.
Global Market Performance: While US markets showed mixed results, other global markets like the Footsie 100 and Chinese indices reached new highs, indicating strong international equity performances.
US Government Investments: The US government's unprecedented move to buy stakes in companies like Intel is discussed, highlighting a shift in investment strategy and potential impacts on the market.
Sector Analysis: The podcast covers the technology sector's recent volatility, with significant declines in major tech stocks like Nvidia, and discusses the broader implications for the market.
Investment Strategies: Various investment factors such as value, growth, income, and momentum are explored, providing insights into different strategies and their current market relevance.
Bubble Indicators: The hosts analyze historical bubbles and current market conditions, emphasizing the importance of valuation, sentiment, and price action in identifying potential bubbles.
Portfolio Management: The podcast reviews their investment portfolio's performance, noting the importance of diversification and the strategic holding of cash amid current market uncertainties.
Transcript
Those which did perform particularly poorly, NASDAQ which fell by 3%. >> So there's a lot of people hurting. They all want it to go down so they can buy it. In one year it went up 86%. >> What a miss if you had sold early. What a miss. >> Brace yourself. Nvidia would be worth eight times what it is today. >> But as long as the music's playing, you've got to get up and dance. Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode seven of The Art of Investing, the US stock market special, including a potentially heated debate on whether those stocks are currently in a bubble. First, as always, we'll go across to Mark for the Spice Market update. It's been a really interesting week, actually. There's been some nerves jangling ahead of the Jackson Hole Symposium, which actually starts Friday, which is the day this podcast comes out, and runs through to Saturday. Um, and everyone's waiting for the chairman of the Federal Reserve speech, which may or may not move interest rates, and we've seen some movement in interest rates this week. But actually, away from the US, there's been some actually pretty strong performances in equities. Uh, again, uh, basically, we hit another all-time high in the Footsie 100. Come on, guys. There we go. >> Oh, now he's a believer. >> Yeah. Yeah. He's changed his tune now, has he? >> Yeah. Obviously, it is the chickens China trade cuz China, the Shanghai composite and the Hong Kong Hang Sen also hit sort of three-year highs as well, which is pretty impressive. With 90% of the companies already reported now, it's been a very good reporting season. We've touched on that before, but this week the last remaining companies have been mainly retail companies and in America, they've been there's been a pretty mixed bag about those. in the UK of interest really this morning as we're recording this WH Smiths I think are down over 30% uh because they've had a massive profit warning and they've also highlighted some irregularities in their accounting practices in the United States but the other one that caught my attention was Rich's makeup artist uh and sponsor Estee Lauder >> I thought you were going to say Matt >> no come on to those in a minute but Estee Lauder shares were down 7% clearly you've changed your uh your makeup Trump uh interestingly uh has instructed his government to buy a 10% stake in Intel. Uh when Trump first started talking to the chief exec of Intel a couple of weeks ago, uh the shares has started moving and they're up 25% since then. So the US government are basically using tariffs and sort of taxes on some of these other companies to basically buy a stake in Intel. And there is speculation that he's going to do more of that. He may take stakes in companies like Micron or even the foreign company TSMC, which is obviously uh the Taiwan semiconductor company. >> And this is unprecedented, isn't it? Because he's taking money from Nvidia and AMD and buying estate for the US government in Intel. I' I've never heard of anything like this before. Well, in the UK, we're used to that sort of thing because back in the day, the British government always had what was called golden shares in companies like British Aerospace or BAE Systems, Rolls-Royce that had defense interests and certain other key assets like utility companies, >> British Telecom, >> British Telecom because they wanted to be able to block foreign takeovers of those companies. So, the golden share concept in the UK is very real and very well known about. Um, but in America, this is a pretty new thing. This is obviously the home of capitalism and here they are buying a stake. Uh and they want to take a significant influence and be a significance influence on the boards of those companies which is really interesting development but remember now that we are data watching uh rather than looking more at companies because as I say we're 93 90% of the way through the reporting season. This is the chairman of the Federal Reserve talking. It could be quite interest rate sensitive. But really the big story this week I suppose is that the technology sector and a bit of NASDAQ hit a bit of an air pocket. Some of the tech companies were down between three and 10% and that includes companies like Nvidia, the world's biggest company. We've highlighted before that we knew that August and September are seasonally traditionally quite weak months months. Remember that there are a lot of the major sort of leaders of teams and chief investment officers away from their desks on holiday. So deaths are run by sort of more junior people, let's maybe with less experience and less ash blonde hair such as I have. So, uh, there's a bit of panic when things start going down and that build a bit of momentum. Anyway, we've had a bit of a bounce back into the close last night, which was for us was, uh, Wednesday night. Um, and we'll see how it settles down today. But there there's maybe a bit of profit taking in some of those big sectors ahead of this Jackson Hole Symposium this weekend. And remember, you know, that comes on the back of uh, you know, that the fact that the S&P 500 is up 35% or so from its April 7th low and NASDAQ's up nearly 55% since then. So, you've had a huge mount back bounce back. In fact, that's the biggest bounce back and the quickest bounce back in NASDAQ for over a decade. >> CJ, anything pop out to you this week? There was one thing I didn't understand this week and actually we had a question on this last night um from Jackie in Elton. She said that she'd listened to our podcasts. She really enjoyed them. She thought she'd understood that if inflation numbers come out higher than expected then interest rate expectations will rise and interest rate expectations rising isn't good for equities. >> Yeah. So, she was saying, "Why did the Footsie have such a good day yesterday when we saw disappointing inflation numbers?" I said, "I'd ask the guru." >> Sorry. >> Well, thanks. Thanks for the question, Jackie. The big reason I think the Footsie 100 managed to rise this week in the face of falling markets in America is that at these sort of points, we quite often see what's called rotation. So people were selling technology companies in America and they were they were sitting on piles of cash basically, but they wanted to keep them in other markets. So they came and put some of that money to work in the UK and bought the Footsie 100 market which has a big dividend yield. If you remember, it's got about a 3 and a half% dividend yield. And lots of the companies in the Footsie 100 are quite defensive. So if markets do fall, the Footsie does tend to do a bit better than other markets. >> A nice port in a storm. >> Exactly. Right. >> Fantastic. Right. Well, UK was actually something that we we looked at last week, wasn't it? The the Footsie 100. So, this week we thought we would do a similar deep dive into the US stock market. Spice, take us through a similar deep dive that you did last week, including those factors. >> Sure. We'll come on to the factors in a minute, but um like the UK, the US have a number of very big large stock markets, in fact, the biggest in the world. the S&P 500, which everyone knows about, uh the NASDAQ uh 100, the Russell 2000, which is the mid and smaller size companies. Those are the main ones, and you can invest in lots of other things, including the factor type sort of scenarios that we'll talk about in a minute. But at its heart, remember, the US has 5% of the world's population. It's got over a quarter of its GDP or it's gross domestic product which obviously we talked about this is the output of the economy but it actually controls over 35% of the global financial assets. So it's a big financial hub even though it is uh you know only 27% of the world's GDP. It controls most of the financial wealth and actually 61% of all the professionally managed assets in the world are done from America. So they are huge and they they control around 78 to 128 there's lots of different numbers between 78 and 128 trillion dollars worth of assets that incl if you include private assets as well and remember despite all of China's best efforts they also have this reserve currency currency stasis China have been trying to take away and as we said before when we did the piece on commodities I think it was episode 4 uh remember that all commodities are priced in US dollars. So that's also very important. So they have a significant influence when it comes to that. Um they are 58% of the world's foreign currency reserves and other central banks. So they're very important. Now the good thing about the US population is they're very well educated when it comes to equity investing. So most of their pension savings, we have a self-invested pension plans here, the SIPs or you have company pension. In America, they have these things called 401ks which are basically they the way they can save privately and they put most of their assets as we've been advocating in equities because they get and they love their equity markets and also their central bank the Federal Reserve tend to look after their equity markets. We've talked before the Federal Reserve looks after equity markets. The European Central Bank looks after bond markets because the Europeans tend to be more bond investors and the UK tend to look after the property market because in the UK most of our pensions are in our houses unfortunately. >> And even you going out for dinner in in the US they love to talk about stocks and the their investments and their winners, don't they? Might get people talking about football here but there they're talking about their their stocks. >> Exactly. There is a saying when you know when you start hearing it from your taxi driver then you know that you're probably tired to sell the stock you're in. But um they are the best capitalists in the world. They've got the deepest and most liquid uh capital markets. So why on earth wouldn't you invest money there? And that's what most people do. And also added to this, at the end of the day, they are now the world's leading um advocates of AI. They've got the biggest AI companies. They're putting the most investment in by a country mark. The next nearest is China. And weirdly, the UK is the third biggest investor in AI, which surprised me when I did a bit of research in that because I'm a bit concerned that every company in the S&P 500 has a chief technology officer or chief AI officer. I think in the UK, we've got about 40% of the footsy have AI officers. So, the Americans are taking much more seriously than we are. And that that's good to see, but that's why they're leading the world. uh and obviously the benefits that will come from a AI which we touched on before there'll be huge efficiency gains much more cash being generated margins will increase and efficiencies and that leads the profitability to go up and some of the stock market moving towards higher valuation than they have been in history is partly to do with that and expectations that this profitability will come through in the next few years. Of course, the benefits of one big beautiful bill which everyone's talking about, the main benefits