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🤹🏽 Stock market tug-of-war

May 27, 2021 Sign up
TOGETHER WITH Finny

Good day. Can you guess how many times Bitcoin's price has fallen at least 30% from an all-time high since 2017? See the answer in the "Trending" section below.

Here are the investing topics we cover today. 

  • Stock market tug-of-war. A look at earnings growth and valuations
  • Bitcoin—beauty is in the eye of the behodler
  • You can’t vote, but you can invest

INVESTING

Stock market tug-of-war

You know that relative who just lives recklessly their whole life and leaves everyone in the family continuously wondering how they still do it? When will they settle down? Will they run out of money? When will they finally crash? That's akin to how the markets have been behaving for the last year. 

We’ve had ourselves a relatively strong and stable market heading into 2021, despite it still being a bit haughty in terms of its historical multiples. This was met with the flash crash ushered in by the pandemic, followed by a violent recovery, and capped off by a euphoric, impromptu retail investor revolution that sent major indexes even higher. 

Now, we’re hanging on for dear life as the markets whipsaw from red to green in an attempt to find a balance. It’s truly a tug-of-war between the bears who believe we’re unprecedentedly overvalued and the bulls who consider this warranted. 

Earnings growth and valuations. Let’s look at some data

Most casual traders don’t obsess over market valuations. They know the age-old adage that “time in the market beats timing the market” and they hold their index funds and Roth IRAs stable for decades. Dave Ramsey loves these folks and for good reason.

But for those who can't turn a blind eye and who seek to actively procure noteworthy returns on their investments, doing the occasional overanalyzing is a lifestyle. So that we’ll do right here.

  • The S&P 500’s current P/E ratio is hovering at around 44x. For reference, around this time of year in 2014, it was 19. On the last day of 2019, it was just 23. It started climbing in early 2020, and now it’s doubled. 
  • The S&P’s average EPS has increased just $4 since 2014, which is a 14% increase. Compared that to the P/E more than doubling in that same time period. 
  • Forward earnings estimates are also rising as more growth and tech companies join the index. Predictions currently sit at around $50 for Q3 2022, up from $35 near the end of 2019, a 42% jump in 3 years. 
  • Even presently, the S&P is seeing record level quarterly bottom-up earnings estimates that we haven’t seen in Q2 since 2002. A 4.2% increase in bottom-up estimates in April.
  • Price to sales is at 3.05, up over 48% from a year ago, and price to book up 38%, sitting at 4.5.
  • For diversification purposes, the Dow is also trading at 29x earnings, up from 20x a year ago—an impressive move for an index with mature companies in it.

What’s next?

Those are just some of the numbers on the situation. There are countless other metrics and indicators that investors can use to discern where we are on a macro scale, and you’re free to go and counter these numbers with any other to try and put a positive spin on the situation.

The bottom line though is that objectively speaking, we look historically overvalued, and the market’s behavior seems to allude to this. Some may speculate that hedge funds are manipulating markets, but it seems more likely we’re experiencing a classic value battle. 

We’re seeing massive daily swings—bloody sessions followed up lofty green days. These don’t always have to be apocalyptic signs of the end of the bull market, and no one can predict what’s next, but we can attempt to read some of the tea leaves.

📚 Review fundamental analysis by taking this digestible 6-min lesson:

CRYPTOCURRENCY

Bitcoin—beauty is in the eye of the behodler

As a follow-up to our discussion on how all value is likely a derivative of social proof and that nothing really has any objective value, we thought it would be suitable to remind everyone that Bitcoin is no exception to this rule. 

Crypto bears have been skeptical of Bitcoin since its formal introduction to the world when it gained notoriety back in 2017, and none of its recent perseverance and success has been able to stop them either. 

Is Bitcoin really worthless though? 

Well, yes and no. As an investor, you should enjoy being objective and pragmatic when it comes to money. Do you really care what the subjectively dubbed “value” of something is, or do you care if you can profit from it? The reality is that it doesn’t matter what something’s worth as long as it has a use, and Bitcoin certainly has that. 

Bitcoin is loved most dearly by the long-term hodlers—those who believe in cryptocurrency and that decentralized finance has a legitimate future. That’s a noble ambition, and we commend them for it. But Bitcoin can also be valuable to those investors who don’t have a horse in this race and are simply looking for an alternative to traditional stocks and bonds.

Comparing Bitcoin to currencies and coconuts

Certain things do have, how shall we say, “subjectively objective” value. Soybeans and coconuts are still food whether we have a currency or not, but even this is a sliding scale. What if someone is allergic to soybeans, or doesn’t have coconuts in their area? The very fact that some may not find value in it keeps almost anything from being objectively valuable outside of a few standalone natural resources like water, which, if we really get existential, still aren’t “objectively” valuable. So think on that one...

