Last year is now over... A great old 'song' to start the new year... The mega-bubble is back (if it was ever truly gone)... Americans are in love with stocks... 'Is this a bubble or the new normal?'... What you can do to prepare today...
 Happy New Year!
I (Dan Ferris) hope 2024 brings you and yours an abundance of health, wealth, and happiness. In my first Digest of the new year, I'll be singing a familiar song to those of you who've followed along here for the past few years. But frankly, it needs to be sung again. You see, market conditions today are a lot like late 2021 and early 2022. Back then, I voiced my skepticism that stocks and bonds were priced for anything but poor returns. And I was mostly right... Stocks suffered mightily in 2022. And bonds have had a horrible time for most of the past three years. My skepticism about stocks probably feels like a big mistake to most folks. After all, the market put on a blistering performance last year. I understand that feeling. And I'm not saying it's wrong. But last year is now over. Plus, it left the market nearly as expensive as it was in late 2021 – when I warned folks to be careful on November 19. The Nasdaq Composite Index peaked that day. The S&P 500 Index peaked about six weeks later. And neither index has eclipsed its high yet (though the S&P 500 got close recently). So today, let's look at where we are in the markets and what it means for your potential returns over the next few years. Then, we'll try to decide what we can do about it. Here we are once again... After a year of huge gains, the U.S. stock market is back in mega-bubble territory. The easiest way to show you that is through the S&P 500's cyclically adjusted price-to-earnings ("CAPE") ratio. It's not good for much else, but it's great for identifying mega-bubbles. When the CAPE ratio gets up to around 20, it means the market is getting expensive. When it's above 25, you're in "bubble" land. And when it's 30 or higher, you're undeniably in mega-bubble territory. In the following chart, you can see that the CAPE ratio was at 31 in July 1929, 44 in November 1999, and 38 in October 2021. Take a look... 
The CAPE ratio is around 32 today. Or in other words... The mega-bubble is back (if it was ever truly gone). The CAPE ratio isn't the only way to see that the mega-bubble has returned, either... We can also see it in the S&P 500's price-to-sales (P/S) ratio. Like the CAPE ratio, it has a good track record of peaking during mega-bubbles... The S&P 500 traded as high as roughly 2.3 times sales at the peak of the dot-com bubble in 1999 and 2000. It hit 3.2 times sales in November 2021, which was the peak of the post-pandemic mega-bubble. Remember, price and valuation aren't the same. So while the index's valuation peaked in November 2021, the S&P 500's price didn't peak until January 3, 2022. Today, the S&P 500 trades at a P/S ratio of about 2.6. That's above the dot-com peak valuation. And as you can see, it's decidedly in mega-bubble territory. Take a look... Of course, the CAPE and P/S ratios aren't timing tools... The CAPE ratio has been at or near mega-bubble levels since 2017, for example. And stocks have mostly gone up and to the right since then. But the point is that the CAPE ratio being at mega-bubble levels doesn't mean stocks will fall tomorrow. You don't look at it to decide how to place short-term trades. (Although, it might be useful for deciding whether to put a long-term equity hedge in place. Now seems like one of those times to me. We recently discussed hedging with hedge-fund manager and author Hari Krishnan on the Stansberry Investor Hour podcast.) It would likely surprise nobody if the market flew higher this year. In fact, as I told subscribers of The Ferris Report at the end of last month, the Federal Reserve could easily cause the market to "melt up" in 2024. It could happen if the central bank cuts rates without key economic data like housing and unemployment indicating a weaker economy. It's important to point out that the S&P 500's CAPE and P/S ratios both measure valuation – not price and momentum... Valuation is not price. It's how cheap or expensive a stock is relative to the underlying cash flows of a business. And price is the dollar amount you pay to buy a share of a business in the stock market. Right now, as I said earlier, the S&P 500's CAPE is around 32 and its P/S ratio is about 2.6. They're both extremely high levels. Meanwhile, its price is around 4,700. Most short-term traders focus on price movements. They don't care about valuation. But I'm a long-term investor... Long-term investors generally care little about price. And they know that valuation is like the force of gravity. Valuation tells you how much you must pay today to receive the future cash flows the business will generate. You should mostly ignore the overall valuation of the stock market, as I've said before. But you should not ignore it when it reaches extremes – like today. You need to understand