are there's going to be tax cuts through to 2028. There's going to be you'll be able to write off any of this manufacturing expense you've got against your taxes. So, you don't have to pay as much tax that will help your earnings per share. That will go that helps your earnings. Basically, they they are all positive things. The most important of which is they're reducing regulation on companies operating in the US, which ultimately is good for equity prices. I'm still focusing on the fact that the UK is the third biggest spender in AI. I mean, it's another ball point for the UK. How many more can we find in these episodes? >> You are converting me more and more. I'm converting myself actually, blind me. What can I say? >> I mean, just to interrupt the torrent of good news there, just with a couple of of of things. I mean the key really is whether the bond market plays ball because the big beautiful bill although it's got all these very big positive points will bring a huge amount of issuance with it. >> Define issuance there. What what do you mean by that? >> Sorry. The US government will be spending more and more money. The tax revenues that are coming in although they will probably increase will be very much smaller than what they're spending. And that difference is the government borrowing. So the US government will have to borrow significantly more than it is now. And it is already, should we say, creaking a little under the uh issuance profile, especially as it needs lots of foreign people to buy the bonds. And if those foreign people are getting a little bit upset at Trump's action towards them, >> they may well say, "We're not going to buy as much as we have in the past." >> Yeah. >> So, there's a really delicate balance here. As long as the bond market behaves itself, >> then what Mark's talking about could you can see that come through beautifully. I I think that works very well. The big problem is if the bond market starts to misbehave. It isn't yet. It hasn't so far, but it's what we need to watch carefully. You could say somewhat Trump is walking a bit of a tight rope with his spending, but then also the debt markets and he he has to be very careful. There's not much room for error, is there? >> There isn't. And I think a positive for him is that when he went down the tariff route to start with, he wasn't walking that tight river. Well, some might say he fell off it and Scott Bessant, the Treasury Secretary, got him back on it again, caught him as he fell off and pulled him back on again. and now he's behaving himself on there saying all the right things for the bond market but it's just something to watch going forward. >> I think it's a very good point and just remember of course apart from Jackson Hole which is this weekend we've talked about we are in the process of potentially seeing the names come forward for the next Federal Reserve chairman which will happen when the current Federal Reserve chairman the most important job arguably of central banks in the world he steps down his term ends in May. Now clearly the bond market may take fright depending on who Trump nominates to bit to replace Jay Pal, Jerome Pal. Uh the current favorite is a guy called Chris Waller. He's already on the Federal Reserve Committee. Markets wouldn't mind Chris Waller because they know him, they understand him. Yes, he's more dovish. In other words, he helps stock markets more than the current Federal Reserve chairman normally does and he's an advocate of cutting interest rates even now. So I think the equity markets would like it. But if the bond markets don't and they overreact and start pushing bond yields up, which means prices go down and we've learned our lesson from Chris, then you know, if that goes too far, then equity markets also might take fright. But we're not going to that would not really come into investors minds until we start to get a firmer number of nominations. >> Hawkish means more likely to put interest rates up or keep them higher than they would otherwise be. Dovish means happy to cut. Make monetary conditions easier. Markets love the doves. They don't like the hawks. >> We focused on the on the UK last week and you you introduced this this term value and value investing to us versus growth. How does the US look in terms of that? >> Well, bear with me a moment. I'm going to go through the main sort of six seven investment factors. And certain investors are value investors as Rich says and some are growth investors. Some are income investors. Some are cyclical, some like defensive, some like momentum. So let's go through those very one by one. Value is basically stocks that are considered undervalue compared to what their fundamental price earnings ratios are. So they price earnings are low. They tend to have higher dividends. And the hope is that one day a catalyst will come along and that price will be driven back up because the company will be run better and become more profitable and earnings will start growing. But those value stocks are quite quite a big chunk of the market and traditionally they've they've been a big part. Growth stocks on the hand which tends to be more the American ones are companies that are expected to grow earnings or revenue faster than the whole market as an average. So the average so they're above average growers above average in revenue and earnings. Income stocks are ones that if you remember the foot seed 100 we said has a yield of three and a half%. If you as a company pay a dividend of 5% you might be considered income company an income stock and a factor of income uh because you'll attract people who want these higher dividends. They don't mind so much about the capital growth and how the earnings are doing as long as the dividend is paid. So those in that's an income factor. Then you have quality equality factor. These are companies with strong balance sheets, stable earnings, high profitability that don't actually get hurt too much when there's a recession. They can actually weather recessions quite well and they do well in all sorts of economic conditions. But there are the ones that that suffer badly during recessions. These are called cyclicals. And this is another factor cyclical. So these are sensitive to economic cycles and they perform perform really well when the economy is booming and expanding but very poorly when the conditions are bad and recessions happen. And then you have defensive stocks again another counter to these cyclicals. And in a downturn you want some of defensives. You want quality stocks because you can weather the storm of a recession. And they're basically they've got stable they've got good balance sheets. They have like long-term contracts like uh for example uh Rolls-Royce, their engine business has a 20-year order book. So investors can see for the next 20 years what the core of their profitability is going to be. >> Even in a recession, we know what consumers turn towards, don't they? They turn towards alcohol, food, cigarettes, food. >> Exactly. Those are the the consumer staples they're often called. So they're BAT industries, unilver, and some of the some of the drug companies as well. uh and that they are all part as you say of those defensive companies and and the UK is very blessed with having a lot of those as we touched on last week. The the last one I want to talk about is momentum because actually that's one of the things that has underperformed this week and seen some of the technology stocks because having had such a strong rise up in the markets from the like say NASDAQ's over nearly 55% since it April the 7th low the stocks that got hit the most this week were the ones that had the greatest momentum and that's a fact of momentum. that keep growing and they they've got accelerated performance uh through when the rest of the market may be doing very little actually the momentum stocks do well. So you know this week top the top 10 momentum stocks in the US actually sort of had a bit of a fall as I say between 3 and 10% mainly technology stocks but actually the other 493 stocks in the in the S&P 500 actually were up. They actually went up. >> Wow. So there were 380 stocks in the S&P on the day when NASDAQ went down nearly 2% uh that went up and that that shows you the differential in the markets that are there and this is a this comes down to factor investing quite often. >> Now talking about when the momentum turns there has been a lot of chatter this week about whether the US market is in a bubble. CJ I was wondering if you could tell us what exactly is a bubble to begin with. In my career, I have heard bubbles mentioned um a a lot of the time, too many times. Um normally what happens is somebody sells something, it keeps going up and they say, "Oh, I don't really know what's going on here. Uh therefore, it's in a bubble. It's in a bubble." And most of the time it's not. They just haven't realized they've got something wrong and they need to do something about it. Bubbles are actually about as rare as finding a generous Scotsman. Oh, >> we're going there, are we, sir? >> Yeah. Well, you you've said that off at my expense with with agism. I'm getting one back at you. >> They are rare, but they happen. And we need to therefore think about what do we mean by a bubble. Now I think of a bubble as a deeply um unsustainable condition in in a market defined by very high valuations and accompanied by irrational market psychology. You know you can't understand what's going on and it just keeps going. >> Now I recognize that word especially irrational >> that has been used on many occasions and there is one famous occasion which we'll get to in one second. Just staking on bubbles for the moment. I like the theory that my old boss George Soros developed called the theory of reflexivity. Now, simply put, he said that there's a that feedback loop exists in which investors perceptions affect economic fundamentals which then in turn change the investor perceptions. Now, that's lovely gobbledegook. What does that actually mean? It basically means people start to believe something and that creates positive price action. >> It's sometimes called animal spirits. >> Animal spirits, right? That's right. And then people watching those animal spirits start getting persuaded by it. So they start believing what's going on from the price action and they start buying more themselves. And then that carries on and the bubble then starts to feed on itself. It starts building and it builds and it builds. it inflates and now we've lost touch of what the real story was because there've been so much story that's gone on behind why these things have happened that's now taken over. That's the fundamentals seemingly changing when in fact they haven't changed at all >> which sounds ties into momentum investing a little bit as well. I think you could argue that there's correlation between the more manic periods of momentum investing and what is going on in a bubble. But it's important thing to realize that the bubble forming takes a long time and the largest percentage price movements happen at the end of it not at the beginning of it. And this is critical to understand when you're looking at what a bubble is. I'll give you an example. The NASDAQ in the 1990s, the US Federal Reserve chairman warned about irrational exuberance in 1996. Your favorite saying there. >> That is one of my favorite things. In fact, I would love to to quote him directly. >> Go on then. Because Alan Greenspan stood up and he addressed the nation, addressed all those investors and he said, "But how do we know when irrational exuberance has unduly escalated asset values which then become subject to an unexpected and prolonged contraction as they have in Japan over the past decade?" Remember, he also said in other speeches, "I guess I should warn you, if I turn out to be particularly clear, you probably misunderstood what I said." Which sums up Alan Greenspan completely. Never wanted to give too much away. If you if you thought you understood him, he wasn't he wasn't getting himself across properly. >> He wasn't one for transparency and clarity, was he? >> What he was saying, though, was irrational exuberance. 