As we enter the midpoint of 2024, confidence in the economy and the financial markets is a lot higher than it was at this time a year ago.
Stocks in particular, have had a phenomenal run over the past 7 months.
So it's little surprise that the bulls expect the party to continue on through the rest of the year.
Will it?
To find out, we turn to the experience and wisdom of high net worth financial advisor Ted Oakley, managing partner & founder of Oxbow Advisors.
While anything is possible in the near term, Ted sees lots of signs that confidence & complacency are far too high on Wall Street today. The piper WILL need to be paid for all of the deformations to economic activity and asset prices that the Federal Reserve and fiscal side have caused since COVID.
Which is why Ted is confident a true bear market will eventually manifest.
Here are my top takeaways from this interview:
Ted believes the Federal Reserve has focused on supporting the stock market rather than the economy, masking the true risks in financial markets. He argues that the brief bear markets in 2020 and 2022 have led investors to believe that market downturns are short-lived and manageable, ignoring the potential for prolonged bear markets.
Ted notes that while the US markets are currently priced to perfection, the economy been slowing for the past 6-12 months. He suggests that the market's current overpriced levels are similar to those seen in 2021, and that a similar period of poor returns may lie ahead.
He points out that asset managers currently have record confidence in US stocks, and cash allocations are at their lowest levels ever. This indicates that investors are fully invested and not holding reserves, reflecting extreme market optimism. Ted suggests this overconfidence could result in significant market corrections when economic realities set in.
The S&P 500's current multiple is high, with a trailing four-quarter P/E ratio of 27x and a price-to-sales ratio of 3x. These are extreme levels, nearly double historical averages.
He mentions that the market is heavily concentrated, with stocks like Nvidia, Facebook, Microsoft, and Amazon contributing overwhelmingly to overall market returns. He draws parallels to 1964, when a similarly concentrated market peaked and then took two decades to recover. This concentration risk is heightened by the popularity of ETFs this time around, which exacerbate the influence of these leading stocks.
Ted states there are serious issues starting to surface, particularly in
private banking and real estate. Private banks are struggling with the cost of funds and bad bond portfolios. Commercial and residential real estate sectors are also facing difficulties. While the market might seem fine now, these problems will eventually have to be addressed, and certain sectors may not fare well. He anticipates that the consequences of these issues will become more apparent over time.
Ted highlights the current limitations of that traditional 60/40 portfolio and explains why Oxbow pursues a different allocation strategy. It includes three main components:
short-term maturity debt,
reasonably priced growing equities,
and real assets with exposure to commodities.
Ted believes that with high debt and persistent inflation, commodities will perform well, which is why Oxbow invest in assets like fertilizers, pipelines, energy, metals, and gold, which tend to increase in value with inflation.
Ted tresses the need for humility in investing, cautioning against overconfidence. He advocates for understanding investments thoroughly and maintaining liquidity to weather market downturns. Ted's long-term approach includes sticking to proven processes, even if they are temporarily out of favor, to ensure sustained financial health.
To hear the full interview with Ted Oakley, watch the below video:
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