So Many Unbelievable Opportunities Are in Front of Us…
Are you scared?
Seriously… Do you want to just cash out and not deal with the stress anymore?
You are not alone… That’s the way everyone feels today.
Whether it’s the trade war, President Donald Trump’s tweets, or the crazy moves in interest rates, investors are downright spooked.
It’s no wonder. Just look at the chart below, showing stock prices in the tech-heavy Nasdaq Composite Index since 1979 – it’s crazy, right?
The chart has gone “vertical.” We have far surpassed the dot-com bubble of 2000. The end has to be here… right?
The thing is, if you’re spooked, that means you are a part of the crowd today.
That doesn’t mean your fear isn’t rational. But right now, everyone believes the same thing you do. And that’s NOT a place you want
to be as an investor.
Me? I’m not spooked at all…
Instead, I’m downright giddy. Seriously.
Look… I’ve been a professional investor for more than 25 years. (I can’t believe I’ve been at it this long.) I’ve seen booms and busts come and go, from China in the 1990s, to the U.S. real estate bubble, to the historic dot-com era Melt Up… and a whole lot more.
I’ve invested in stocks, bonds, currencies, commodities, real estate, you name it… Real assets, too – from rare guitars to coins, stamps, and timberland. No kidding.
I know what opportunity looks like. And what we have today – shockingly – looks like opportunity.
Thanks primarily to 1) near-record-low interest rates, and 2) fear in the markets so thick you can feel it… right now is an absolutely fantastic time to be an investor.
The opportunities in front of us today are extraordinary. This is nearly as good as it gets. I’m well aware you may not believe me – at first.
But the clock is ticking.
Let’s get started…
Why the Crazy Move in Interest Rates Creates Powerful Opportunities in Housing
“How are things, Jeff? I bet business is good with these low interest rates… “
Jeff is a friend I’ve known for many years. He also happens to be a local mortgage banker. A few months ago, we were both eating dinner at the same restaurant.
“Business is great,” he answered. “I just locked in a 30-year mortgage today for a client – at a rate of 3.375%.”
“3.375%!” I said. “Lucky client…”
To see just how crazy this is, you need to understand one thing… That number is near the all-time record low for a mortgage rate – in U.S. history. Seriously…
Looking back at the last century, the best mortgage rate you could have gotten for a house was just under 5% – back in the late 1940s.
In this century, mortgage rates bottomed out in 2012 and 2016 at around the same 3.375% level Jeff locked in for his client.
Today, mortgages are still in the 3% to 4% range, but time is running out.
So what should you do? You should do the obvious thing in this case… and refinance your house – right now.
Better yet, consider buying a house…
You’re probably thinking, “Are you kidding, Steve? Don’t you know that house prices are way up?”
Sure I do. The median existing home price in the U.S. is about $278,000 today. That’s just shy of a recent high of $289,000… even higher than we saw at the peak of the housing bubble a dozen years ago. Take a look at the this chart of the 10-month moving average.
We all know prices are up. But here’s the important thing – the big takeaway:
The price of an investment isn’t the only thing to consider.
Ultimately, what you need to consider is value, not price. You need to answer the question, “What am I getting for my money?”
We will look at this idea in the context of house prices first… Then we’ll look at it with U.S. stocks.
I like to look at a few indicators to see where we are in the housing market cycle – such as new building permits, new housing starts, and the overall supply of homes on the market.
We’re a long way from the previous peaks in these indicators. In short, new homes today are being built at half the rate they were at the peak of the housing bubble. That tells us we’re not near a top in the housing market yet.
But what trumps everything else is value – what you’re getting for your money.
And when you start thinking seriously about value, housing “affordability” is the ultimate measure in the housing market.
Essentially, housing affordability is a combination of three things: the house price, the mortgage rate, and household income.
Household income doesn’t change a whole lot over time. So interest rates and house prices are what affect housing affordability the most.
Now, as we saw earlier, house prices are at an all-time peak. But thanks to ultra-low mortgage rates, housing in the U.S. is still incredibly affordable. Take a look…
This chart distills the three pieces that make up affordability into one simple number. A reading of 100 means a typical person can afford a typical house in the U.S. A reading of 150 means he could afford 150% of the typical home price. So higher numbers (low on the chart) mean housing is more affordable.
As you can see, the market isn’t as cheap as it was in 2012, when both house prices and interest rates were incredibly low. But remember, my friend Jeff is writing mortgages at some of the lowest rates in U.S. history.
Again, don’t look at the price by itself… Look at the value. The value in housing today is all about interest rates. They’re at near-record lows… And that’s giving us our extraordinary opportunity today.
So yes, house prices have gone up – a lot. They’re near record highs.
And, I’m telling you, U.S. house prices are going higher… Much higher. You ain’t seen nuthin’ yet.
So please, talk with your bank. Or go online. Do what it takes to at least find out how much money you could save by refinancing today. (Make sure you ask about how long it takes before you “pay off” the closing costs… Basically, that tells you when refinancing starts to be profitable for you. And if it’s in five years or less, it’s a no-brainer.)