1996 NASDAQ had rallied 40% in 95 and 22% in 1996. So he comes out it's gone up circa 55%. >> Mhm. Similar to the NASDAQ in the last few weeks. >> Exactly. >> Ah but if you had sold then if you taken Greenspan's advice which I did by the way I took Greenspan advice thought he know he knows what he's doing. He's chairman of the Federal Reserve. Let's take some risk off the table. you would have missed the NASDAQ rallying 21.6% in 1997, >> 40% in 1998. >> Okay. >> And 86% in 1999. >> In one year it went up 86%. >> What a miss if you had sold early. What a miss. It then fell 80% by October 22. So the point here is a lot of the price action happens at the end. So don't get out too early. Be patient and look very carefully at the signs and how the market is moving before you decide to sell because you think you're in a bubble. >> Now, okay, that NASDAQ.com boom was one example of a bubble, but there have been many others over the years as well, Spice. And it it's not just recently, is it? I in fact, there's rumors that CJ made a lot of money back selling tulips from his family garden back in the day. So, take us through some some other examples of uh of bubbles in history. >> There have been five of the most famous bubbles that I'm going to just touch on very briefly. The first one goes back to 1720. So, this is not a new phenomenon. It was called the South Sea bubble and it's all about a company taking on managing the UK debt instead of the government. And for that, they got a monopoly in certain trades. At the end of the day, that bubble ended very badly and their stock market having gone up 500%. Five, this one company went up and there was great investors in it, Isaac. So, Isaac Newton was an investor in this company. It went up at nearly a,000% from its lows and then went bust basically and the stock market fell 80 plus%. >> It found gravity. >> Yeah. The numbers weren't very clear in those days, but it fell nearly as much as it had gone up. The other most famous ones are the ones in the 1920s in America. There was a big economic boom after the first world war rebuilding rem building all the manufacturing back and America was leading all that. Then they started this thing called margin buying. They were borrowing money to buy shares and borrowing money they didn't have mortgaging their houses doing that sort. Now we've heard that before. We'll come on to another bubble that happened that but that led to the Wall Street crash in 1929 and then the S&P 500 as it was then fell 86%. But again it had gone up hundreds of several hundred% in the 10 years beforehand and so you get you lost a huge amount if you didn't get out in time. And it's a lot of this is about timing. We've had the Japanese uh bubble market which happened in the 80s. They had a massive property boom. Tokyo was the most expensive country in the world. you needed a mortgage just to go and have dinner there. But that bubble when it burst the uh the Nikai basically fell 57%. It then took 40 years for it to go back. In fact, only in the last couple of years, we've seen the Nikai recover to where it was back in the 80s. In more recent times, we've also seen two very big bubbles. The ones that uh our generation will certainly remember and hopefully some of you will as well listening to us was the dotcom bubble in 99200. Um this is basically built on a lack of technology companies. Everyone wanted to get involved in companies that had exposure to the internet or providing the internet. The most famous of that is a company called Cisco which we'll come on to talk about later. But nevertheless, they were so short of equities. The ones that were there were ramped up in price and got traded on absolutely ridiculous multiples. Basically the stock market then fell about 50 to 60% and NASDAQ which was the most exposed to that fell 80%. Uh but the most recent one was the global financial crisis that we all remember. Now what built up to that was a huge property bubble particularly in America. But when that ended which inevitably it did it led to the global financial crisis and a huge credit crunch where no banks would or mortgage companies would lend money because they were so scared of losing it and they wouldn't lend any money and that and that led to a big economic recession and central banks had to step in very heavily. During that time stock markets fell about 57%. So huge force can happen but at the end of the day central banks often step in to help this. >> Okay CJ I mean that worries me. Okay if if there is a bubble but how do we actually recognize if there is one? What are the warning signs? >> I mean clearly Rich if I if I knew every single warning sign I could get it right. I wouldn't be sitting here I'd be on a beach in the Bahamas with my yacht having a great time. But but here are the sort of things that I look out for. I mean first of all the valuation needs to be extreme not just high it needs to be extreme >> and there was this very famous investor called Tony Dy Tony Dy was the chief investment officer of a company called Philips and Drew he was effectively Warren Buffett of the UK wasn't quite as famous globally but he in his own right he was very famous in the UK and he was known as a great value investor remember we talked about the factors earlier on so he was the leading value investor in the UK uh in the in the mid '90s Now in 1995 he was convinced the US stock market was too expensively valued and so he started selling his clients US equity holdings started selling them down and putting that money into cash. He didn't put them in other stock markets cuz if one stock market falls led by America others fall. They may not fall as fast but they all fall. So he took the view that because America was overvalued all stock markets would eventually fall. say he started out building cash positions by selling his American exposure and he started that in 1995. As Chris said, the NASDAQ went up and up and up and up and up >> for another four years. >> Exactly. Between 1995 and the peak of the dotcom bubble in 2000, March 2000, the stock market, the S&P 500 had gone up threefold. 300%. And basically, guess what happened to poor Tony? Literally 2 weeks before the peak of the the bubble bursting in March 2000, late February, he retired early. He took early retirement >> and he left the market >> and basically he he disappeared. Honest truth, two weeks later after his for that was made that announcement was made to the market, the NASDAQ started falling and it fell 77% in 6 months. He would have been an absolute hero. He was remembered as unfortunately the man who got out too soon. But there is a big lesson here and that is that markets can remain irrational longer than you can remain solvent. And that was a quote from the econ great economist uh John Maynard Kees. >> Right. So valuation's one. What's the second one CJ? >> Secondly, sentiment indicators. So lots of sentiment indicators out there. There's surveys of investors behavior whether they be retail investors whether they be institutional investors you know do they like the market do they not like the market how much cash are they holding blah blah blah they like bonds like this like the other normally you'll find that everybody is loving it when it's just about at the top >> cuz everybody's made >> because everybody's got in it everybody's behind the momentum and thinks this is what it's all about there are other sentiment indicators but the survey evidence I've seen is not completely worrying. There are bulls out there, but there's a lot of people who are cautious as well. Other sentiment indicators, Warren Buffett, everybody understands that Warren Buffett is a great investor and he is holding more cash than he's ever held before cuz his favorite measures are showing that there's no value in the US stock market at all. Taxi drivers though aren't talking to me whenever I go out to talk about the stock they like best and how it's all going yet. So when I look at my sort of mixed sentiment indicators there, I've got some which are flashing red and I've got some which are still amber. So I'm going to say that's a broadly a score draw. Is this because you get the chauffeur driven cars and we're in the black cabs? >> It might be, but even the chauffeers buy stocks when everybody's in. >> The other big indicator is the amount of cash that is sitting in people's portfolios. So we can't really see it very easily in the UK but in America this data is available if you look on the Federal Reserve's uh websites. Um and basically it shows that at the moment there is a massive $7.4 trillion of cash sitting in money market funds on the edge of the market potentially waiting to be invested. Now, if that were all to be put in the S&P 500, that would be equivalent to about 14% of the entire S&P 500. It's a huge amount of cash and it's a record level, never been ever higher, and it's been growing and growing and growing as this bull market has developed. So, there's loads of people saying, "Oh, it's great bull market. There's lots of people who haven't participated in it. They're talking the talk, but they're not in it." So, there's a lot of people hurting. They all want it to go down so they can buy it. And at the moment the fear of missing out is hurting them. >> At the moment in those money market funds they're earning a good interest rate but suddenly if interest rates come down then that changes and and maybe stocks do look more attractive. >> Exactly. And that's one of the reasons central bankers cut interest rates because they want to encourage people to use that cash to spend it either in the real economy or in in financial assets like equities. >> So my third indicator is price action. I mean, we talked just now about how the NASDAQ accelerated so sharply just before the top. >> When you look at equity prices generally against their moving averages, against the history as a momentum investor might, for example, they look a little expensive, but the the price action this week bringing has brought them back to sort of average levels. So really, there's nothing in the price action of equities that concerns me. One thing I would be looking at though is out of my side glance, I'd be looking at what the bonds are doing because bonds have a habit of starting to do strange things when suddenly the equity market's going to crack or or do something. But bonds are pretty well behaved now at the moment as well. We're not seeing that worry as we said earlier about issuance. So my price action indicators are not looking um too silly at all. Now my fourth thing which is in fact my most important indicator is at key levels you'll normally find someone saying something stupid or you'll find something stupid happens. Now for example Mark's just given the example of the NASDAQ where Tony Dy the most famous value investor in the UK lost his job. Oh sorry um retired early um to spend more time with the family >> just before the peak. So there's a sign. My my personal favorite was in 2007, just before credit blew up. When Chuck Prince, the CEO of City Bank, said, "When the music stops in terms of liquidity, things will get complicated. But as long as the music's playing, you've got to get up and dance, and we're still dancing." And that was just a red red flag. There's a problem here. Within two or 3 weeks, the credit problem started to to to show. Indeed, in the movie Margin Call, they made a play on that, didn't they, with Jeremy Irons talking about the the music completely stopping. >> So, to me, you got to look at that sign. Uh there was another sign from Lloyd Blankfin, the head of Goldman Sachs, who said, "We're doing God's work just before another collapse." So, there are always these signs, and you got to look for them. So, you're looking for that sharp price action and then somebody saying something silly. The most worrying thing of all, if you ever hear this, run for the hills, is when someone says, "This time it's different." Or, "It's a new paradigm." It never is. If you hear people saying that, get out. >> He's been trying to get me to say that for weeks on the on here, and I'm not going to cuz I don't believe it is. >> Cuz essentially investing and markets, it's just human emotion, isn't it? Whether psychology absolutely it's it's psychology. It's it's how crowds react. When I worked for George Soros, he would spend a lot of time analyzing and thinking about how people react