Investing

The S&P 500 (VOO) Is Ready for a Sell-Off

Austin Smith

Published: November 16, 2024 9:30 am

Key Points:

• The current run in the S&P 500 is among the best in history given its astonishingly high valuation of 25x earnings.
• This elevated multiple is well above the long-term average of 18-19x.
• Though this would be more of a valuation reset than a full-fledged crash, should a large company like Nvidia Corp. (NASDAQ: NVDA) miss its earnings estimate, the market may start to slide.
• Also: Are you ahead or behind for retirement? Click here to check. (sponsored)

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Transcript:

[00:00:00] Doug: So the stock market run up, I’m not saying this is the greatest bull market in history, but if it’s not the greatest, it’s a close second.

[00:00:08] Lee: It’s real close. It’s been two years and it’ll end up over 50 percent unless December brings a big sell off.

[00:00:16] Doug: So when you look at the S& P, not individual companies, you’re not looking at earnings. You’re looking at the S& P. How expensive is the S& P right now?

[00:00:28] Lee: The S& P 500 is trading between 25 times and 26 times anticipated earnings, and that is the most expensive it’s been in the last, I think, 50 years. And I know that there’s a ton of momentum, and, we’re not in a, bad situation economically in the big picture.

[00:00:50] Lee: the short term inflation still bad, but it’s extremely expensive. And at this point, if you’re trying to chase NVIDIA if you’re trying to chase meta if you’re trying to chase these really big magnificent seven stocks I don’t think we’re going to have any sort of depression or anything of that nature But we can have a strong correction and we actually need a strong correction because, we need to just let a little air out of the tires.

[00:01:22] Doug: Well, look, I, haven’t examined this in a while, but I think if you go back over time, 18 to 19 X is probably where it sits the majority of the time. It’s a really bad market. It’s down. If you’re somebody who’s worried about, not, just sort of a sell off because of the economy, but just a reset on valuations.

[00:01:45] Doug: Yeah. you could look at going from say 25 down to 19 and, isn’t the world falling apart? It’s basically resetting to the mean.

[00:01:55] Lee: Yeah. and I think that’s what everybody, should be well aware of because, Hey, on a long term basis, if you’re, bullish on the stock market on a long term basis, 45 angle will stay in pl have some big dips and we towards one of those.

[00:02:18] Lee: And mean, this rally really started in the fall of ’22. So we’ve eclipsed 2 years.

[00:02:26] Lee: Again, the Nasdaq this year is up over 30%. That’s just, I mean, average gains for the S& P 500 over, say, the last 25, 35, 45 years has been 6, 7 percent a year, solid. If you, had dividend paying stocks, it was a little more because of the total return. and that’s the norm. And like you said, Doug, 18 times or 17 times or 19 times is in the realm of the norm, but not 25 or 26 times.

[00:02:54] Lee: And again, just a correction back to the mean is probably going to be 15%. Maybe more.

[00:03:02] Doug: I think that what people should look for really is that If one very important name comes in really light, it can drag the S& P down. It may not drive it, drag it from 25 to 18, but it can certainly drag it from 25 to 21.

[00:03:22] Doug: I’m going to go out on a limb and say that company could be Nvidia. NVIDIA is about to announce if it’s light, even a little bit, the market is going to take a tumble. If I were a typical investor, I would say we’re going to have, we’ve had a few bad days. I wouldn’t sell out. I wouldn’t unload a bunch of stocks.

[00:03:43] Doug: If it’s 25 or 26 right now, I can almost promise people it ain’t going to make it to 30. If

[00:03:50] Lee: it does, it would be absolutely stunning. And the thing is, I, I worked on wall street as an institutional sales guy for 20 years, and there’s always a large cadre of analysts to just say, this time is different.

[00:04:04] Lee: This time is different. It’s never been different. It’s just that the timing. on when that correction comes through, nobody can pinpoint when that is. And the good thing is if you don’t want to sell stock or you don’t want to take those gains, then there’s ways to hedge it up a little bit. You can sell covered calls on your positions, and all you have to do is ask your stockbroker or your financial advisor how to do that.

[00:04:28] Lee: That’s a literally, that’s a very safe use of call options to take advantage of that huge, move that many of these talks has made. And some people, and you’d have to ask, what your advisor thinks about this, but you can do what’s called a, a collar with, and what you do is. You sell your meta calls.

[00:04:52] Lee: I mean, if meta is trading at 450, we’ll sell the 500 call or, something out of the money. Then you take that revenue from that call option and you buy out of the money put options with that revenue. And basically they, could very well expire worthless, but you didn’t pay for them. The, the option on the other side did.

[00:05:11] Lee: But it’s a good safe way to kind of put a safety net under huge gains.

[00:05:16] Doug: I’m not going to ask my advisor. I’m going to ask chat GPT to tell me how to do it because it’s free and Better and clearer answer. So I’m, going down that road.

[00:05:30] Lee: Well, that’s what you should just get into chat GPT and say. How do I write a covered call long put a collar

[00:05:38] Doug: That’ll be perfect.

[00:05:40] Lee: Yeah.