But my friend… refinancing is the least you can do. I urge you to go further…
I urge you to consider buying U.S. residential real estate.
What more can I tell you than this: The majority of my financial assets are in Florida real estate.
I am practicing what I preach here… I bought another house in Florida to update and rent out just a few months ago!
I get it. The deals in property aren’t as great as they were in 2012. But, my dear friend – and I hate to be the bearer of bad news – we aren’t going to see values that good again in our lifetimes.
Meanwhile, we have near-record-low mortgage rates. That means housing is still a great value today. Plus, the typical housing market indicators tell me we are nowhere near the top of the housing market.
Take advantage of this opportunity! Consider refinancing – right now. And consider buying U.S. residential real estate – right now.
The Same Simple Interest-Rate Story Applies to the Stock Market…
I know what you’re thinking…
“How could you even consider buying stocks, Steve?”
Yes, I’m fully aware that stocks have soared since bottoming out in 2009. And I’m fully aware of the chart I showed you at the beginning of this essay. The Nasdaq has practically soared straight from lower left to upper right over the last 40 years (with the exception of the dot-com bubble and bust in 2000).
But I look at stocks differently…
Once again, instead of just looking at price, I want to value stocks relative to interest rates. I want to look at stock market affordability.
I look at stock values relative to interest rates because all investing is relative…
If you could earn 20% interest at the bank, then you would have zero incentive to invest in the stock market. But if the bank is paying you zero percent, and stocks have averaged 8% a year over time, then you have an incentive to invest in stocks.
Investing is all relative… Investors make decisions every day, asking the one question that matters: “Which investment is best today, relative to the other investing choices?”
So please take a look at the chart to the left. It’s my chart of stock market affordability.
Like housing affordability, I look at three things here: stock prices, stock earnings, and interest rates. Here’s what it looks like when you put it all together…
As you can see, my indicator shows that stocks were dangerously overpriced in 1987 – right before Black Monday hit on October 19. And you can also see that stocks were extremely overpriced at the peak of the dot-com bubble in 2000.
When were stocks the cheapest by this measure? After the collapse of Lehman Brothers, near the stock market bottom of 2009.
This means in hindsight, my stock market affordability indicator did a good job showing peaks in 1987 and 2000, and finding the last great stock market bottom.
So where do you think we are today, 10 years after that market bottom in 2009?
Wouldn’t you think – after 10 years of soaring stock prices – that stocks would no longer be affordable? Wouldn’t you think that stocks would be extremely expensive?
Well, take a look at this next chart. It’s the same as the one before, updated to the present…
Isn’t it crazy – after 10 years of soaring stock prices – that stocks are still cheap based on this measure?
You may not believe it… but I’m simply comparing the benchmark of interest rates (the 10-year U.S. Treasury yield) to the benchmark of stock valuations (the price-to-earnings ratio, or P/E ratio for short).
In order to compare apples to apples – and look at stock yields versus Treasury yields – I invert the P/E ratio. It still shows whether stocks are expensive or cheap… It’s just the E/P ratio instead of the P/E ratio. In finance, we call it the “earnings yield.” So, if the P/E ratio is 20, then the earnings yield is 5% (1 divided by 20).
Now that you know all the “ingredients,” here’s how my stock market affordability indicator works…
Whenever interest rates are high relative to the earnings yield, then stocks are expensive. And whenever the earnings yield is high relative to interest rates, then stocks are cheap.
You can see these two yields in the above chart. And if you look closely, you’ll notice something interesting…
Throughout history, the relationship between the earnings yield and interest rates has held up pretty well. When it gets out of whack, something big happens to push the relationship back into place.
In late 1999 for example, bonds paid nearly 7% interest. But the earnings yield on stocks was around 3.5%. So stocks were a terrible deal in late 1999 relative to bonds.
We all know what happened next… Stock prices crashed, and the earnings yield soared (remember, yields and prices move in opposite directions). Meanwhile, investors fled to safety… pushing bond prices up and yields down.
By 2004, both lines on this chart were moving together again. And that brings us to today…
Recently, the 10-year Treasury yields fell to a crazy low level – below 1.5%. Meanwhile, at a P/E ratio of 19, the earnings yield on stocks is above 5%.
So this time, bonds are a terrible deal compared with stocks.
To get this relationship back on track, either stocks need to absolutely soar, or interest rates need to skyrocket… or both.
Now, don’t get me wrong. While this relationship has highlighted some key market moves, it doesn’t have to be perfectly one-to-one today. It’s doesn’t guarantee stocks will continue higher.
But it does tell us something about the relative value of different investments. And that’s our big lesson today… We evaluate investments relative to each other.
It’s the only way to determine what’s cheap or expensive… and a good deal or a bad deal.
Right now, stocks are an incredible deal relative to bonds and we’re nowhere near a bubble.
Take advantage of it.
Dr. Steve Sjuggerud holds an MBA and a PhD in finance. He’s worked as a stockbroker, vice president of a global mutual fund, and a hedge-fund manager. His track record has landed him on various television networks including stints on Fox Business News, Bloomberg’s Taking Stock, and CNBC, among others.