and how people move in herds and how people do things together because when everybody's on one side of the the the boat, it's normally going to go the other way. And you've got to be very very very careful. That's why when you look at these uh indicators of of where investor sentiment is, if everybody's the same way, it's telling you you got a problem. But as long as there's balance in the world, as long as it's balancing the force, we're okay. >> Can I give you some examples of the the things I've lived through that are big warnings and and I've seen at at work. One is about greed. And talking about Goldman Sachs, they were the main stock broker for a company called lastminut.com. You may remember it and some of you probably used it getting holidays and it's still going now but it's owned by I think it's a Dutch company actually I think it's a Swiss company but lastminute.com floated in March 2000 which if you remember that was the peak of the dotcom bubble and uh basically it was floated with a 571 million market capitalization. It made zero money. it was losing money and it peaked later that day at 768 million a 35% increase on one day >> and it never saw that price again but I was a fund manager at the time I was running equity UK equity funds and I was running about 2.5 billion pounds worth of equities and I applied through Goldman Sachs for 50 million pounds worth which is a lot of money but it was a part of a big cake so for me that was the sort of holding I it. I got allocated by a Goldman Sachs, love them dearly, £125,000 worth >> and I'd applied for 50 million. Now, that was useless for any of my funds. I literally took the view that I wasn't going to go and buy even more of them when the price had gone up another 35%. So, I sold them later that day. It's called staging. When you buy something in a new issue and you sell it the same day or a few days later, I staged it and I made 30%. That's just fantastic. But that was a sign of greed and that was investment bankers trying to get the squeeze of the last penny out of investors. And greed is often again a sign of these bubbles, these market tops. That flashes a little bit of a red warning, doesn't it? Because we have had two IPOs in the US recently that have been up 100% and people still come to buy them. So, you know, recently the circle IPO and then of course bullish and we saw bullish I mean a company calling themselves bullish and IPOing that in itself has got to be one of these red flags around you know when something worus that that I'm that I draw on it is that there are certainly signs out there that there is bubble behavior in various stocks. No doubt about that. Um, you're one of them very close to your own heart, Palanteer, which I know has meant that you can take us all out for dinner tonight because you've made so much money shorting that. And when I say shorting, by the way, I mean selling stock you don't own to buy it back later a lot lower. Rich has hated the stock for a long time and has it fell very sharply this week. >> Well, let's just get that absolutely right. I think it's a wonderful company, but wonderful companies can trade at the wrong price. What I meant was you hated the price and you thought the price should go lower. >> But that's an important distinction. >> Precisely. So there are bubbles around in various stock prices, but the question here isn't whether there's the occasional bubble in the odd stock. It's does the market look to us to be in bubblelike conditions. Now we totally accept that there could be a correction which is why on our portfolio that we have set up which we'll be talking about in a second we are holding 20% as cash. Now, we're holding in short guilts, but we are holding that as cash. Waiting for this seasonality of August and September to play out is because if you remember in the episode where we talked about this, August, September are the worst two months of the year for equities in a normal year. So, we wanted a hold of cash back. So, this weakness that we're seeing now in the S&P is good news. We we'd like it to go a bit further yet. so we can then put that money back to work. But we very much think we're in that corrective phase of a bull market. We've not seen that price action that you would expect to see in the whole um of an index driving upwards and forwards. So that is the conclusion that we have drawn. Chris touched on a really good point there. It's the importance of not overpaying for assets, understanding what you're paying for, what you're buying, and when you're buying it in the cycle. So I want to use an example here to show that in in my mind particularly we are not anywhere near for example the peak of the dotcom bubble. So back in in 2000 in 99 2000 the internet as I say was taking off. The biggest provider of the internet backbone and the nuts and bolts that went in the picks and shovels as it's sometimes called of the internet the enabler of the internet was Cisco and at the time it was the biggest company in the world. It had a market capitalization of $570 billion. Right. It we was 4.3% of the S&P back then. At that time, it was generating $22 billion of revenue and 6 billion of pre-tax profit, which is very impressive. It's big numbers in the biggest in in the world at that time. This year, and they had the results a couple of weeks ago, they've increased their revenue and profits 150% in 25 years. They they made 57 billion. So, they've made a huge amount more, but it's now valued at just 278 billion. is roughly half of what it was back in March 2000. So if you bought it in March 2000, you would you basically still h haveved in value since then. And by the way, in between March 2000 and now they've delivered they've delivered sort of 10% earnings growth every year, year in year out. They've been a great company. But if you bought them at the wrong time, you've got carried out. Now, interestingly, if you look at Nvidia, which is the current biggest company in the world, >> yeah, how does that compare with Cisco back in 2000? So if you put in Nvidia is currently valued at about $4 trillion. The multi- price earnings ratio, remember we've talked about the price earnings ratios before. If you put the same price earnings ratio on Nvidia's profits as as was Cisco was at the time back in March 2000, right? Brace yourself. Nvidia would be worth eight times what it is today. >> Okay? >> Eight times bigger than it is today. And that I think is the key point which is there are signs valuations are high but they're nowhere near as high as they were if people start talking about the same sort of thing as the internet bubble. This is why we decided to focus on ETFs and indices, isn't it? We we didn't want to go for single stocks just in case we got tripped up somewhere along the way. which takes us perfectly into having a look at this week's portfolio analysis. So, chairman, run us through in a tricky week for the US, how has the portfolio done overall? The portfolio has returned since we started.2% and it was 5%. So, we had a disappointing week. Best performer on the week was the India ETF and second best was the Footsie. I had to get that in cuz it quite often be up there. So, I'm going to keep sharing it. The worst performers of the week were the mining holdings and our US holdings. I don't think that's surprising at all. We've got um Jackson Hole coming up on Friday. Chairman's speech. US has run very strongly. Bit of profit taking seems sensible. We're still pleased with our performance, but we are not as pleased as we were last week. And CJ, just for those who are listening rather than watching on YouTube, run us through exactly the week-on-week performance of the US stocks and our worst performer, the World Mining Trust there. Okay, so those which did perform particularly poorly were our crypto and blockchain ETF, which fell by 1%. The S&P 500 ETF, which fell by 1.2%, and NASDAQ, which fell by 3%. Black Rockets World Mining Trust was down a solid 4%. So there's some pretty ugly moves in that area, but we're still up since inception. So we'll we'll take that. Okay. And that plays into this idea of diversification. We had shares in India give us a decent return and that offset this weakness in the US. So you know overall it's a kind of tick in the box for diversification working, isn't it? You want to ensure uh as investors u and everybody listening uh to the podcast, we want to get this across very strongly that you have a portfolio made up of lots of different positions rather than just one or two. If you have just one or two and one of those goes wrong, all that could be quite ugly for you. Or if it goes right, well done to you. But actually, it's much more sensible to have a small number of positions which are diversifying and are moving at different times to smooth out that performance and that's what we have in the portfolio. Okay, Spice, what's the feeling on any changes this week then? >> Well, I personally don't think we should do any. As uh as we've talked about before, we are in the the most seasonally weaker traditionally months of the year for equities, which is August and September. We'd be mad to do it just ahead of the Jackson Hole Symposium, which we've talked about. If if for example Jay Pal was to turn around and say, "Actually, we're going to put interest rates up because we are worried about inflation." Trust me, on Monday morning, markets would be quite a lot lower. And then we might consider because he's about to lose his job and ignore him anyway and start putting that money to work. But I doubt we'll get that chance because he's not that much of a fool. And I think he'll just play a very straight bat and do very very little to un unnerve markets. And so next week once that's out of the way, that uncertainty has been removed, equity markets should be able to maybe move up a bit more. >> CJ concur. >> We talked some time ago about the seasonality. I see nothing to change that. I I would expect us to be looking to put that 20% of cash that we've got to work before or at the end of September depending on the price action. But let's just see how this traditionally poor time goes. I suppose the only question that we could um look at is our 20% in the short end of the guilt market. Um we've seen some bad inflation numbers. The bond market's been under a little bit of pressure. Um I I'm not suggesting we should change it, but I I suppose we could make the argument that that perhaps cash, which uh within the IG network of ISA pays about 4%. >> Would be just as good a place to put it. >> Yeah. >> But I'm suggesting we just wait and see what happens at Jackson Hole before we do anything. >> Excellent. Right. Well, I would say there could be an increased probability of changes next week after Jackson Hole just in case J. Powell might utter those words, irrational exuberance. But next week is going to be an exciting episode because we have had a lot of questions come in about the construction of the portfolio. So many questions, CJ, that you've had a wonderful idea on what next week's deep dive could be. >> Yeah. So I think next week um we will look to answer a number of the questions that have come in. There's a lot of very good questions about portfolio constructions as as to what we've bought, why we've chosen the waitings we've chosen, um are some of the tactics around what we might do next. And I think we should sweep up a lot of those um if possible next week, uh provide those answers to people and help them see practically how we uh want to answer those questions. What I do say to everybody out there is I encourage you if you have a question about the portfolio, write in this week and so then we can next week have a lot of questions and get to as many as we possibly can. >> Right. Excellent. And where should the viewers write to if they have such a question? The >> the answers of investing at.com. >> I think that's my favorite point of every single week. Right. Drop us a follow, drop us a like, and tell your friends and family to subscribe to the UK's number one investing podcast, voted by CJ's mother-in-law, my mother, and Spice's wife. We'll see you next week. Thank you so much for joining us, gents. A wonderful week to all. Thanks very much. [Music]
EP 07: S&P 500: Are stocks in a Bubble or Rational Exuberance?