Dollars on the other hand are worthless if there’s nothing to buy with them, and Bitcoin is similar in that it will become worthless when investors stop believing in it and its overall use case. There’s nothing intrinsically valuable about a Dollar unless you just need some extra paper, and most of you probably don’t carry much cash anyway, so the point stands. 

The difference is in the agency behind the fiat medium of exchange. Bitcoin has none, other than the blockchain, and currency has, well, a federal government guaranteeing it and trying to keep it stable. And obviously, one has a bit of a longer and more reputable history than the other.

The takeaway

Because of that, Bitcoin’s value remains in its potential use and how much adoption it can muster overall. It’s essentially Schrodinger’s investment, but that can still be a profitable venture.

We won’t tell you whether or not Bitcoin is valuable or not, because there’s no right answer to this question. Our advice is simply to divest a portion of your portfolio into crypto that you’re 100% comfortable with losing.

SPONSORED BY PIESTRO

Get a slice from the robots disrupting the $46B pizza industry

The US buys $46B worth of pizza annually. Here’s how to get a slice of the pie.

We’re talking about the future of pizza, and luckily, it has nothing to do with waiting 30 minutes for some random person to make your pie.

Enter Piestro, the robotic pizzeria that’s baking high-quality, artisanal pizza in just 3 minutes and at a fraction of the cost of traditional pizzerias.

3 key ingredients that have investors drooling over Piestro:

  • The US pizza market will be worth an estimated $54B by 2023–up from $46B today
  • Minimal food waste and lower operating costs result in an estimated 48% projected profit margin–compared to 22% for traditional pizzerias
  • Dual go-to-market approach: There are Piestro-operated pods and white-labeled units that allow existing pizzerias to grow market share for a fraction of the cost

Invest while it’s hot.

INVESTING

You can’t vote, but you can invest

Our country has some strange and even antiquated age restrictions on certain things. For example, you can get involuntarily sent off to a war you didn’t start at the age of 18, but we’ll allow you to drive a car at 16. Go ahead and buy nicotine at 18, but please don’t buy alcohol until you’re 21. Oh and, don’t buy stocks unless you’re over 18. 

And recently, some change is coming to one of these areas: Fidelity is becoming one of the first-ever brokerages to allow teenagers aged 13 to 17 to begin opening brokerage accounts, giving them access to free trading across a multitude of equities across their platform. 

This all comes on the heels of a massive influx of new retail investors of late and a growing interest in investing by younger generations in a way that hasn’t often been accessible to the generations before them. 

Here’s what we think (and let us know what you think too).

  • Financial education is key. Learning is always a hands-on process, no matter how much information we pick up from reading and watching tutorials. Allowing our youth to get hands-on, guided, parentally-approved experience, investing their money in the real world is a responsible way to get started. Oh, and so is Finny.
  • The future is coming faster. Generation Z and those following it are more informed at younger ages than other generations before them. With unlimited access to information, and now the financial world too, the future is poised to come sooner rather than later, with moves like this continuing to put these kids on the fast track to competency.

ASHU'S CORPORATE COLOR

Today's Movers & Shakers

  • Boeing (+2.5%) after its rival Airbus is increasing production as demand rises
  • Best Buy (+3.8%) saw its sales rise by 36% in Q1 
  • Snowflake (-3%) after reporting lower than expected losses; however investors are focused on rising losses in concert with rising sales
  • Okta (-4%) after reporting larger than expected losses after CFO steps down
  • Dollar General (2%) as it topped revenue and earnings; Dollar Tree (-6%) beat the street on top- and bottom-line but issued tepid guidance
  • William-Sonoma (+2%) saw its sales beat estimates and so did its profits
  • Meme stocks are down; Gamestop and AMC are giving back some of this week’s gains

This commentary is as of 6:19 am EDT.

✨ TRENDING ON FINNY & BEYOND

  • ANSWER: 10x. Since 2017, Bitcoin's price dropped by at least 30% from its all-time high, ten times! (Irrelevant Investor)
  • Bets against $357 Billion S&P 500 ETF jump to highest this year (Yahoo Finance)
  • Unbiased news and pure facts about current events delivered to your inbox (The Factual)
  • Finny lesson of the day. With sunny summer days ahead of us, many of you have asked us if solar panels are worth it. Here's a 5 mins lesson on this topic. Hope it helps!

Finny is a personal finance education start-up offering free, game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools (aka Finnyvest).  Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own bosses!  It's sent twice a week (Tues & Thurs). The editorial team: Austin Payne and Chihee Kim. Thanks to Ashu Singh for Today's Movers & Shakers.

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