The Market Is About To Drop - Again

What's up, grandma's guys? Here, so throughout the last few days, there's been a new topic that's begun to make its way around the internet, and we got to break this down because it's from the renowned investor Ray Dalio, with some rather serious claims that would affect all of us as investors.

On May 2nd, he went on record to say that the stock market was on the edge of a bubble similar to the magnitude of the dot-com crash and the 1929 Great Depression. According to him, bubbles like this could be measured throughout six predictable categories that repeat themselves throughout history, which I'll admit is eerily similar to what we're seeing today. This also comes at the same time that the stock market saw its worst start to the year since 1939. Fund performance hit an all-time low, and a survey found that people were more pessimistic about the stock market today than they were at the start of the COVID shutdown or in 2009.

So let's break this down: what this means for you, how our market today compares with previous bubbles throughout history, and then my own thoughts about what he says right after. Of course, you pop that like bubble for the YouTube algorithm by giving it a gentle tap and subscribing if you haven't done that already.

Alright, so to start, Ray Dalio needs no introduction, but just in case he does, here's why so many people listen to what he has to say. He currently runs the world's largest hedge fund, Bridgewater Associates, which was founded in 1975. Throughout that time, Bridgewater has grown to over 140 billion dollars under management, often beating out the S&P 500. In the process, Ray Dalio has gained over 45 years of macro investing experience throughout some of the biggest boom and bust cycles in the market.

In this case, he now has cause to believe that we are in the midst of a bubble, and as a way to see it coming, he's broken it down into six categories. First, high prices relative to traditional measures of value. Second, unsustainable conditions like extrapolating past revenue and earnings that cannot be sustained. Third, many new naive buyers who were only attracted because the market goes up. Fourth, broad bullish sentiment. Fifth, a large portion of the market financed by debt. And sixth, a lot of forward and speculative purchases made to bet on those price gains continuing.

Of course, throughout the last few years, we have seen some of the highest valuations on record. Companies were valued based on unsustainable past performance, new investors bought in at record numbers throughout the COVID shutdown, and bullish sentiment hit an all-time high at the end of 2021. Margin debt hit a record just six months ago, and one could say that there was a lot of excitement for investing because “stonks” only go up.

So on the surface, quite a lot backs up Ray Dalio's belief that maybe the market could be in a bubble and is about to burst the moment you finally decide to invest. That's because, in January of this year, he called out the excessive valuations of certain companies, which later turned out to be true. He noted that the bubble indicator was approaching 70 percent of the peaks last seen in both 1929 and 2001, suggesting that some stocks were severely overvalued and poised to crash under the right conditions—or, I guess, wrong conditions if they caused them to crash. Either way, they were about to fall.

There were fewer buyers entering the market, investor sentiment was irrationally optimistic, and IPOs were the highest they've been since 2001. But since that first article came out, the stock market has, for a lack of a better word, popped, and he was right for calling them out. However, he makes it a point to mention that bubbles could take a very long time to unwind and that just because they aren't at a bubble extreme does not mean that they are safe or that it's a good time to go long.

In fact, U.S. stocks in aggregate still look overvalued by our measures, as he suggests. Once a bubble pops, it continues to trend downward, and in this case, most previous bubbles tend to settle around 20 percent, which gives us a little more room to potentially fall. In fact, emerging tech has followed the exact same trajectory as both 2001 and 1929.

And now, the biggest question remains: how do we compare throughout the rest of the market with prices now down anywhere from 15 to 70 percent? Well, he shows that relative to previous bubbles, the market is high but dropping. The price-to-earnings growth is also somewhat elevated, but as fewer newer investors enter the market, valuations have had a chance to come back down. Now, forward growth suggests that there might be more room to drop, but the shocker from all of this is that bullish sentiment is at an all-time low.

Now here's why that last point is so interesting. Studies have shown that generally, the more people believe there to be an upcoming crash, the more likely the market is to do the exact opposite of that and not crash. After all, the beginning of a recession is usually after peak euphoria, not after peak fear. So when consumer sentiment drops and bullish sentiment is at an all-time low, that usually indicates that, hey, you know what? It might be a pretty good time to buy.

As proof of this, just look at the data throughout the last 60 years. Large declines in consumer sentiment translate to an average 23% gain in the S&P 500 over those following 12 months. We also have something called the U.S. Crash Confidence Index—that's a tongue twister. Just try saying that three times! Anyway, that measures investor sentiment and how likely they think a crash is going to happen. Now this is really important because the overwhelming data finds that the average investor is almost always wrong with the most crucial points.

If the average investor believes prices are about to go a lot higher, usually that's a sign that things will get a lot worse. This also works in reverse—where the more worried investors are, the more likely we are to have bottomed out. Now that we've begun to trend downwards, maybe this could be a sign that we're about to see a reversal.

Now this is also mirrored by the Warren Buffett Fear and Greed Index, which analyzes that right now the market is mainly driven by fear, especially as the market trades well below its 125-day moving average. Although, even though it seems that we could be coming up on a reversal, before we talk about what this means for all of us as investors and whether or not Ray Dalio believes we're still in a bubble, we need to talk about the very popular saying, “Sell in May and go away.”

