- “The Main Street and Wall Street divide is massive”…
- Stocks remain significantly overvalued…
- Jim Rickards issues an urgent warning for all investors…
Dear Reader,
“You better go out and buy stock now,” said the president yesterday.
Private investors are running ahead of the president. They are already buying stock.
Reports the Kobeissi Letter:
- Individual investors have been net buyers of equities for 21 consecutive weeks, the longest streak on record, according to BofA.
- This is more than DOUBLE the previous records seen in 2021 and 2022.
- Over the last 4 weeks, BofA’s private clients have purchased a record $2 BILLION of equities.
And yet — and yet:
- On the other hand, hedge funds have sold a record ~$1.5 billion.
- At the same time, BofA’s institutional clients have dumped ~$2.7 billion, the second-largest amount in history.
- This is a much larger divergence between retail and institutional investors than during the 2022 bear market.
- The Main Street and Wall Street divide is massive.
“This is absolutely incredible,” concludes the Kobeissi Letter.
Who’s Right? Who’s Wrong?
Which street is placing the proper wager on stocks — Main Street — or Wall Street?
I do not know. Yet Wall Street’s is generally the more… informed… opinion.
Institutional investors are labeled the “smart money.” Individual investors, meantime, represent the “dumb money.”
As reports The Wall Street Journal:
- Wall Street has long derided everyday investors as “dumb money,” prone to making decisions based on fear and greed. By contrast, hedge funds and institutional investors were dubbed “smart money,” for their historic ability to lean on reams of data and analysis and ignore emotion-driven swings.
Institutional investors — the smart money — often command information out of public sight.
Their comings and goings in and out of the stock market therefore hold capital significance.
If institutional investors are purchasing stock, it is because they sense favorable winds at their backs and a clear sky ahead.
If they are shaking stocks loose, it is often because their binoculars reveal weather ahead… and a poor business outlook.
And institutional investors have been shaking stocks loose.
You Might Want to Avoid These Stocks
Which particular stocks are they most shaking loose?
MarketBeat has identified 15 of them:
Booking, Live Nation Entertainment, Schwab, MongoDB, SPDR S&P 500 ETF Trust, CyberArk Software, Guidewire Software, MACON Technology Solutions, Tyler Technologies, Affirm, Microchip Technology, Spotify Technology, Liberty Live Group, Natera… and Stride.
Are you the owner of any of these equities?
If you are, you must ask yourself why institutional investors are fleeing them.
Yet are institutional investors fleeing stocks because they gaze into crystal clearer than private investors?
Not necessarily, argues the Journal. They may flee for reasons more technical in aspect:
- Hedge funds aren’t the first out the door necessarily because they panic or get weak in the knees. These funds usually rely on leverage, or borrowed money, to juice their returns.
- When stocks fall, the collateral they’ve given their lenders to back these loans drops in value, forcing them to come up with quick cash to cover the hole. So they do some selling to raise this money.
- And more funds than ever rely on predetermined limits on how much they are willing to lose. So-called multimanager firms have soared in size, dominating the industry by promising steady returns. When they incur even 5% losses, many begin selling, to avoid deeper losses.
Thus the dumb money is not necessarily dumb for flocking into stocks.
It is merely that the dumb money is untethered, in most instances at least, to outside obligations.
It is not leveraged (again, in most instances at least). And it need not meet performance standards.
The Buffett Indicator
Yet is the dumb money smart for piling into stocks at present?
The answer, as with the smart money, is not necessarily.
Despite the stock market’s recent tumults, stocks remain overvalued — as history runs.
Let us turn to the departing Mr. Warren Buffett and his famous indicator.
What would Omaha’s sage say about present valuations?
The Buffett Indicator is simply the ratio of total United States stock market capitalization to the gross domestic product.
If United States stock market capitalization precisely equals the gross domestic product… you have a reading of 100%.
Wall Street and Main Street are perfectly parallel, the one the perfect mirror of the other.
A reading below 100% indicates a stock market undervalued against the economy underlying it.
Stocks are steals.
A reading above 100% indicates a stock market overvalued against the economy underlying it.
Stocks are dear.
Historically, 85% is roughly par.
The Buffett Indicator attained a delirious 206% in February — nearing a record.
Stocks Remain “Significantly Overvalued”
What does the Buffett Indicator presently read?
The answer is approximately 180%.
That is, the stock market is not merely overvalued relative to the gross domestic product.
The stock market remains “significantly overvalued” relative to the gross domestic product… given even its recent wobbles.
Meantime the so-called Shiller Price-to-Earnings Ratio is another valuation contraption.
When it exceeds 30 for extended lengths, as history goes, the S&P 500 is in for significant losses, perhaps of 20% or more.
In December, the ratio nearly summited 39 — its third-highest reading in 154 years.
It has since plummeted all the way to… 35.
Thus the ratio still exceeds, ominously, its red zone threshold of 30.
Weather vs. Climate
Of course, all such indicators report the climate. They do not report the weather.
Thus you need not plan your daily travels around them.
The sun may shine and shine for extended periods… even though the overall outlook suggests rainfall.
And you need not always carry an umbrella on your person.
Yet given today’s fantastic stock market valuations… perhaps you should maintain one close at hand.
The smart money — evidently — is.
Brian Maher
for Freedom Financial News
