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Executive Summary

Some of the things impacting the stock market currently include tariff implementation, negotiations over tariffs, DeepSeek, AI, earnings, ISM and PMI data releases along with the January jobs report. Each datapoint seems to initiate exaggerated market moves. Partly because markets are very overvalued, as illustrated in the first graph below, creating substantial risk in the market. Warren Buffet appears to recognize this, as evidence in the second graph below showing massive accumulation of cash and short-term investments. Another point of risk is the top seven companies in the S&P 500 represent 33% of the indexes market capitalization. All of this leads one to ask, are investors seeing the forest for the trees?

Please proceed to read The Details below for more information.

“Patience is the companion of wisdom.”
–Saint Augustine

 

The Details

To say there is currently a lot going on that could affect the stock market would be an understatement. Although not an exhaustive list, here are a few things impacting markets today: Tariffs imposed on Mexico and Canada; almost immediately thereafter, negotiations postponing tariffs for one month on Mexico; potential tariffs on China and Europe; DeepSeek upending the AI market; a slew of S&P 500 companies reporting earnings; ISM and PMI data releases; and the January jobs report. And all of this is occurring in the most overvalued and, therefore, risky stock market in history. The uncertainty of the above plus the slowing economy, as seen in the last GDP release, amidst persistent inflation and high mortgage interest rates increases the risk in equity markets.

To see the record overvaluation in the stock market, look at the following graph from Elliott Wave International, via @MacroEdgeVision. This graph shows a combination of seven valuation methodologies. Currently, this chart shows the market is on par with markets just prior to the Great Depression. Other single methodologies, such as the CAPE or Shiller P/E indicate valuations are higher than the 1929 peak.

The rapid developments regarding tariff negotiations are causing wild swings in equity prices. For example, the Dow was down by over 600 points Monday morning, February 3. By the afternoon, with the announcement of the agreement with Mexico, the Dow had turned positive on the day (as of this writing). It is almost as if investors, or speculators, are not seeing the forest for the trees. Each datapoint initiates an exaggerated move in the market. A step back reveals that significant risk exists in a market more overpriced than ever before, and one where a major reset in markets could be starting. Just as the current administration is attempting to reset the overall Federal budget.

The following graph via @FinanceLanceLot illustrates how one of the most renowned investors, Warren Buffett, appears to recognize the risk with the massive shift to cash and short-term investments.

And, for some perspective regarding the concentration in this market, the top seven companies in the S&P 500 represent about 33% of the entire market capitalization of the index. One example compared to a similar situation during the Technology Bubble which peaked in 2000 is shown in the graph below by Crescat Capital, LLC. A comparison of Nvidia today to Cisco Systems during the Technology Bubble should give a clear perspective of how much more dangerous today’s market is versus the last major bubble.

Trying to catch each market movement relating to current tariff negotiations is like trying to pick up nickels in front of a steamroller. An extreme amount of risk is embedded in the equity markets, and investors would be wise to recognize its presence. The rapid changes in the geopolitical environment are only one factor impacting market prices. One should be aware of the forest, not just the trees.

The S&P 500 Index closed at 6,041, down 1.0% for the week. The yield on the 10-year Treasury Note fell to 4.57%. Oil prices decreased to $73 per barrel, and the national average price of gasoline according to AAA dropped to $3.10 per gallon.


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© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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