High Valuations Meet Economic Uncertainty
Every once in a while, I’m reminded that many investors haven’t lived through a normal recession or market decline in their investing lives. 2020 doesn’t count, in part because the market recovered in a few months and there was nothing “normal” about 2020.
2008 and 2009 were the last real recession we had in the U.S. and someone who started their investing journey at the market bottom in 2009 at 22 years old would now be 38 years old!
To say that the last 16 years of stability and prosperity for investors are an outlier would be an understatement. The only major pullbacks in that time were a short drop when COVID hit and the popping crypto/SPAC/ZIRP speculation in 2022. But there hasn’t been a normal recession since 2009.
Zoom out to the beginning of the century and the last 16 years look like a dream. From the peak in the 2000, the S&P 500 $SPDR S&P 500 ETF Trust(SPY)$ fell 56.5%, and the Nasdaq 100 $Invesco QQQ(QQQ)$ fell 83% and didn’t recover its losses until 2016.
In 2008/2009, the S&P 500 fell 56.5% and the Nasdaq 100 dropped 53.6% from their 2007 peaks.
It’s easy to see this year’s drop in stocks as dramatic and I’m seeing a combination of fear and “buy the dip!” mentality. But keep in mind the chart above when you think an 8.8% drop in the market is big. Stocks are down, but this is nothing!
I’ve used this chart of the P/E ratio of the S&P 500 $S&P 500(.SPX)$ before, but it’s worth highlighting that we’re still near historic highs in stock valuations, despite the recent pullback.
There was no time before 1998 that stocks were this expensive and they’ve never been this pricy in non-recessionary times (when the “E” in P/E falls).
Those high valuations are meeting the economic uncertainty of today. Guidance for most companies was tepid, to say the least. And retailers were sounding alarm bells that consumers are cutting back.
This can be a noisy chart, but the Atlanta Fed’s GDPNow estimate thinks we will see a decline in GDP in the first quarter. Falling auto sales alone may be enough to push GDP negative.
And so the market goes from greed to worry. This is normal volatility for stocks and we shouldn’t shy away from it.
Our job now is to build conviction in the companies we want to buy hand over fist if the market really collapses. In March 2009, I bought Las Vegas Sands and Apple at the bottom (yep, a 2-stock portfolio).
Today, I have a list of 21 stocks in the Asymmetric Universe that I would be happy to buy if shares fall 20%, 30%, or more.
When everyone was greedy late in 2024 and early in 2025, I was getting fearful. That’s why I added the first short position in Asymmetric Investing.
I’m not getting greedy yet, but I’m preparing to get greedy if a falling market hits and gives us some great buying opportunities.
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