Stretched Valuations No Concern For Investors

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

Big tech roared back to life last week, while defensives took a back seat.  Investors continue to have a strong appetite for US equities. Just two months ago US equities saw massive inflows of more than $12 billion in one week. Last week, that number was dwarfed as flows of $20.1 billion were seen going into US equities. Meanwhile, US Equity valuations have crept higher since mid-October, whether Big Tech is included or not.  If we compare US total equity market cap versus US GDP, the numbers look even more staggering. The ratio of equity market cap to GDP has never been greater for US stocks. When that ratio reaches significant peaks, as it did in 1999, 2007, 2019, and 2021, equity markets corrected soon thereafter.

One of the top drivers of excess valuation—Mag 7 stocks—may be seeing a slowdown.  The 50-day moving average of volume in Mag 7 stocks has been on the decline the 2nd quarter, with only retail investors stepping in to purchase.  So far, holiday shopping has been strong , but the amount of credit consumers continue to take on is of concern.  October’s reading of Consumer Credit surprised to the upside as the measure was $9 billion higher than expected.  Yet, credit card default rates are at record levels—higher than 2001 and 2008.  Fed futures continue to show an 83% probability of another rate cut coming next week.  At such elevated valuations, diversification is critical moving forward.

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

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