Alright, so in terms of the phrase "Sell in May and go away," is there any truth to this? And historically, is May actually a good time to sell? Well, the phrase is said to have originated from an old English saying, "Sell in May," when merchants and bankers noticed that their investment returns were lower in the summer throughout London's financial district. But in the modern era, it is thought that the stock market tends to underperform in the six-month period between May and October, although is there actually any evidence to prove this?

Actually, as it turns out, there is kind of. It is true that generally, investors are more likely to go on vacation and take time off between Memorial Day and Labor Day, which means less activity in the market and downward pressure on prices as a result. One chart shows that since 1928, the average May delivered a return of negative 0.1%. However, since 1950, the May through October time frame has returned an average of positive 0.3%. In 2021, May returned 0.56%, and the year before that was 4.53%.

The other interesting point is that even though May isn't historically a great month, it was found that going all the way back to 1928, the June-August period typically is the second best of the year, with gains 63% of the time and an average return of 2.97%. Over the last 10 years, stocks have delivered positive returns over every six-month period between May and October.

So in recent history, even though yes, May doesn't typically do as well as some of the other months, it can do well. Plus, let's be real, trying to time the market based on an old English saying is probably a pretty horrible idea. In terms of Ray Dalio, though, his data shows that yes, the market is considered expensive according to their historic indicators. But if anything, it is a good sign that people are beginning to be bearish because, if anything, irrational exuberance is a much bigger indicator of a bubble than excessive pessimism.

Of course, he also suggests that the market could have some more room to fall, with the disclaimer that what one chooses to do with this is a tactical decision. He also goes on to say that bubbles often overcorrect and sell off beyond what their fundamentals would suggest, implying that if things get bad, prices get worse, and that could be a fantastic opportunity to keep buying in.

However, on the other hand, the housing market is a completely different story. Just like most Americans are bearish on the stock market, a new poll found that only 30% of Americans believe that now is a good time to buy a house, which is the lowest on record since they started the survey in 1978. It's the first time that less than 50% of the people across the country thought it was a good time to buy.

The result is that the negative assessment may keep more people out of the market, leading to slower sales, resulting in a buildup of inventory and eventually lower housing values. There's also the ongoing issue of home affordability, which right now is almost the worst on record. In fact, with rates now having risen an extra 50 basis points and the largest rate increase since 2000, if housing prices stayed the exact same, we could hit a new low for housing affordability any day now, with the average monthly payment having increased 72% since the onset of the pandemic.

The issue today is that you have a lot of people rushing into the markets to get ahead of the mortgage rates, with the assumption that if they don't buy right now, rates are going to be higher in the future. We're also seeing what's described as a lock-in effect, where homeowners refuse to move because otherwise, they'd be giving up a historically low interest rate.

Of course, if we apply the same logic that if the average investor is almost always wrong and they think it's a bad time to buy, then maybe it's a good time to buy. Alright, I'm kind of joking, but I will say that as a real estate investor now for over a decade, this is actually the time I'm beginning to get back into the real estate market because there are finally deals to be had from sellers who want to sell or cash out quick.

It was a long process, but I partnered with other investors like Ryan Pineda to lock in two deals that were much larger than I'd be able to do myself. For anyone curious, one is a mix between commercial and residential lofts in St. Louis, and the other is a project in Phoenix, Arizona, where I believe we'll continue to see consistent long-term growth. It's also unique because we're opening this up to accredited investors who could literally invest right alongside with us.

So if you're interested in partnering, I'll link to everything down below in the description. On top of that, rents tend to be fairly consistent over time, even throughout the price fluctuation. So as a long-term investor, consistent cash flow to me seems a lot more appealing. As far as where I think prices are going to be throughout the next few years, I'll be honest, I would not be surprised if rising rates lead to some softening throughout the markets, and some parts of the country could begin to see a lot more inventory.

But because of a lack of new building and strong demand, I would not be surprised if prices still remained fairly high, at least until they changed the laws for more construction and building one day. So to answer the title of the video, it does appear as though Ray Dalio did correctly call out several segments of the market that were drastically overvalued and have fallen a significant amount. If you were all in SPAC IPOs on emerging tech during stay-at-home plays, chances are if you didn't sell, you've lost a lot of money.

However, it is a lot more difficult to determine whether or not the broad market is overvalued. Even though, as data shows, that it is expensive relative to past history, that doesn't mean it can't go even higher. So to me, the biggest solution for all of this is to simply diversify as continuously as possible throughout as many different sectors as possible, whether that be stocks, real estate, cash, and even a little bit of cryptocurrency.

And then from there, just understand that prices will fluctuate for absolutely no reason whatsoever, in ways that make absolutely no sense, completely outside of your control. But long-term, history has shown us that eventually, markets recover, prices trend back up, and the most profitable thing you could always do is subscribe if you haven't done that already.

So thank you guys so much for watching, and also don't forget to add me on Instagram. And do not forget to get that free stock down below in the description that's worth all the way up to a thousand dollars when you sign up for public.com using the code ‘gram’. The link is down below in the description, make sure to take advantage of that before the offer expires. Let me know what stock you get. Thank you so much for watching, and until next time!