The Laughing Stocks
Overvaluation and the Imminent Shift in Investment Trends
by Bryan A. Sarff, CFP
Can I let you in on a little secret? The current state of the market has me chuckling at the complete disregard for risk and discussions about gambling within the investing chatrooms, albeit with a double dose of concern .6 Why? Let’s start with a couple of startling figures:
- A mere 15 stocks in the S&P 500 make up almost 36.23% of the index.1
- Only 10 stocks make up 59.52% of the Nasdaq 100, better known as QQQ.2
Imagine having a cocktail party where over half of the room is dominated by the same ten guests. Seems unbalanced, doesn’t it?
This disproportion has been fueled by the wave of passive mutual fund and ETF investments that blindly throw money at these behemoth corporations. Invest a dollar into QQQ and almost 60 cents winds up in the pockets of the top 10%.
But let’s not forget about the credit markets. While the stock market is having a festive run-up, credit markets are sitting out of the dance. The Fed is raising interest rates which throws sand in the gears of finance. Corporations, governments, and individuals are having to shell out more money just to keep their operations running. And, while banks are tightening credit and Congress is pushing for more banking regulations, the wave of commercial property loans that will need to be refinanced from 2023 to 2027 is about $2.2 trillion.3 Yes, TRILLION.
Then, inflation is sticking around our hypothetical cocktail party at about 5% like the unwelcome guest that it is. That number is significantly higher than the Federal Reserve’s stated goal of 2%.4
When we look back at 2000 through 2020 we see the average mortgage rates plummeted from nearly 8.05% to 2.96%, and inflation mostly followed suit .7 Fast forward to the present, and we’re navigating hilly terrain with both interest rates and inflation on the rise. We believe this situation is ushering in a new era of investing.
If you had been a homebuilder from 2000 to the outbreak of Covid, you would have thrived. The falling labor costs, low interest rates, decreasing material prices, and a consumer more willing to purchase upgrades meant that profits often surged by the time the final product – a beautiful home – was delivered to your satisfied customer.
Today, in our opinion, you’d be facing a different challenge. Rising interest rates have dampened the customer’s enthusiasm for home upgrades. Volatile delivery times and price hikes are inflating material costs. Labor prices are also increasing in step with persistent inflation. The result? Profits are squeezed and a finished home is often less profitable than initially forecasted.
From 2000 to Covid, it was best to invest in companies at the end of the supply chain. In contrast, the post-Covid era will likely reward investors who choose companies at the beginning of the supply chain. Picture tangible assets like copper, silver, gold, platinum, cobalt, lead, iron ore, natural gas, oil, real estate, farmland, and more. In times of market turmoil, these are the steadfast investments you can rely on – those you can touch and see.
As we step into this new era, consider reevaluating your investment portfolio. Emphasize defensive investments. Look beyond your borders to international investments. Prioritize private credit over public. If these concerns are not being discussed with your current advisor, it might be time for a second opinion.
If your advisor hasn’t pulled up a chair to discuss the changes in market dynamics, we’re here to have that crucial conversation. Call us at (913) 653-8783 and schedule a stress test for your portfolio.
So, here’s to the promise of a new era, where we reevaluate, reallocate, and reorient our investments towards the tangibility of hard assets. Cheers to staying informed, adapting to change, and looking beyond the laughing stocks to the gems waiting to be discovered.
Bryan Sarff is the founder and CEO of True Wealth & Company and has been serving his client’s financial needs since 2003. His services cover all areas of the wealth management process, including business succession planning, investment strategies, business value acceleration, retirement planning, legacy planning, and insurance planning. Bryan acts as a personal wealth manager for successful business owners and thrifty millionaires who want to make work optional. When working with clients, his highest priority is to help them “achieve financial independence and economic freedom” so they can spend more time doing what they love.
Bryan has a Bachelor of Science in Business Administration in Marketing from the University of Missouri – Columbia. Before transitioning to wealth management, he spent eight years working for Lear Corporation and GE leading successful process improvement initiatives at multiple locations. In 2009, he earned the Certified Financial Planner™ designation. Outside the office, Bryan has spoken at hundreds of wealth management workshops, hosted financial talk radio shows, the “Let’s Make Work Optional” Podcast, and is launching a new podcast in 2023. In the community, he is involved with Strive 4 Life and the Johnson County Christmas Bureau. He enjoys playing golf, swimming, smoking tasty ribs on his Traeger, traveling with his wife and three daughters, attending concerts, and is a fan of the Kansas City Chiefs and Mizzou Football. To learn more about Bryan, connect with him on LinkedIn.