Summary
Transcript
Those which did perform particularly poorly, NASDAQ which fell by 3%. >> So there's a lot of people hurting. They all want it to go down so they can buy it. In one year it went up 86%. >> What a miss if you had sold early. What a miss. >> Brace yourself. Nvidia would be worth eight times what it is today. >> But as long as the music's playing, you've got to get up and dance. Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode seven of The Art of Investing, the US stock market special, including a potentially heated debate on whether those stocks are currently in a bubble. First, as always, we'll go across to Mark for the Spice Market update. It's been a really interesting week, actually. There's been some nerves jangling ahead of the Jackson Hole Symposium, which actually starts Friday, which is the day this podcast comes out, and runs through to Saturday. Um, and everyone's waiting for the chairman of the Federal Reserve speech, which may or may not move interest rates, and we've seen some movement in interest rates this week. But actually, away from the US, there's been some actually pretty strong performances in equities. Uh, again, uh, basically, we hit another all-time high in the Footsie 100. Come on, guys. There we go. >> Oh, now he's a believer. >> Yeah. Yeah. He's changed his tune now, has he? >> Yeah. Obviously, it is the chickens China trade cuz China, the Shanghai composite and the Hong Kong Hang Sen also hit sort of three-year highs as well, which is pretty impressive. With 90% of the companies already reported now, it's been a very good reporting season. We've touched on that before, but this week the last remaining companies have been mainly retail companies and in America, they've been there's been a pretty mixed bag about those. in the UK of interest really this morning as we're recording this WH Smiths I think are down over 30% uh because they've had a massive profit warning and they've also highlighted some irregularities in their accounting practices in the United States but the other one that caught my attention was Rich's makeup artist uh and sponsor Estee Lauder >> I thought you were going to say Matt >> no come on to those in a minute but Estee Lauder shares were down 7% clearly you've changed your uh your makeup Trump uh interestingly uh has instructed his government to buy a 10% stake in Intel. Uh when Trump first started talking to the chief exec of Intel a couple of weeks ago, uh the shares has started moving and they're up 25% since then. So the US government are basically using tariffs and sort of taxes on some of these other companies to basically buy a stake in Intel. And there is speculation that he's going to do more of that. He may take stakes in companies like Micron or even the foreign company TSMC, which is obviously uh the Taiwan semiconductor company. >> And this is unprecedented, isn't it? Because he's taking money from Nvidia and AMD and buying estate for the US government in Intel. I' I've never heard of anything like this before. Well, in the UK, we're used to that sort of thing because back in the day, the British government always had what was called golden shares in companies like British Aerospace or BAE Systems, Rolls-Royce that had defense interests and certain other key assets like utility companies, >> British Telecom, >> British Telecom because they wanted to be able to block foreign takeovers of those companies. So, the golden share concept in the UK is very real and very well known about. Um, but in America, this is a pretty new thing. This is obviously the home of capitalism and here they are buying a stake. Uh and they want to take a significant influence and be a significance influence on the boards of those companies which is really interesting development but remember now that we are data watching uh rather than looking more at companies because as I say we're 93 90% of the way through the reporting season. This is the chairman of the Federal Reserve talking. It could be quite interest rate sensitive. But really the big story this week I suppose is that the technology sector and a bit of NASDAQ hit a bit of an air pocket. Some of the tech companies were down between three and 10% and that includes companies like Nvidia, the world's biggest company. We've highlighted before that we knew that August and September are seasonally traditionally quite weak months months. Remember that there are a lot of the major sort of leaders of teams and chief investment officers away from their desks on holiday. So deaths are run by sort of more junior people, let's maybe with less experience and less ash blonde hair such as I have. So, uh, there's a bit of panic when things start going down and that build a bit of momentum. Anyway, we've had a bit of a bounce back into the close last night, which was for us was, uh, Wednesday night. Um, and we'll see how it settles down today. But there there's maybe a bit of profit taking in some of those big sectors ahead of this Jackson Hole Symposium this weekend. And remember, you know, that comes on the back of uh, you know, that the fact that the S&P 500 is up 35% or so from its April 7th low and NASDAQ's up nearly 55% since then. So, you've had a huge mount back bounce back. In fact, that's the biggest bounce back and the quickest bounce back in NASDAQ for over a decade. >> CJ, anything pop out to you this week? There was one thing I didn't understand this week and actually we had a question on this last night um from Jackie in Elton. She said that she'd listened to our podcasts. She really enjoyed them. She thought she'd understood that if inflation numbers come out higher than expected then interest rate expectations will rise and interest rate expectations rising isn't good for equities. >> Yeah. So, she was saying, "Why did the Footsie have such a good day yesterday when we saw disappointing inflation numbers?" I said, "I'd ask the guru." >> Sorry. >> Well, thanks. Thanks for the question, Jackie. The big reason I think the Footsie 100 managed to rise this week in the face of falling markets in America is that at these sort of points, we quite often see what's called rotation. So people were selling technology companies in America and they were they were sitting on piles of cash basically, but they wanted to keep them in other markets. So they came and put some of that money to work in the UK and bought the Footsie 100 market which has a big dividend yield. If you remember, it's got about a 3 and a half% dividend yield. And lots of the companies in the Footsie 100 are quite defensive. So if markets do fall, the Footsie does tend to do a bit better than other markets. >> A nice port in a storm. >> Exactly. Right. >> Fantastic. Right. Well, UK was actually something that we we looked at last week, wasn't it? The the Footsie 100. So, this week we thought we would do a similar deep dive into the US stock market. Spice, take us through a similar deep dive that you did last week, including those factors. >> Sure. We'll come on to the factors in a minute, but um like the UK, the US have a number of very big large stock markets, in fact, the biggest in the world. the S&P 500, which everyone knows about, uh the NASDAQ uh 100, the Russell 2000, which is the mid and smaller size companies. Those are the main ones, and you can invest in lots of other things, including the factor type sort of scenarios that we'll talk about in a minute. But at its heart, remember, the US has 5% of the world's population. It's got over a quarter of its GDP or it's gross domestic product which obviously we talked about this is the output of the economy but it actually controls over 35% of the global financial assets. So it's a big financial hub even though it is uh you know only 27% of the world's GDP. It controls most of the financial wealth and actually 61% of all the professionally managed assets in the world are done from America. So they are huge and they they control around 78 to 128 there's lots of different numbers between 78 and 128 trillion dollars worth of assets that incl if you include private assets as well and remember despite all of China's best efforts they also have this reserve currency currency stasis China have been trying to take away and as we said before when we did the piece on commodities I think it was episode 4 uh remember that all commodities are priced in US dollars. So that's also very important. So they have a significant influence when it comes to that. Um they are 58% of the world's foreign currency reserves and other central banks. So they're very important. Now the good thing about the US population is they're very well educated when it comes to equity investing. So most of their pension savings, we have a self-invested pension plans here, the SIPs or you have company pension. In America, they have these things called 401ks which are basically they the way they can save privately and they put most of their assets as we've been advocating in equities because they get and they love their equity markets and also their central bank the Federal Reserve tend to look after their equity markets. We've talked before the Federal Reserve looks after equity markets. The European Central Bank looks after bond markets because the Europeans tend to be more bond investors and the UK tend to look after the property market because in the UK most of our pensions are in our houses unfortunately. >> And even you going out for dinner in in the US they love to talk about stocks and the their investments and their winners, don't they? Might get people talking about football here but there they're talking about their their stocks. >> Exactly. There is a saying when you know when you start hearing it from your taxi driver then you know that you're probably tired to sell the stock you're in. But um they are the best capitalists in the world. They've got the deepest and most liquid uh capital markets. So why on earth wouldn't you invest money there? And that's what most people do. And also added to this, at the end of the day, they are now the world's leading um advocates of AI. They've got the biggest AI companies. They're putting the most investment in by a country mark. The next nearest is China. And weirdly, the UK is the third biggest investor in AI, which surprised me when I did a bit of research in that because I'm a bit concerned that every company in the S&P 500 has a chief technology officer or chief AI officer. I think in the UK, we've got about 40% of the footsy have AI officers. So, the Americans are taking much more seriously than we are. And that that's good to see, but that's why they're leading the world. uh and obviously the benefits that will come from a AI which we touched on before there'll be huge efficiency gains much more cash being generated margins will increase and efficiencies and that leads the profitability to go up and some of the stock market moving towards higher valuation than they have been in history is partly to do with that and expectations that this profitability will come through in the next few years. Of course, the benefits of one big beautiful bill which everyone's talking about, the main benefits are there's going to be tax cuts through to 2028. There's going to be you'll be able to write off any of this manufacturing expense you've got against your taxes. So, you don't have to pay as much tax that will help your earnings per share. That will go that helps your earnings. Basically, they they are all positive things. The most important of which is they're reducing regulation on companies operating in the US, which ultimately is good for equity prices. I'm still focusing on the fact that the UK is the third biggest spender in AI. I mean, it's another ball point for the UK. How many more can we find in these episodes? >> You are converting me more and more. I'm converting myself actually, blind me. What can I say? >> I mean, just to interrupt the torrent of good news there, just with a couple of of of things. I mean the key really is