As 2023 reaches its halfway point, it’s hard to believe how fast the year has flown by.
Not long ago, we were contemplating our bold prediction for 2023—a potential conflict involving China and Taiwan.
So far, this scenario remains unrealized, and we certainly hope it stays that way. However, with figures like Anthony Blinken at the helm, the unexpected could very well become a reality.
The stock market has shown promising performance, particularly the S&P 500, which has increased by 14.51 percent year-to-date as of market close on June 29. Not bad at all.
However, the real winners this year have been in the technology sector. The NASDAQ index has surged by 29.86 percent. Did you manage to take advantage of this rise?
If you missed out, don’t worry—you still might seize the opportunity for substantial returns in the coming six months. Research from Thomas Lee, the founder of Fundstrat Global Advisors, supports this notion. As reported by MarketWatch:
“In the 22 instances where the S&P 500 ended the first half more than 10 percent higher since 1950, the median return for the second half was 8 percent, boasting an 82 percent winning ratio.”
“Among the nine instances when the S&P 500 ended in the negative the prior year but gained over 10 percent in the first half of the next year, the median return for the second half is 12 percent with a 89 percent win ratio. This suggests the S&P 500 could close 2023 around 4,900.”
These returns and success rates are certainly appealing.
According to Lee’s analysis, you have almost a 90 percent chance to achieve a median return of 12 percent from now until the year’s end—simply by investing in the S&P 500 index.
This return significantly outpaces the current yield of 5.43 percent from six-month Treasury bills.
DOW 900,000?
While the S&P 500 and NASDAQ have offered impressive gains in the year’s first half, the Dow Jones Industrial Average has lagged with just a 2.94 percent return. But don’t despair; the key to profits in the Dow is a long-term investment strategy.
Ron Baron, CEO of Baron Capital Management, predicts that the Dow could exceed 900,000 in 50 years. However, he warns that persistent inflation may result in everything becoming “twice as expensive” within the next 14 to 15 years.
Baron bases this outlook on the Dow’s performance since 1970, noting a remarkable 35-fold increase. He shared his thoughts with CNBC:
“I expect inflation to persist at around 4-5 percent annually. This means that over the next 50 years, you’ll have 35 times your money. Currently at 34,000, the Dow Jones could reach 900,000.”
“I believe consumer prices will likely be double in 14 or 15 years. While they may fluctuate slightly, they won’t stay low.”
Do you agree with Baron’s perspective?
Every investment guide typically warns that ‘past performance does not ensure future results.’ Yet Baron seems to be banking on this principle.
The verdict on his predictions remains to be seen.
Where Valuations Stand
At the Economic Prism, we acknowledge the uncertainty of predicting market trends over the coming months, let alone decades. Surprises are inevitable.
Future projections of the stock market are far from scientific. They lack observable phenomena that can be reliably tested.
It’s possible the S&P 500 could indeed yield a 12 percent return in the next six months, or the Dow might hit 900,000 over the next fifty years. However, these journeys may not be smooth.
Some analyses may suggest stocks are on an upward trajectory, yet valuation metrics signal potential turbulence ahead, indicating it could be wise to proceed with caution.
One significant metric is the Buffett Indicator, which Warren Buffett himself described as “probably the best single measure of where valuations currently stand.”
At present, the Buffett Indicator shows a ratio of total market capitalization to gross domestic product at over 167 percent. Specifically, as of last Thursday, the Total Market Index measured by the Wilshire 5000 stood at $44.38 trillion, surpassing the last reported U.S. GDP of around $26.53 trillion.
A balanced market typically ranges between a ratio of 75 and 90 percent, with anything exceeding 115 percent being classified as highly overvalued.
For context, in March 2000, the Buffett Indicator reached 148 percent just prior to a 49 percent decline of the S&P 500. Similarly, the indicator registered a mere 110 percent in September 2007 before a 56 percent crash ensued.
More recently, the Buffett Indicator peaked at a staggering 211 percent in December 2021, coinciding with the S&P 500’s peak, followed by a 24 percent dip over the following nine months.
Are You Gambling with Your Retirement Account?
The future remains uncertain. The Buffett Indicator could surpass 200 percent once again, but at 167 percent, it serves as a cautionary signal indicating that the stock market is notably overvalued.
In summary, there are two primary ways for these inflated valuations to realign: either GDP must rise, or the market capitalization needs to decrease.
The advanced GDP estimate for Q2 will be released by the Bureau of Economic Analysis on July 27. Recently, the third GDP estimate for Q1 indicated a growth rate of 2 percent annually, totaling $26.53 trillion.
At this growth rate, a significant adjustment to the high valuation reflected by the Buffett Indicator seems unlikely. However, it’s feasible that market capitalization could still rise, leading to even greater overvaluation.
At this point, the risk-to-reward ratio of betting on increased market capitalization doesn’t appear very attractive, especially when a six-month Treasury bill currently offers a yield of 5.43 percent.
Historically, there have been few moments in the past 40 years where being bearish has proven unwise. Instances such as before Black Monday in 1987, and again in early 2000, mid-2008, early 2020, and late 2021, indicated better times to be cautious. Right now may also be one of those times.
While a market crash may not be imminent, the reality is that significant declines are likely forthcoming.
Many individuals have their retirement accounts heavily invested in the stock market right now, a situation that might be likened to gambling.
Are you risking your retirement savings in this high-stakes game?
[Editor’s note: Is Joe Biden inciting China to strike Taiwan? Are your finances equipped for such volatility? Discover answers to these pressing questions in a special report. You can access it here for less than a penny.]
Best regards,
MN Gordon
for Economic Prism
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