This is the market on irrational exuberance.
Stocks are clearly in a bubble. And like all bubbles, this one could soon burst.
At the moment, the U.S. economy has been rallying on cheap money, massive amounts of debt, and irrational exuberance.
Unfortunately, history has proven that it doesn’t last.
In 1929, 2000, and 2008, markets soared just as they are right now before stock market crashes. And to be honest, we’re now long overdue for a major correction.
Considering Corporate America didn’t have the greatest fourth quarter on record, such a winning streak is rather troublesome. It seems we’re trading on extreme optimism about Donald Trump’s proposed economic plans for growth.
At the same time, though, profit margins are slipping. In fact, corporate profit margins have been in a decline for the last few years after running well above 10%.
Major brick and mortar retailers are closing stores as consumers turn to buying on line rather than going out to shop.
As a matter of fact, in its most recent quarter, Target’s CEO announced that “results reflect the impact of rapidly-changing consumer behavior… which drove unexpected softness in our stores.”
Worse, according to Moody’s Investor Services, a credit rating agency, the number of retailers in distress is the highest since the Great Depression. Plus, in January 2017, while consumer consumption was up 2.8% year over year; if you go back to 2015, it was 4%.
However, not all retailers are struggling.
Some have taken advantage of niche markets, like The Container Store (TCS), which is the nation’s leading retailer of storage and organization products and the only company solely devoted to that category of retailing. The Container Store originated the concept of storage and organization retailing when it opened its first store in 1978. Today, the retailer sells 11,000 products in 86 store locations nationwide.
The Cheap Investor recommended The Container Store at $5.33 in September 2016. Shortly after that recommendation, the stock ran up 57% to $8.34. Due to Wall Street’s negative outlook on the retail sector, the stock has fallen back to $4.10. It’s an interesting company with $18 million in cash, a book value of $4.39 and increased sales and earnings for the third quarter and nine months.
We think the market has run up too fast since the election. Meanwhile, analysts are more bullish than ever. At the moment, the average consensus forecast is that the S&P 500 will rally by about 4% to 5% this year.
The problem with that, of course, is that forecasts are rarely correct. The current bull market is on track to celebrate its eight-year anniversary in March 2017 – a long bull market by most standards.
However, as long as you know how to spot market gems, as we did with The Container Store, your odds of success increase, despite the potential corrections.