whether the bond market plays ball because the big beautiful bill although it's got all these very big positive points will bring a huge amount of issuance with it. >> Define issuance there. What what do you mean by that? >> Sorry. The US government will be spending more and more money. The tax revenues that are coming in although they will probably increase will be very much smaller than what they're spending. And that difference is the government borrowing. So the US government will have to borrow significantly more than it is now. And it is already, should we say, creaking a little under the uh issuance profile, especially as it needs lots of foreign people to buy the bonds. And if those foreign people are getting a little bit upset at Trump's action towards them, >> they may well say, "We're not going to buy as much as we have in the past." >> Yeah. >> So, there's a really delicate balance here. As long as the bond market behaves itself, >> then what Mark's talking about could you can see that come through beautifully. I I think that works very well. The big problem is if the bond market starts to misbehave. It isn't yet. It hasn't so far, but it's what we need to watch carefully. You could say somewhat Trump is walking a bit of a tight rope with his spending, but then also the debt markets and he he has to be very careful. There's not much room for error, is there? >> There isn't. And I think a positive for him is that when he went down the tariff route to start with, he wasn't walking that tight river. Well, some might say he fell off it and Scott Bessant, the Treasury Secretary, got him back on it again, caught him as he fell off and pulled him back on again. and now he's behaving himself on there saying all the right things for the bond market but it's just something to watch going forward. >> I think it's a very good point and just remember of course apart from Jackson Hole which is this weekend we've talked about we are in the process of potentially seeing the names come forward for the next Federal Reserve chairman which will happen when the current Federal Reserve chairman the most important job arguably of central banks in the world he steps down his term ends in May. Now clearly the bond market may take fright depending on who Trump nominates to bit to replace Jay Pal, Jerome Pal. Uh the current favorite is a guy called Chris Waller. He's already on the Federal Reserve Committee. Markets wouldn't mind Chris Waller because they know him, they understand him. Yes, he's more dovish. In other words, he helps stock markets more than the current Federal Reserve chairman normally does and he's an advocate of cutting interest rates even now. So I think the equity markets would like it. But if the bond markets don't and they overreact and start pushing bond yields up, which means prices go down and we've learned our lesson from Chris, then you know, if that goes too far, then equity markets also might take fright. But we're not going to that would not really come into investors minds until we start to get a firmer number of nominations. >> Hawkish means more likely to put interest rates up or keep them higher than they would otherwise be. Dovish means happy to cut. Make monetary conditions easier. Markets love the doves. They don't like the hawks. >> We focused on the on the UK last week and you you introduced this this term value and value investing to us versus growth. How does the US look in terms of that? >> Well, bear with me a moment. I'm going to go through the main sort of six seven investment factors. And certain investors are value investors as Rich says and some are growth investors. Some are income investors. Some are cyclical, some like defensive, some like momentum. So let's go through those very one by one. Value is basically stocks that are considered undervalue compared to what their fundamental price earnings ratios are. So they price earnings are low. They tend to have higher dividends. And the hope is that one day a catalyst will come along and that price will be driven back up because the company will be run better and become more profitable and earnings will start growing. But those value stocks are quite quite a big chunk of the market and traditionally they've they've been a big part. Growth stocks on the hand which tends to be more the American ones are companies that are expected to grow earnings or revenue faster than the whole market as an average. So the average so they're above average growers above average in revenue and earnings. Income stocks are ones that if you remember the foot seed 100 we said has a yield of three and a half%. If you as a company pay a dividend of 5% you might be considered income company an income stock and a factor of income uh because you'll attract people who want these higher dividends. They don't mind so much about the capital growth and how the earnings are doing as long as the dividend is paid. So those in that's an income factor. Then you have quality equality factor. These are companies with strong balance sheets, stable earnings, high profitability that don't actually get hurt too much when there's a recession. They can actually weather recessions quite well and they do well in all sorts of economic conditions. But there are the ones that that suffer badly during recessions. These are called cyclicals. And this is another factor cyclical. So these are sensitive to economic cycles and they perform perform really well when the economy is booming and expanding but very poorly when the conditions are bad and recessions happen. And then you have defensive stocks again another counter to these cyclicals. And in a downturn you want some of defensives. You want quality stocks because you can weather the storm of a recession. And they're basically they've got stable they've got good balance sheets. They have like long-term contracts like uh for example uh Rolls-Royce, their engine business has a 20-year order book. So investors can see for the next 20 years what the core of their profitability is going to be. >> Even in a recession, we know what consumers turn towards, don't they? They turn towards alcohol, food, cigarettes, food. >> Exactly. Those are the the consumer staples they're often called. So they're BAT industries, unilver, and some of the some of the drug companies as well. uh and that they are all part as you say of those defensive companies and and the UK is very blessed with having a lot of those as we touched on last week. The the last one I want to talk about is momentum because actually that's one of the things that has underperformed this week and seen some of the technology stocks because having had such a strong rise up in the markets from the like say NASDAQ's over nearly 55% since it April the 7th low the stocks that got hit the most this week were the ones that had the greatest momentum and that's a fact of momentum. that keep growing and they they've got accelerated performance uh through when the rest of the market may be doing very little actually the momentum stocks do well. So you know this week top the top 10 momentum stocks in the US actually sort of had a bit of a fall as I say between 3 and 10% mainly technology stocks but actually the other 493 stocks in the in the S&P 500 actually were up. They actually went up. >> Wow. So there were 380 stocks in the S&P on the day when NASDAQ went down nearly 2% uh that went up and that that shows you the differential in the markets that are there and this is a this comes down to factor investing quite often. >> Now talking about when the momentum turns there has been a lot of chatter this week about whether the US market is in a bubble. CJ I was wondering if you could tell us what exactly is a bubble to begin with. In my career, I have heard bubbles mentioned um a a lot of the time, too many times. Um normally what happens is somebody sells something, it keeps going up and they say, "Oh, I don't really know what's going on here. Uh therefore, it's in a bubble. It's in a bubble." And most of the time it's not. They just haven't realized they've got something wrong and they need to do something about it. Bubbles are actually about as rare as finding a generous Scotsman. Oh, >> we're going there, are we, sir? >> Yeah. Well, you you've said that off at my expense with with agism. I'm getting one back at you. >> They are rare, but they happen. And we need to therefore think about what do we mean by a bubble. Now I think of a bubble as a deeply um unsustainable condition in in a market defined by very high valuations and accompanied by irrational market psychology. You know you can't understand what's going on and it just keeps going. >> Now I recognize that word especially irrational >> that has been used on many occasions and there is one famous occasion which we'll get to in one second. Just staking on bubbles for the moment. I like the theory that my old boss George Soros developed called the theory of reflexivity. Now, simply put, he said that there's a that feedback loop exists in which investors perceptions affect economic fundamentals which then in turn change the investor perceptions. Now, that's lovely gobbledegook. What does that actually mean? It basically means people start to believe something and that creates positive price action. >> It's sometimes called animal spirits. >> Animal spirits, right? That's right. And then people watching those animal spirits start getting persuaded by it. So they start believing what's going on from the price action and they start buying more themselves. And then that carries on and the bubble then starts to feed on itself. It starts building and it builds and it builds. it inflates and now we've lost touch of what the real story was because there've been so much story that's gone on behind why these things have happened that's now taken over. That's the fundamentals seemingly changing when in fact they haven't changed at all >> which sounds ties into momentum investing a little bit as well. I think you could argue that there's correlation between the more manic periods of momentum investing and what is going on in a bubble. But it's important thing to realize that the bubble forming takes a long time and the largest percentage price movements happen at the end of it not at the beginning of it. And this is critical to understand when you're looking at what a bubble is. I'll give you an example. The NASDAQ in the 1990s, the US Federal Reserve chairman warned about irrational exuberance in 1996. Your favorite saying there. >> That is one of my favorite things. In fact, I would love to to quote him directly. >> Go on then. Because Alan Greenspan stood up and he addressed the nation, addressed all those investors and he said, "But how do we know when irrational exuberance has unduly escalated asset values which then become subject to an unexpected and prolonged contraction as they have in Japan over the past decade?" Remember, he also said in other speeches, "I guess I should warn you, if I turn out to be particularly clear, you probably misunderstood what I said." Which sums up Alan Greenspan completely. Never wanted to give too much away. If you if you thought you understood him, he wasn't he wasn't getting himself across properly. >> He wasn't one for transparency and clarity, was he? >> What he was saying, though, was irrational exuberance. 