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Euphoria in the Markets

Posted August 28, 2018

The great investor John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

Here is the Nasdaq 30-year chart. Every candlestick is a quarter:

Many of you are old enough to remember the gut-wrenching spectacle in the markets in 2000 and again in 2008...

They say it takes 20 years or a whole new generation of buyers to recreate a bubble. This would seem to be the case on the Nasdaq.

The current bull market, the longest in history, was born of abject despair. Workers were moaning that they would have to work through retirement. Defenestration was a “thing.” Houses and jobs were lost by the hundreds of thousands per month. Half the couples you knew divorced.

On March 9, 2009, the Nasdaq was at a low of 1,268.64. Today, it is trading at an all-time high of 8,015.69. That’s gain of 532% from the bottom.  

It’s been an amazing and historical run.

For nine and a half years, the market has been climbing a wall of worry without a 20% correction. Though the market did drop 19.5% in 2011, it didn’t count as a technical bear market.

Right now, we are in the late stages of optimism and bordering on euphoria. I’m seeing people who have been out of the market for years get back in.

However, there is no sense yet that this market is in the late euphoric phase. No one is saying “it's different this time” or “the trend is your friend.” But we are at the point in the market where tech stocks with no earnings are running to beat the band.

New companies like Yext (NYSE: YEXT), Zuora (NYSE: ZUO), and Splunk (NASDAQ: SPLK) are jumping 20% in a day. This tells us speculation is back. People would rather buy stories than fundamentals.

Good, old-fashioned ETF investing is back as well. In July, $26.8 billion flowed into ETFs.

Perhaps this is the dumb money coming back in after a remarkable run...

But there are also fundamental reasons to buy stocks, the first of which is that you aren't getting a return from owning bonds.

The second is that earnings from companies in the S&P 500 are hitting records.

EPS for the S&P 500 is 20% higher than 2017. EPS is expected to reach $159 for 2018. That's solid growth.

Good News Bulls

What we are seeing now is a situation where good economic news, like the Fed holding pat, pushes stocks higher, and bad economic news, like trade wars, doesn't take it down to the extent you would think.

In other words, investors are buying the dips and buying the news.

Going forward, I see some value in old-school stocks like Microsoft (NASDAQ: MSFT) and Visa (NYSE: V). Disney (NYSE: DIS) is undervalued in terms of what it could do with its streaming business over the next two years.

In my newsletter Bubble and Bust Report, we are also going to continue to make money in markets that will benefit from current market conditions.

For example, coal stocks are the most overlooked and undervalued companies out there. There is a lot of growth selling high-quality U.S. coal to China and India. Exports are up 6%, while prices are up 29% this year and sitting at a five-year high.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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