An Ominous Warning for Wall Street: 4 of the Most Prominent Value-Focused Billionaire Investors Are Net Sellers of Stocks
2024-10-12 11:06:00
Over the last century, stocks have stood on a pedestal above all other asset classes. While everything from Treasury bonds and housing to various commodities, including gold, silver, and oil, have delivered positive nominal returns for investors, none of these other asset classes comes remotely close to matching the average annualized return of stocks.
But just because stocks have consistently outperformed over extended periods, it doesn’t mean Wall Street’s major stock indexes move up in a straight line.
In 2024, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) have reached record closing highs on multiple occasions. Yet based on the actions of some of Wall Street’s most prominent value investors, trouble may be brewing.
When back-tested to January 1871, the S&P 500’s Shiller P/E has averaged 17.16. But as you can see from the chart above, it’s spent almost the entirety of the last 30 years above this mark. The internet making it easier than ever to access information and place stock trades, coupled with lower interest rates, increased the willingness of investors to take risks.
But there comes a point when this risk-taking becomes excessive. The unofficial line in the sand that’s represented a problem for Wall Street is a Shiller P/E reading above 30. For context, the S&P 500’s Shiller P/E closed above 37 on Oct. 9, which marks the third-highest reading during a continuous bull market throughout history.
There have been only six occurrences, including the present, where the S&P 500’s Shiller P/E has topped 30 dating back 153 years. Following all five previous instances, the Dow, S&P 500, and/or Nasdaq Composite lost at least 20% of their value, if not considerably more. In other words, the Shiller P/E has a flawless track record of forecasting eventual bear markets on Wall Street.
What the Shiller P/E can’t tell us is when these declines will occur. There’s no rhyme or reason as to how long stocks can be remain pricey in the short term. History merely shows us that extended valuations aren’t sustainable over long periods.
I don’t believe the selling activity we’re witnessing from four of Wall Street’s most revered value investors is coincidental. More than likely, it’s in response to the stock market being historically pricey. Having dry powder at the ready to take advantage of possible price dislocations, just like Buffett, Ackman, Smith, and Tepper, may be a smart move.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Brookfield, Brookfield Corporation, Chipotle Mexican Grill, Meta Platforms, Microsoft, Nike, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short December 2024 $54 puts on Chipotle Mexican Grill, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
An Ominous Warning for Wall Street: 4 of the Most Prominent Value-Focused Billionaire Investors Are Net Sellers of Stocks was originally published by The Motley Fool
