Latest / Markets with Megan: A Quick Financial Markets Update / Volatility Tests High Valuations | S2 E095

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Volatility Tests High Valuations | S2 E095 · Markets with Megan: A Quick Financial Markets Update

• 0:00
  Megan Horneman: Are we finally headed for that valuation correction that not only us but many have warned equity investors about?
• 0:06
  Megan Horneman: It's Tuesday, November the 18th, and this is Markets with Megan.
• 0:10
  Megan Horneman: If you like this podcast, please subscribe, hit the alarm bell, share with friends, family, or colleagues, anyone who might be interested on what is that economic data and what does it mean for the markets?
• 0:21
  Megan Horneman: Specifically today, we're gonna focus though on the markets because we have seen volatility as measured by the VIX index spike to levels that we haven't seen since really that Liberation Day volatility back in April.
• 0:35
  Megan Horneman: We are matching right now intraday the level we saw a few weeks ago in October.
• 0:40
  Megan Horneman: But aside from that, you've got to go all the way back to the big decline we saw in April after Trump announced those tariffs.
• 0:47
  Megan Horneman: We're seeing this volatility pick up for really five reasons.
• 0:51
  Megan Horneman: First of all, valuations had been very stretched in the SP 500.
• 0:56
  Megan Horneman: The SP 500 price to earnings multiple, when you consider next the forward earnings, the next 12 months, had reached 26 times.
• 1:06
  Megan Horneman: If you take out the pandemic distortions in PE multiples, you've got to go all the way back to the late 1990s before you saw PE multiples that high.com bubble, but we have been concerned valuations are really getting stretched here.
• 1:35
  Megan Horneman: Investors need to be convinced with these big tech names where valuations ran very high that they're being rewarded and the money that's been spent is going to translate into future earnings.
• 1:49
  Megan Horneman: We'll get NVIDIA earnings tomorrow on Wednesday the 19th, and the markets will be paying very close attention to that.
• 1:56
  Megan Horneman: The third reason is the economy.
• 1:58
  Megan Horneman: And unfortunately, it's showing the economy's slowing, the consumers slowing, and that is causing some fear amongst investors in the equity market.
• 2:25
  Megan Horneman: You saw today with even Home Depot that did warn consumers really aren't spending that much on home improvements anymore.
• 2:33
  Megan Horneman: So that's showing that budgets are starting to get tightened here a bit.
• 2:36
  Megan Horneman: The fourth reason is this mixed rhetoric we're getting from Federal Reserve officials.
• 2:41
  Megan Horneman: Some say they want to cut rates, some say they don't.
• 2:44
  Megan Horneman: We don't have the government data to really get a clear picture.
• 2:48
  Megan Horneman: So the odds of a federal um a Fed rate cut in December have dropped from about 100% all the way down to 40%.
• 2:57
  Megan Horneman: And that's because some of the private sector data we've seen is a labor market that's weakening, not completely collapsing, but inflation that just continues to be stubborn.
• 3:07
  Megan Horneman: So it does give the Fed the flexibility to maybe, hey, let's hold on, let's wait and get some more of this government data before we make any decisions on interest rates.
• 3:16
  Megan Horneman: And really the the last reason has just been this overall risk-off mentality.
• 3:22
  Megan Horneman: We've seen it in, for example, Bitcoin, which we have often warned investors is a very risky investment, regardless of those that tell you it's a hedge against the equity market, it's a hedge against inflation, it's a hedge against the dollar.
• 3:35
  Megan Horneman: Well, it hasn't proven to be anything like that this year.
• 3:38
  Megan Horneman: In fact, we're now in the second bear market this year alone in Bitcoin, and that's on top of two additional 10% corrections in Bitcoin.
• 3:48
  Megan Horneman: So that does create some fear.
• 3:50
  Megan Horneman: And remember, Bitcoin's been a momentum trade just like these AI names.
• 3:54
  Megan Horneman: And when you get fear on the streets when it comes to momentum, you tend to see indiscriminate selling there.
• 4:00
  Megan Horneman: And we're seeing that right now.
• 4:02
  Megan Horneman: Um, the other concern that's been out by a lot of economists and and also analysts is not only around private credit, but then also just these uh PE multiples and how stretched that they are in the in the specifically U.S.
• 4:16
  Megan Horneman: large cap market.
• 4:17
  Megan Horneman: So let's just break down some of the damage we've seen thus far.
• 4:20
  Megan Horneman: The SP 500 through through today, so about halfway through the month, is on pace to have its worst November since 2008.
• 4:28
  Megan Horneman: And remember, we're we tend to be in a very positive seasonal period in October, November, and December.
• 4:36
  Megan Horneman: The small, mid-cap, and NASDAQ, this is the part of the US equity market that's feeling the most pain.
• 4:42
  Megan Horneman: The Nasdaq is down about 7% from its recent high in October.
• 4:47
  Megan Horneman: The Russell 2000 is down about 8%.
• 4:50
  Megan Horneman: But when you look at the growth sectors, when you look at the Russ, the large cap growth, the Russell 1000, that's down about 7%.
• 4:58
  Megan Horneman: When you look at this mid-cap growth, that's down about 10% from its recent high.
• 5:04
  Megan Horneman: So that's where you're getting more pain there because of the concern about the economy as well as the stretched valuations.
• 5:12
  Megan Horneman: And as we mentioned, we're seeing just Bitcoin continue to get hit here.
• 5:16
  Megan Horneman: We are seeing treasury yields down a little bit on this risk-off sentiment.
• 5:21
  Megan Horneman: And we're seeing um gold get a bit of a bit here in the markets.
• 5:25
  Megan Horneman: Now we'll come back and continue to update you on the market developments as we see them.
• 5:30
  Megan Horneman: The biggest thing this week will not only be NVIDIA earnings tomorrow on Wednesday, but Thursday with the September jobs report.
• 5:38
  Megan Horneman: So we're finally getting back to some of that economic data that does give us a clearer picture here on the economy, specifically for investors and what's the appropriate price to pay for these investments.
• 5:49
  Megan Horneman: Thank you.
• 5:50
  Megan Horneman: And if you want to see a history of our podcast, you can go to marketswithmegan.fm.