1996 NASDAQ had rallied 40% in 95 and 22% in 1996. So he comes out it's gone up circa 55%. >> Mhm. Similar to the NASDAQ in the last few weeks. >> Exactly. >> Ah but if you had sold then if you taken Greenspan's advice which I did by the way I took Greenspan advice thought he know he knows what he's doing. He's chairman of the Federal Reserve. Let's take some risk off the table. you would have missed the NASDAQ rallying 21.6% in 1997, >> 40% in 1998. >> Okay. >> And 86% in 1999. >> In one year it went up 86%. >> What a miss if you had sold early. What a miss. It then fell 80% by October 22. So the point here is a lot of the price action happens at the end. So don't get out too early. Be patient and look very carefully at the signs and how the market is moving before you decide to sell because you think you're in a bubble. >> Now, okay, that NASDAQ.com boom was one example of a bubble, but there have been many others over the years as well, Spice. And it it's not just recently, is it? I in fact, there's rumors that CJ made a lot of money back selling tulips from his family garden back in the day. So, take us through some some other examples of uh of bubbles in history. >> There have been five of the most famous bubbles that I'm going to just touch on very briefly. The first one goes back to 1720. So, this is not a new phenomenon. It was called the South Sea bubble and it's all about a company taking on managing the UK debt instead of the government. And for that, they got a monopoly in certain trades. At the end of the day, that bubble ended very badly and their stock market having gone up 500%. Five, this one company went up and there was great investors in it, Isaac. So, Isaac Newton was an investor in this company. It went up at nearly a,000% from its lows and then went bust basically and the stock market fell 80 plus%. >> It found gravity. >> Yeah. The numbers weren't very clear in those days, but it fell nearly as much as it had gone up. The other most famous ones are the ones in the 1920s in America. There was a big economic boom after the first world war rebuilding rem building all the manufacturing back and America was leading all that. Then they started this thing called margin buying. They were borrowing money to buy shares and borrowing money they didn't have mortgaging their houses doing that sort. Now we've heard that before. We'll come on to another bubble that happened that but that led to the Wall Street crash in 1929 and then the S&P 500 as it was then fell 86%. But again it had gone up hundreds of several hundred% in the 10 years beforehand and so you get you lost a huge amount if you didn't get out in time. And it's a lot of this is about timing. We've had the Japanese uh bubble market which happened in the 80s. They had a massive property boom. Tokyo was the most expensive country in the world. you needed a mortgage just to go and have dinner there. But that bubble when it burst the uh the Nikai basically fell 57%. It then took 40 years for it to go back. In fact, only in the last couple of years, we've seen the Nikai recover to where it was back in the 80s. In more recent times, we've also seen two very big bubbles. The ones that uh our generation will certainly remember and hopefully some of you will as well listening to us was the dotcom bubble in 99200. Um this is basically built on a lack of technology companies. Everyone wanted to get involved in companies that had exposure to the internet or providing the internet. The most famous of that is a company called Cisco which we'll come on to talk about later. But nevertheless, they were so short of equities. The ones that were there were ramped up in price and got traded on absolutely ridiculous multiples. Basically the stock market then fell about 50 to 60% and NASDAQ which was the most exposed to that fell 80%. Uh but the most recent one was the global financial crisis that we all remember. Now what built up to that was a huge property bubble particularly in America. But when that ended which inevitably it did it led to the global financial crisis and a huge credit crunch where no banks would or mortgage companies would lend money because they were so scared of losing it and they wouldn't lend any money and that and that led to a big economic recession and central banks had to step in very heavily. During that time stock markets fell about 57%. So huge force can happen but at the end of the day central banks often step in to help this. >> Okay CJ I mean that worries me. Okay if if there is a bubble but how do we actually recognize if there is one? What are the warning signs? >> I mean clearly Rich if I if I knew every single warning sign I could get it right. I wouldn't be sitting here I'd be on a beach in the Bahamas with my yacht having a great time. But but here are the sort of things that I look out for. I mean first of all the valuation needs to be extreme not just high it needs to be extreme >> and there was this very famous investor called Tony Dy Tony Dy was the chief investment officer of a company called Philips and Drew he was effectively Warren Buffett of the UK wasn't quite as famous globally but he in his own right he was very famous in the UK and he was known as a great value investor remember we talked about the factors earlier on so he was the leading value investor in the UK uh in the in the mid '90s Now in 1995 he was convinced the US stock market was too expensively valued and so he started selling his clients US equity holdings started selling them down and putting that money into cash. He didn't put them in other stock markets cuz if one stock market falls led by America others fall. They may not fall as fast but they all fall. So he took the view that because America was overvalued all stock markets would eventually fall. say he started out building cash positions by selling his American exposure and he started that in 1995. As Chris said, the NASDAQ went up and up and up and up and up >> for another four years. >> Exactly. Between 1995 and the peak of the dotcom bubble in 2000, March 2000, the stock market, the S&P 500 had gone up threefold. 300%. And basically, guess what happened to poor Tony? Literally 2 weeks before the peak of the the bubble bursting in March 2000, late February, he retired early. He took early retirement >> and he left the market >> and basically he he disappeared. Honest truth, two weeks later after his for that was made that announcement was made to the market, the NASDAQ started falling and it fell 77% in 6 months. He would have been an absolute hero. He was remembered as unfortunately the man who got out too soon. But there is a big lesson here and that is that markets can remain irrational longer than you can remain solvent. And that was a quote from the econ great economist uh John Maynard Kees. >> Right. So valuation's one. What's the second one CJ? >> Secondly, sentiment indicators. So lots of sentiment indicators out there. There's surveys of investors behavior whether they be retail investors whether they be institutional investors you know do they like the market do they not like the market how much cash are they holding blah blah blah they like bonds like this like the other normally you'll find that everybody is loving it when it's just about at the top >> cuz everybody's made >> because everybody's got in it everybody's behind the momentum and thinks this is what it's all about there are other sentiment indicators but the survey evidence I've seen is not completely worrying. There are bulls out there, but there's a lot of people who are cautious as well. Other sentiment indicators, Warren Buffett, everybody understands that Warren Buffett is a great investor and he is holding more cash than he's ever held before cuz his favorite measures are showing that there's no value in the US stock market at all. Taxi drivers though aren't talking to me whenever I go out to talk about the stock they like best and how it's all going yet. So when I look at my sort of mixed sentiment indicators there, I've got some which are flashing red and I've got some which are still amber. So I'm going to say that's a broadly a score draw. Is this because you get the chauffeur driven cars and we're in the black cabs? >> It might be, but even the chauffeers buy stocks when everybody's in. >> The other big indicator is the amount of cash that is sitting in people's portfolios. So we can't really see it very easily in the UK but in America this data is available if you look on the Federal Reserve's uh websites. Um and basically it shows that at the moment there is a massive $7.4 trillion of cash sitting in money market funds on the edge of the market potentially waiting to be invested. Now, if that were all to be put in the S&P 500, that would be equivalent to about 14% of the entire S&P 500. It's a huge amount of cash and it's a record level, never been ever higher, and it's been growing and growing and growing as this bull market has developed. So, there's loads of people saying, "Oh, it's great bull market. There's lots of people who haven't participated in it. They're talking the talk, but they're not in it." So, there's a lot of people hurting. They all want it to go down so they can buy it. And at the moment the fear of missing out is hurting them. >> At the moment in those money market funds they're earning a good interest rate but suddenly if interest rates come down then that changes and and maybe stocks do look more attractive. >> Exactly. And that's one of the reasons central bankers cut interest rates because they want to encourage people to use that cash to spend it either in the real economy or in in financial assets like equities. >> So my third indicator is price action. I mean, we talked just now about how the NASDAQ accelerated so sharply just before the top. >> When you look at equity prices generally against their moving averages, against the history as a momentum investor might, for example, they look a little expensive, but the the price action this week bringing has brought them back to sort of average levels. So really, there's nothing in the price action of equities that concerns me. One thing I would be looking at though is out of my side glance, I'd be looking at what the bonds are doing because bonds have a habit of starting to do strange things when suddenly the equity market's going to crack or or do something. But bonds are pretty well behaved now at the moment as well. We're not seeing that worry as we said earlier about issuance. So my price action indicators are not looking um too silly at all. Now my fourth thing which is in fact my most important indicator is at key levels you'll normally find someone saying something stupid or you'll find something stupid happens. Now for example Mark's just given the example of the NASDAQ where Tony Dy the most famous value investor in the UK lost his job. Oh sorry um retired early um to spend more time with the family >> just before the peak. So there's a sign. My my personal favorite was in 2007, just before credit blew up. When Chuck Prince, the CEO of City Bank, said, "When the music stops in terms of liquidity, things will get complicated. But as long as the music's playing, you've got to get up and dance, and we're still dancing." And that was just a red red flag. There's a problem here. Within two or 3 weeks, the credit problem started to to to show. Indeed, in the movie Margin Call, they made a play on that, didn't they, with Jeremy Irons talking about the the music completely stopping. >> So, to me, you got to look at that sign. Uh there was another sign from Lloyd Blankfin, the head of Goldman Sachs, who said, "We're doing God's work just before another collapse." So, there are always these signs, and you got to look for them. So, you're looking for that sharp price action and then somebody saying something silly. The most worrying thing of all, if you ever hear this, run for the hills, is when someone says, "This time it's different." Or, "It's a new paradigm." It never is. If you hear people saying that, get out. >> He's been trying to get me to say that for weeks on the on here, and I'm not going to cuz I don't believe it is. >> Cuz essentially investing and markets, it's just human emotion, isn't it? Whether psychology absolutely it's it's psychology. It's it's how crowds react. When I worked for George Soros, he would spend a lot of time analyzing and thinking about how people react and how people move in herds and how people do things together because when everybody's on one side of the the the boat, it's normally going to go the other way. And you've got to be very very very careful. That's why when you look at these