We Are Witnessing the Return of Irrational Exuberance (original) (raw)

Many equities have overshot reasonable valuations, which could cause regrets in 2024.

Equities continued on Thursday to ride investor enthusiasm about the Federal Reserve's significantly more dovish stance toward future rates cuts. All the major indexes posted minor gains while the Russell 2000 continue its recent run of scorching outperformance with a gain of 2.7% on the day. The Dow Jones Industrial Average has run up 1,000 points on the week and now is at an all-time high as yields on the 10-year Treasury declined another 10 basis points Thursday to end the day at just over 3.9%. Banks and real estate stocks also have seen huge surges on the fall in rates.

My opinion is that the central bank appears to be pivoting before the war on inflation has been won. The core Consumer Price Index (CPI) remains well above the Federal Reserve's official target rate of 2%. Not surprisingly, oil has jumped some four bucks a barrel since the central bank adjusted its dot plot on Wednesday in a more accommodating direction.

At this point there seems to be more than enough irrational exuberance in the market in the face of slowing global growth in 2024 and what appears in my view to be an early surrender on the inflation front by the Federal Reserve. The rally in small-caps and other beaten-up parts of the market I can justify to some extent given the huge divergence until late October between their market performance and that of the Magnificent Seven stocks. The rallies in other equities seem perplexing to say the least and many well-known names seem well into overbought territory.

Let's take Williams-Sonoma (WSM) , the high-end retailer of household goods. The company is facing its first full-year revenue decline since the Great Financial Crisis of 2008-2009. However, the stock is up more than 85% since its recent lows in late May. Yes, the decline in mortgage rates from nearly 8% to around 7% helps the housing market on the margin. However, that decline is not going to lead to a spike in home sales, which would benefit the company's West Elm and Pottery Barn properties.

Apple (AAPL) sits at nearly 200ashareandhassurgedpastthe200 a share and has surged past the 200ashareandhassurgedpastthe3 trillion market capitalization milestone. The shares of Apple, which is a holding of the Action Alerts PLUS portfolio, fetch 30 times forward earnings and have soared 52% year to date even though the company had flat earnings and a 3% revenue decline in its fiscal 2023, which ended in September. Apple should see challenges with slowing economic growth in both the U.S. and globally in 2024 and could experience hiccups moving some of its production out of China into India. The recent court loss of Alphabet's (GOOGL) Google to Epic Games concerning the monopoly of Google's app store also might have longer term ramifications for Apple. I opened a new short position in Apple on Thursday via long-dated bear put spreads.

Finally, we have Repligen (RGEN) , a biologics manufacturer whose stock that has been its stock move up 50% since the overall market rally started in late October. Repligen's revenue and earnings are tracking to substantial declines in fiscal 2023 and the stock trades at nearly 60 times trailing profits and more than 100 times forward earnings.

It is nice to see equities close out 2023 on a high note. However, many equities have overshot reasonable valuations, which could lead to a tough start for investors in 2024 once some rationality returns to the market.

(AAPL and GOOGL are holdings of Action Alerts PLUS. Want to be alerted before the portfolio buys or sells these stocks? Learn more now.)

At the time of publication, Jensen was short WSM and AAPL via long-dated, out-of-the-money bear put spreads.