Investor Insights:
- Last week, I said to avoid buying Apple and
- To those, I’d add pretty much every other big stock that’s had lots of momentum.
- Investors chasing the year-end rally for one huge company are in big trouble.
This time last year — as the stock market fell nearly 20% in three months — I told you to keep calm, because stocks were destined to rebound in 2019.
And so they have.
But as the major indexes glide ever higher to new all-time records here in December, the alarm bells are starting to go off.
So I have a new message:
Prepare for a sizable correction soon.
I’m talking on the order of 10% to 15% after early January as we flip the calendar to 2020.
If I’m right, it ought to be just steep enough, and scary enough, to suck the wind out of most investors’ sails … and set things up nicely for the second half of the year.
Big Stocks Have Been Pushed to Bullish Extremes
I noted last week two of the stocks I’d avoid buying (or sell now at the highs) — Apple and Microsoft — because their valuations are stretched.
To those, I’d add pretty much every other big stock that’s had lots of momentum into the end of the year.
For instance, I’ve long cheered the kinds of e-commerce investments that Walmart and other big retailers have made in recent years to compete with Amazon.
This year’s Christmas season ought to be very kind to the retail sector. But in their year-end enthusiasm, investors have pushed retail stocks to bullish extremes.
If you divide Walmart’s price by the profits that Wall Street expects it to earn in 2020, it’s trading at a price-to-earnings ratio of 23 — its highest valuation in 15 years.
But it only takes a glance at the accompanying chart to see that the retailer’s shares go through plenty of corrections and sharp sell-offs on a regular basis.
Walmart Inc. (NYSE: WMT)
(Source: TradingView.com)
The Coming Correction
Once the correction gets going, I’m sure we’ll hear plenty of reasons for the market’s decline:
- Interest rates are too low (after everyone complained they were too high a year ago).
- Fear of a Democrat in the White House, or a second Trump term — choose your side.
- Overindebted consumers and businesses.
- Uncertainty on the “phase 1” China trade deal.
The point is, we can always attach a motive to why stocks go up and down. Ultimately, it’s a stock’s value, future profits and cash-flow growth that matter most.
So if you’re looking for something to do this Christmas and New Year’s, avoid chasing the year-end rally. Prepare a shopping list for buying stocks when the smoke clears after the coming correction.
Best of Good Buys,
Editor, Total Wealth Insider
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