*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades.
Go to the homepage for my latest market outlook. I update this webpage throughout the day.
- Tech is surging. Not a bearish factor for the stock market.
- Warren Buffett is holding a lot of cash. This doesn’t mean that he’s expecting a bear market to begin tomorrow.
- Trump is imposing tariffs on China. This is not the start of a full-blown trade war.
- The stock market used Powell’s speech as an excuse to selloff yesterday.
2 pm. Tech is surging. Not a bearish factor for the stock market
The tech sector now accounts for 25% of the S&P 500. The last time tech accounted for so much of the S&P 500 was in late-1999, just before the dot-com bubble burst and the equities bull market ended.
The tech sector’s forwards P/E ratio is 19 today. The tech sector’s forwards P/E ratio in March 2000 was 60. Tech valuations are much lower today than they were back then.
In addition, there’s no reason why tech can’t weigh more than it used to. A 25% weighting is not “astronomical”. In comparison, industrial stocks accounted for almost half of the U.S. stock market until the 1920s! Tech companies today are the industrial giants from 100 years ago. Tech companies are taking over the world and disrupting many traditional industries.
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This isn’t a medium-long term bearish factor for the U.S. stock market.
3 am: Warren Buffett is holding a lot of cash. This doesn’t mean that he’s expecting a bear market to begin tomorrow.
Warren Buffett’s company is holding $116 billion in cash. He’s having a hard time putting that cash to use because “stocks are overvalued”.
Bears jumped on this to support their case for a bear market in stocks.
For starters, Warren Buffett’s investment time frame is EXTREMELY LONG. He can sit on “record amounts of cash” for many years. This is exactly what he did in the second half of the 1990s. So just because Buffett is holding a lot of cash does not mean that he is expecting a bear market to begin tomorrow or next month.
I agree that stocks will be at the bottom of a bear market in 5 years. But in the meantime, the stock market will go higher before it goes lower. My time frame is shorter than Buffett’s.
In addition, Warren Buffett’s value investing methodology has not worked very well in the past 20 years because valuations have been consistently elevated.
Moreover, Buffett’s company is now so large that it’s practically the same as an index fund. Berkshire’s stock has not really outperformed the S&P 500 over the past 15 years. The following chart overlaps Berkshire Hathaway with the S&P 500.
3 am: Trump is imposing tariffs on China.
The U.S. Commerce Department slapped tariffs on Chinese aluminium foil (see Bloomberg). Trump has until mid-April to impose tariffs on other Chinese metals.
This is not the start of a full-blown trade war between the U.S. and China. These small-scale tariffs happen all the time. Trump is not unique in imposing tariffs on Chinese goods.
Obama did it too.
- Obama slapped tariffs on Chinese tires in 2009.
- Obama slapped tariffs on Chinese solar panels in 2014.
- Obama slapped tariffs on Chinese steel in 2016.
China responds to these small-scale tariffs with equally-small tariffs. China is a net exporter to the U.S. while the U.S. is a net importer. China does not want a tariff war to get out of control. China stands to lose much more than the U.S. in the event of a trade war.
This is not a medium-long term bearish factor for the U.S. economy or stock market.
3 am: the stock market used Powell’s speech as an excuse to selloff yesterday.
Fed chairman Powell told Congress yesterday that the U.S. economy is growing nicely and that inflation is heading higher. He stated a fact: the U.S. economy is growing, which is medium-long term bullish for the stock market.
Financial media attributed yesterday’s selloff to Powell’s statements. According to conventional thinking, Powell might “hike rates 4 times instead of 3 times this year”. This is supposed to be “bearish” for the stock market. Here’s what I think:
- Who cares if it’s 4 hikes or 3 hikes! That’s a difference of 0.25%. A 0.25% rate hike is not going to have any significant impact on the U.S. economy or stock market’s long term direction.
- Interest rates are still very low (historically). Even if the 10 year Treasury yield rises another 1%, it will still be very low. Rising interest rates will not hurt stocks until the 10 year yield reaches 4.5%. It is currently under 3%.
- Yesterday’s selloff merely used the Powell statement as an EXCUSE. The market was ready to selloff from a technical pattern perspective.
We don’t know if this is the beginning of the short term pullback that we’ve been looking for.
Read Stock market on February 27: outlook
Here’s what I think will happen based on my discretionary outlook.
- The S&P has made a small 6%+ “small correction”. This will not turn into a “significant correction”.
- The S&P 500 has approximately 2 years left in this bull market.
I do not use my discretionary outlook to trade. I remain 100% long UPRO because my Medium-Long Term model does not foresee a significant correction at this point in time. I ignore small corrections. I only sidestep significant corrections and bear markets.
I have been 100% long UPRO since September 7, when the S&P was at 2465 and UPRO was at $109.3
*I also have a small Day Trading portfolio. Click here to view my day trades.