Stock Market Bubble: Record Returns & Record Prices

Record Returns & Record Prices:

The chart shows the rolling annual returns of the S&P 500 since 1963
We put the Price to Sales ratio above the years that returned over 40% (the 96th percentile)
In the year ending March 1998 the market rose 48% and was valued at 1.8x sales – a level which was a precursor to the final run higher into the peak of the dot.com bubble
The 12 months ending in March 2021, the S&P was up 56% – the third highest return in history
Post this 56% run the market hit 3.0x sales, valuing the market higher than the peak of the speculative bubble in 2000

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The market has never run this far this quickly to a multiple this high. Massive stimulus from the federal reserve, record low bond yields and investor enthusiasm have sent equities markets to peak returns and peak valuations. Our Bear Traders missive uses historical data to make the importance of avoiding big losses painfully clear while our piece on GARP stocks offers a way to find reasonably priced profits in the most speculative market in history.

Bubble Stocks & Long Term Investing

We have written extensively about the highly bifurcated nature of markets today. The “stock market bubble 2021” is similar to 2000 and 2008. Like those peaks, we believe there are enormous risks and terrific opportunities. Reading our Nifty Fifty piece, our unflattering missive on a SPAC, and our printing of some bearish views on bitcoin one could be forgiven if you took us for bears hoping the bubble bursts.

Yet nothing could be further from the truth. In our recent Quick Take we put a spotlight on the few stocks around that are still trading at 10x earnings and paying owners. We have written work about the massive value and quality spreads in small cap stocks and explained how we think those spreads can be exploited.

We have also written about similar opportunities in mid-cap stocks, staples and took a simple bullish stance on energy within days of the market’s Covid trough. Since publication, financial markets have rotated away from speculative growth stocks and we have seen our favored stocks’ prices rise.

We are not speculators. For those interested in high quality firms and quality small cap stocks at reasonable prices that generate income for owners, we offer a number of systematic methods that have been running for over a decade. Reach out if you would like to explore how to bring simplicity, discipline and process to investing in a time of chaotic and volatile markets.

With 10-year treasury bonds offering real yields of -3.5% and interest rates at all time lows, Wall Street is aggressively filling demand for speculative securities. In our piece “Innovation vs. Value” we noted that investing luminaries from GMO, Yale University, Stanley Druckenmiller and others had all highlighted market risks. Recently unblocked from Twitter, Michael Burry has dubbed himself “Cassandra” on Twitter and is talking about the extreme risks of a stock market crash.

We make no claims to any market-timing ability. Our research team simply believes that “life’s bills do not always come at market tops.” We hope readers will have the courage to invest based on fundamentals rather than the fads so prevalent in markets today.

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SERVICES

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

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SOURCES

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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