uh indicators of of where investor sentiment is, if everybody's the same way, it's telling you you got a problem. But as long as there's balance in the world, as long as it's balancing the force, we're okay. >> Can I give you some examples of the the things I've lived through that are big warnings and and I've seen at at work. One is about greed. And talking about Goldman Sachs, they were the main stock broker for a company called lastminut.com. You may remember it and some of you probably used it getting holidays and it's still going now but it's owned by I think it's a Dutch company actually I think it's a Swiss company but lastminute.com floated in March 2000 which if you remember that was the peak of the dotcom bubble and uh basically it was floated with a 571 million market capitalization. It made zero money. it was losing money and it peaked later that day at 768 million a 35% increase on one day >> and it never saw that price again but I was a fund manager at the time I was running equity UK equity funds and I was running about 2.5 billion pounds worth of equities and I applied through Goldman Sachs for 50 million pounds worth which is a lot of money but it was a part of a big cake so for me that was the sort of holding I it. I got allocated by a Goldman Sachs, love them dearly, £125,000 worth >> and I'd applied for 50 million. Now, that was useless for any of my funds. I literally took the view that I wasn't going to go and buy even more of them when the price had gone up another 35%. So, I sold them later that day. It's called staging. When you buy something in a new issue and you sell it the same day or a few days later, I staged it and I made 30%. That's just fantastic. But that was a sign of greed and that was investment bankers trying to get the squeeze of the last penny out of investors. And greed is often again a sign of these bubbles, these market tops. That flashes a little bit of a red warning, doesn't it? Because we have had two IPOs in the US recently that have been up 100% and people still come to buy them. So, you know, recently the circle IPO and then of course bullish and we saw bullish I mean a company calling themselves bullish and IPOing that in itself has got to be one of these red flags around you know when something worus that that I'm that I draw on it is that there are certainly signs out there that there is bubble behavior in various stocks. No doubt about that. Um, you're one of them very close to your own heart, Palanteer, which I know has meant that you can take us all out for dinner tonight because you've made so much money shorting that. And when I say shorting, by the way, I mean selling stock you don't own to buy it back later a lot lower. Rich has hated the stock for a long time and has it fell very sharply this week. >> Well, let's just get that absolutely right. I think it's a wonderful company, but wonderful companies can trade at the wrong price. What I meant was you hated the price and you thought the price should go lower. >> But that's an important distinction. >> Precisely. So there are bubbles around in various stock prices, but the question here isn't whether there's the occasional bubble in the odd stock. It's does the market look to us to be in bubblelike conditions. Now we totally accept that there could be a correction which is why on our portfolio that we have set up which we'll be talking about in a second we are holding 20% as cash. Now, we're holding in short guilts, but we are holding that as cash. Waiting for this seasonality of August and September to play out is because if you remember in the episode where we talked about this, August, September are the worst two months of the year for equities in a normal year. So, we wanted a hold of cash back. So, this weakness that we're seeing now in the S&P is good news. We we'd like it to go a bit further yet. so we can then put that money back to work. But we very much think we're in that corrective phase of a bull market. We've not seen that price action that you would expect to see in the whole um of an index driving upwards and forwards. So that is the conclusion that we have drawn. Chris touched on a really good point there. It's the importance of not overpaying for assets, understanding what you're paying for, what you're buying, and when you're buying it in the cycle. So I want to use an example here to show that in in my mind particularly we are not anywhere near for example the peak of the dotcom bubble. So back in in 2000 in 99 2000 the internet as I say was taking off. The biggest provider of the internet backbone and the nuts and bolts that went in the picks and shovels as it's sometimes called of the internet the enabler of the internet was Cisco and at the time it was the biggest company in the world. It had a market capitalization of $570 billion. Right. It we was 4.3% of the S&P back then. At that time, it was generating $22 billion of revenue and 6 billion of pre-tax profit, which is very impressive. It's big numbers in the biggest in in the world at that time. This year, and they had the results a couple of weeks ago, they've increased their revenue and profits 150% in 25 years. They they made 57 billion. So, they've made a huge amount more, but it's now valued at just 278 billion. is roughly half of what it was back in March 2000. So if you bought it in March 2000, you would you basically still h haveved in value since then. And by the way, in between March 2000 and now they've delivered they've delivered sort of 10% earnings growth every year, year in year out. They've been a great company. But if you bought them at the wrong time, you've got carried out. Now, interestingly, if you look at Nvidia, which is the current biggest company in the world, >> yeah, how does that compare with Cisco back in 2000? So if you put in Nvidia is currently valued at about $4 trillion. The multi- price earnings ratio, remember we've talked about the price earnings ratios before. If you put the same price earnings ratio on Nvidia's profits as as was Cisco was at the time back in March 2000, right? Brace yourself. Nvidia would be worth eight times what it is today. >> Okay? >> Eight times bigger than it is today. And that I think is the key point which is there are signs valuations are high but they're nowhere near as high as they were if people start talking about the same sort of thing as the internet bubble. This is why we decided to focus on ETFs and indices, isn't it? We we didn't want to go for single stocks just in case we got tripped up somewhere along the way. which takes us perfectly into having a look at this week's portfolio analysis. So, chairman, run us through in a tricky week for the US, how has the portfolio done overall? The portfolio has returned since we started.2% and it was 5%. So, we had a disappointing week. Best performer on the week was the India ETF and second best was the Footsie. I had to get that in cuz it quite often be up there. So, I'm going to keep sharing it. The worst performers of the week were the mining holdings and our US holdings. I don't think that's surprising at all. We've got um Jackson Hole coming up on Friday. Chairman's speech. US has run very strongly. Bit of profit taking seems sensible. We're still pleased with our performance, but we are not as pleased as we were last week. And CJ, just for those who are listening rather than watching on YouTube, run us through exactly the week-on-week performance of the US stocks and our worst performer, the World Mining Trust there. Okay, so those which did perform particularly poorly were our crypto and blockchain ETF, which fell by 1%. The S&P 500 ETF, which fell by 1.2%, and NASDAQ, which fell by 3%. Black Rockets World Mining Trust was down a solid 4%. So there's some pretty ugly moves in that area, but we're still up since inception. So we'll we'll take that. Okay. And that plays into this idea of diversification. We had shares in India give us a decent return and that offset this weakness in the US. So you know overall it's a kind of tick in the box for diversification working, isn't it? You want to ensure uh as investors u and everybody listening uh to the podcast, we want to get this across very strongly that you have a portfolio made up of lots of different positions rather than just one or two. If you have just one or two and one of those goes wrong, all that could be quite ugly for you. Or if it goes right, well done to you. But actually, it's much more sensible to have a small number of positions which are diversifying and are moving at different times to smooth out that performance and that's what we have in the portfolio. Okay, Spice, what's the feeling on any changes this week then? >> Well, I personally don't think we should do any. As uh as we've talked about before, we are in the the most seasonally weaker traditionally months of the year for equities, which is August and September. We'd be mad to do it just ahead of the Jackson Hole Symposium, which we've talked about. If if for example Jay Pal was to turn around and say, "Actually, we're going to put interest rates up because we are worried about inflation." Trust me, on Monday morning, markets would be quite a lot lower. And then we might consider because he's about to lose his job and ignore him anyway and start putting that money to work. But I doubt we'll get that chance because he's not that much of a fool. And I think he'll just play a very straight bat and do very very little to un unnerve markets. And so next week once that's out of the way, that uncertainty has been removed, equity markets should be able to maybe move up a bit more. >> CJ concur. >> We talked some time ago about the seasonality. I see nothing to change that. I I would expect us to be looking to put that 20% of cash that we've got to work before or at the end of September depending on the price action. But let's just see how this traditionally poor time goes. I suppose the only question that we could um look at is our 20% in the short end of the guilt market. Um we've seen some bad inflation numbers. The bond market's been under a little bit of pressure. Um I I'm not suggesting we should change it, but I I suppose we could make the argument that that perhaps cash, which uh within the IG network of ISA pays about 4%. >> Would be just as good a place to put it. >> Yeah. >> But I'm suggesting we just wait and see what happens at Jackson Hole before we do anything. >> Excellent. Right. Well, I would say there could be an increased probability of changes next week after Jackson Hole just in case J. Powell might utter those words, irrational exuberance. But next week is going to be an exciting episode because we have had a lot of questions come in about the construction of the portfolio. So many questions, CJ, that you've had a wonderful idea on what next week's deep dive could be. >> Yeah. So I think next week um we will look to answer a number of the questions that have come in. There's a lot of very good questions about portfolio constructions as as to what we've bought, why we've chosen the waitings we've chosen, um are some of the tactics around what we might do next. And I think we should sweep up a lot of those um if possible next week, uh provide those answers to people and help them see practically how we uh want to answer those questions. What I do say to everybody out there is I encourage you if you have a question about the portfolio, write in this week and so then we can next week have a lot of questions and get to as many as we possibly can. >> Right. Excellent. And where should the viewers write to if they have such a question? The >> the answers of investing at.com. >> I think that's my favorite point of every single week. Right. Drop us a follow, drop us a like, and tell your friends and family to subscribe to the UK's number one investing podcast, voted by CJ's mother-in-law, my mother, and Spice's wife. We'll see you next week. Thank you so much for joining us, gents. A wonderful week to all. Thanks very much. [Music]