LTP Notes 010: Very Expensive S&P 500
I’ve noticed some warning signals in the market that I believe are worth paying attention to. From record levels of insider selling to extreme valuations and concentration in US stocks, these trends might suggest potential risks ahead. While history shows that such conditions can lead to corrections, I think it’s important for every investor to stay true to their own strategy, keep a long-term perspective, and avoid making emotional decisions. These are just my observations, not a recommendation to act, but a reminder to stay informed. Be long-term directed.
Previous publication: Updated Valuations: PINS, SQ, IDXX, MKTX, FTNT, and SBUX
Content:
📉 GDP Decrease
↘️ Economy Continues To Contract
😳 Equity Market Concentration
🫰 Very Expensive S&P 500
🐂 Record Long On Futures
💵 Aggressive Asset Allocation
🌐 US vs ex-US Equities
💲 Massive Insiders’ Sells
📉 GDP Decrease
Morningstar predicts that US GDP will slow down in 2025. This is due to the delayed impact of monetary tightening and the reduction of extra household savings. During economic slowdowns, investors often move to safer assets like bonds. This shift could increase the price of TLT and EDV, as people leave riskier investments for the safety of long-term government bonds. Potentially, this demand might push bond prices higher and lower their yields.
In the Long-Term Pick Portfolio, a portion is allocated to long-term bonds.
↘️ Economy Continues To Contract
The ISM Manufacturing Purchasing Managers Index (PMI) report was released at the start of the month (November 2024). The PMI came in at 46.5, which is lower than expected (47.6) and worse than the previous number (47.2). This shows the economy is still decreasing. Also, new jobs in private businesses (not including government jobs) dropped to -28K, according to the U.S. Private Nonfarm Payrolls data.
😳 Equity Market Concentration
Capital is now more concentrated in a few companies than at any time in the last 100 years. This doesn’t directly mean that markets will drop, but history shows that high concentration often leads to problems. When too much capital is in a small group, the market becomes weaker and more at risk of big changes or downturns.
🫰 Very Expensive S&P 500
The S&P 500 is expensive, no matter how you look at it. Based on the chart, the current valuation levels are high compared to the past 20 years, from 2003 to 2024. Key metrics like P/E, P/B, P/S, PCF, and Dividend Yield are at or near the top of their 20-year ranges. This shows the market is expensive when viewed from a long-term historical perspective.
🐂 Record Long On Futures
The chart above shows that investors are heavily positioned in the S&P 500, with asset managers holding near-record long futures positions. This reflects strong confidence in the US stock market. However, such extreme positioning could lead to a market sell-off. If these bullish bets reverse, it might create strong selling pressure.
💵 Aggressive Asset Allocation
As of October 15, US households held 48% of their financial assets in equities, matching the record set around the early 2000s. While this shows strong confidence in the stock market, it could also be risky. High exposure to equities makes portfolios vulnerable to market downturns. If stocks fall sharply, households could face significant losses, especially if they lack diversification into safer assets like bonds or cash.
🌐 US vs ex-US Equities
US stocks compared to the rest of the world have reached a new extreme. While this highlights the strong performance of US markets, it could be a warning sign. Such extremes might mean the market is overvalued, increasing the risk of a correction. Additionally, heavy reliance on US stocks may limit diversification, leaving investors exposed if global markets outperform or if US stocks face a downturn.
💲 Massive Insiders’ Sells
Every Monday, on my Telegram channel, I share insider transactions from top companies for the past week. Recently, I’ve noticed insiders are selling large amounts of their shares. Only B. Arnault continues buying LVMH regularly 🙂 While insider selling isn’t always a red flag, it can be a bad sign if many insiders across industries are selling at the same time. It might indicate they expect stock prices to drop or see limited growth ahead, raising concerns about the broader market outlook.
This is not a financial or investing recommendation. It is solely for educational purposes.
Thank you for being a reader of Long-Term Pick! Your valuable feedback is welcome, so feel free to share your thoughts.