Coronavirus Is A Match That Lit The Overvaluation Tinder

Summary

  • The stock market has been set up for a brutal fall for months now.
  • Valuations are stretched, revenue already was flat and economic indicators are past peak, heading the wrong way.
  • The central banks already are firing bazookas and seeing diminishing marginal impact.
  • If the stock market doesn't hold support around 3000 on the S&P 500, we could see a retest of the December 2018 lows.
  • If the stock market does hold support, then you will want to look to sell into any rallies before it turns more decidedly down.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »

In my annual outlook for 2020, I tried to warn people that the stock market was on thin ice. Risk management also has been my refrain for months on my weekly "Investing 2020s" webinars.

In my outlook, I suggested an early year "volatility event" would cause a small correction. It didn't matter what the volatility was. The market has been looking for a reason to lower valuations.

On Jan. 23, I stated on my Twitter feed that Coronavirus "is actually the most important story in the world..." The Coronavirus COVID-19 outbreak has become the volatility event that's driving a necessary stock market correction.

For many investors, the urge is to buy the dip here. That's a bad idea. The stock market has a long way to fall sometime this year.

A better strategy is to reassess you risk tolerance and accept that valuations matter. Ultimately, you should be selling the rips on the very disrupted S&P 500 ETFs (SPY) (VOO), or rallies, in an attempt to bring your cash levels up temporarily. You will get opportunities to buy back into equities at lower valuations in coming quarters.

Thin IceHigh Valuations At Low Interest Rates Are A Warning

I have covered for members of Margin of Safety Investing for months now that stock market valuations are very high. A single-digit percentage stock market correction has not changed that.

Stock Market Valuations

Jill Mislinski

An argument is made that because interest rates are low, the stock market can sustain higher valuations. I would agree that is true, however, to what degree should be asked. Should the stock market be the third most highly valued in history?

LIRP Meets ZIRPThe chart above shows that despite low interest rates heading towards zero, corporate profits haven't been growing much the past several years. What we have with low interest rates is a

We believe the 2020s are going to be more volatile than the easy money inspired 2010s. We also believe that many companies and industries will be significantly impacted by disruptive technology.

With that in mind, we offer to help you build a margin of safety, while taking part in the opportunities that are emerging. Join me, Kirk Spano, and our other top ranked MoSI analysts for deep research and a 4-step approach to finding great growth and dividend investments.

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This article was written by

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I own and operate Bluemound Asset Management, LLC - a boutique registered investment advisory that manages and consults on 9 figures of wealth. I was lucky to have several mentors who managed billions of dollars, including, one who literally helped write the book on option selling. I have now managed money since the 1990s through several major market cycles. 

In the past decade I was able to work on investment and real estate projects with several private equity firms, hedge funds and family offices. Since 2011, I have been widely syndicated and appear as an investing expert in the media. 

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor, Bluemound Asset Management, LLC, but publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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