No. of Recommendations: 3
Thanks for cross-posting your METAR report, Wendy. It appears the temperature has dropped and clouds have moved in. Storm clouds on the horizon? Entirely possible. I'm taking some steps to prepare myself to take advantage of cheaper burgers in the days ahead. In my case, burgers being small cap value (SCV) stocks that I want to accumulate.
They are already a decent buy, a little below average valuation, IINM, but if I believe a thesis of challenging economic times ahead, with plenty of chaos and uncertainty, interacting with the broader stock market being at very high valuation to produce a stock market downdraft that will take the SCV stocks down with them, producing a good buying opportunity in a potentially short amount of time.
Regarding those valuations: S&P 500 CAPE is a very high 36.5, and S&P 500 Excess CAPE Yield a low 1.7, both indicating high relative valuation.
A 20% drop in the S&P 500 is likely be matched or exceeded by SCV, since it's typically a more volatile sector. Say we get a 25% drop in prices of SCV from average valuation, that would produce a pricing that would need to gain 33% to get back up to average valuation, that's a pretty nice bounce to be able to expect.
It wouldn't be unlikely for the S&P and SCV to go down quite a bit more than that, but it's enough of a discount to make good returns highly likely in the intermediate & long term. The S&P 500, meanwhile, will need to drop in half to get to "average", but it seems like average has just kept climbing through my investing lifespan, starting in the mid '90s. Back then the long term average of PE-10y aka CAPE was about 15, now it's 17, and the average since 1990 is 18.6. I can't say I expect the S&P 500 to have such a brutal bear as to take CAPE down into the teens, an almost 50% drop from here, but it's entirely possible. And if that happens, SCV will likely lose as much or possibly even more, creating a compressed spring of high value for that sector going forward.
This is all somewhat speculative, so it's not like I'm selling my large cap stocks, for the most part, but I'm scrounging up money to put in the market if we do get a serious downdraft.
One large cap that I did sell recently was KMX, which failed to execute a turnaround from the post COVID blues during an acceptable time frame for me. I'm toying a little bit with lightening up a small amount on my BRK, as it's up there on the rich side of its valuation lately, but I try to resist the urge to trade stocks as it more often than not doesn't do so well for me.
