Are stocks headed for a Potcom meltdown?
Stocks involved in the emerging cannabis industry have been on a tear. The industry continues to garner more attention and main stream acceptance as additional states and countries legalize its use. (It will be legal to recreationally use marijuana in Canada on October 17.) The group has gotten a stamp of legitimacy with investments from several old mainline consumer staples companies like Coca Cola. Investor attention on the group is approaching mania status with leading pot producers seeing their stocks move up and down 20% or more in a day. Valuations are based on hype and hope but there is enough viable potential to drive them higher. Make no mistake, there will be huge winners in the bunch. There will also be spectacular failures and even some scams. The Wild West casino environment is reminiscent of the Bitcoin mania in recent years and the tech boom of the late 90’s. Neither of which ended well, although it can be argued that the game isn’t over yet in thee cryptos. So…is the stock market which has been hitting new highs set up for a bursting of a Potcom bubble? Should investors get out of stocks after prices have risen nearly unimpeded for 10 years? Our proprietary tools and nearly 30 years of experience say no. But there are some changes to be made. There are only a handful of marijuana stocks that are “buyable” for US investors. The same is true for cryptocurrencies where investable options have been limited. Conversely, in the early part of the decade, technology and emerging dotcom stocks made up over 20% of the S&P 500. Even if the pot stocks all go up in smoke, the overall damage to the market will be very limited. Bull markets do not die of old age, they usually need a recession or structural shock to end them. We don’t see a recession on the horizon. The estimate for economic growth in the second quarter was just revised up to 4.2%. That isn’t exactly teetering on the brink. Corporate earnings, the ultimate determinant of stock prices, continue to improve dramatically. Growth has exceeded 20% in each of the last two quarters. Stock prices have increased over 325% from the bottom, but earnings have grown by over 400%, meaning valuation is still “ok” With all of that said, there are some indicators that we are watching closely that could change the entire outlook quickly. We have built and tested several proprietary tools that will help sound the alarm when it is time to build protection into your portfolios. In fact, while we have been underweight international stocks, this tool recently suggested we should lighten up even more. We would be happy to show you how our experience and technology are combining to build better portfolios for our clients.