...."the Magnificent Seven traded this week at an average of 43.3 times what analysts expect them to earn over the next 12 months” .......imagine you bought a business and paid cash with your life savings in your local city downtown. The price you paid was all of this years profits the business would earn plus the next 42 future years of profits. However, this one year profit is the maximum that business has ever earned historically so past results do not guarantee future performance etc etc. Therefore, your break even might take more than 43 years.
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Here’s the relevant passage: ”The US stock market has a giant problem. ‘Giant’ in the sense that investors have poured money so steadily and so long into a handful of leaders that their valuations are beginning to redefine ‘irrational.’ Jason Zweig notes, ‘Even after the stumble in tech stocks late last month, the Magnificent Seven traded this week at an average of 43.3 times what analysts expect them to earn over the next 12 months” (‘What You Should Do About the Stock Market’s Giant Problem,’ com, 2/7/25).”
Ummm … I haven’t had trouble finding equity pockets that have held up well the past 3-6 months - even on the worst days. Don’t want to advise people what to buy, but I’d agree with David that foreign markets are less overvalued. Value stocks have turned up - at least for the time being. I’d add that some exposure to foreign currencies might be prudent. They stand to gain if U.S. interest rates fall and the dollar weakens. You can actually do that with some international / global / area specific equity funds if you check to make certain it isn’t hedged 100% back to the U.S. dollar.
Longer duration bond funds worry me. However in the hands of a good equity or multi-asset manager (like David Giroux) bonds can even-out the ride. For those willing to take a bit of risk in fixed income, you can improve your return (and increase your potential losses) with CEFs that use leverage. M* does a decent job indicating the amount of leverage the fund uses along with the historical and current discount / premium to NAV. Do your homework before you jump. I’m currently using WEA, BWG, TEI. (With CEFs there is strength in numbers as they are very volatile.)
I agree with comments in The Observer that short term fixed income is somewhat attractive at 4 - 4.5% That’s an area where I’m willing to “reach” a bit for yield (JAAA / VNLA) knowing full well the idea is riskier than just sitting in a money market fund. I can’t recall a lot of discussion about junk bonds in the commentary, but I’d be very cautious there, Tight spreads now suggest that the premium return paid by junk over investment grade bonds is very small by historical standards. There will be better days ahead to buy junk. All in all, a broadly diversified portfolio that side-steps the hottest sectors would seem a prudent choice if your time horizon is in the 5-10 year range. Of course, if you are 21 and socking $$ away for 50 years down the road you may want to throw caution to the wind.
https://www.oaktreecapital.com/insights/memo/gimme-credit
CEF holders experience the effect of much higher leverage that is debt/Net Assets.
https://ybbpersonalfinance.proboards.com/post/471/thread
I am surprised how well credit is holding up today, even HYG which is not really short term at 4 yr Duration. Seems like the panic is all in the equities with QQQ down 3% and SPY down 2%. It can not be all AI unwind.
A look at 2022 performance offers some possible insights, although there is no guarantee future performance won’t be much worse. Many income-centric CEFs lost near 25% in ‘22. If you can find one that held up better it’s at least worth taking a look at. Might indicate a more conservative management approach.
Not a “cheer-leader” for leverage. It is what it is - fraught with additional risk. But if you are seeking to “goose” positive returns of fixed income holdings, a bit of leverage can do that. Since I largely avoid junk and stick with investment grade paper, some leverage is desirable. I can’t begin to imagine the devastation that could come about if one coupled junk bond holdings with high leverage. (Look out below!)
The premium or discount to NAV is important. Fidelity has some pretty good commentaries available that address that. A year or two ago discounts to NAV were very high on average - signaling a good buying point. However, those high discounts have largely evaporated.