valuation because it indicates how much return you can expect in the future. It can't tell you that with great precision. But it can tell you if you're getting a bargain, paying too much, or some level between the two. Bargains provide great returns. Paying too much yields poor returns – or even losses. Stock valuations are sort of like bond yields. A bond yielding 10% tells you that if you buy it today, you'll make 10% per year until it matures (apart from any capital gains or losses along the way). A stock selling for 10 times earnings is like a bond yielding 10% – except that the yield will grow or shrink with the company's earnings. You or I don't know what a stock will return over time. We can't predict the future. But a savvy investor can learn to spot when a stock is too expensive or cheap enough to be a bargain. Economist and portfolio manager John Hussman discussed the meaning of high and low valuations rather brilliantly in a recent post on social media platform X (formerly Twitter). As he wrote... Rising valuations transform expected future returns into realized past returns. Falling valuations transform realized past returns into expected future returns. The cash flows are the same, but valuations at any time determine whether the returns are in the future or in the past. You don't want to see too much of your future returns transformed into realized past returns. You'd rather pay a good price – or even a bargain price – and have enough expected future returns to make the stock a good investment. When the market soars to mega-bubble valuations, it's telling you that it has already delivered a substantial amount of future returns in the past. When that happens, the market tends to claw back those pre-delivered returns at some point. For example, if a business grows earnings at 10% per year and will likely continue doing so for years to come... and its stock price appreciates at 20% per year for a couple years, you should probably expect subpar returns until it claws back some of the excess returns. That's why the stock market is said to "correct"... It's correcting the mistake it made by delivering too much return, too soon. And CAPE and P/S ratios in mega-bubble territory are telltale signs that the market has delivered too much return, too soon. At some point, it will have to claw back some of those returns. The fact that brutal bear markets tend to follow mega-bubble peaks suggests that the more excess return the market delivers up front, the more it will need to claw back later to align the valuation with the actual performance of the underlying businesses. If the current mega-bubble generates the same kind of correction as previous ones, we should expect the S&P 500 to claw back a whole bunch of returns eventually. And ultimately, the index could bottom out roughly 75% below its all-time high. Valuation isn't the only way to understand the overall stock market... Other metrics are also at extreme levels today. The CBOE Volatility Index ("VIX") is one example... The VIX is often referred to as the market's "fear gauge." It's based on the average of several S&P 500 put- and call-option prices expiring roughly 30 days from today. As a sentiment indicator, it tells us what investors think the market will do over the next 30 days. The VIX tends to rise when stock prices fall, as investors buy put options to protect themselves against further losses. Investors are typically most fearful at the tops in the VIX (which coincide with stock market bottoms). And they're most greedy when the VIX is low – like today. When the VIX is at or near an extreme level like right now, it can function as a good contrarian indicator... The VIX was below 15 on February 19, 2020 – the pre-pandemic stock market top. And it surged to an all-time high above 80 on March 16, 2020 – just days before the market bottomed with a 34% plunge in roughly a month. Recently, the VIX has traded around 13 or 14. That's well below its long-term average of 20. And it's not too far above the all-time low of less than 10 in late 2017 and early 2018. It traded as low as 12 on December 12 – its lowest level since November 2019. The VIX started 2022 below 17. Again, that was at the time of the S&P 500's all-time peak. And it surged more than 100% to 36 by mid-March (after the S&P 500 had fallen 13%)... In other words... investors are even less scared today than they were at the S&P 500's pre-pandemic highs and at the index's all-time high on January 3, 2022. Given the VIX's contrarian nature and stocks' elevated valuations, it seems like investors are once again unafraid of a market decline. And they're hitting the "buy" button as hard as they can. In a nutshell, Americans are in love with stocks right now. In fact, you could argue that... More Americans are in love with stocks than any time since at least 1989... As the Wall Street Journal reported on December 18... The share of Americans who own stocks has never been so high. About 58% of U.S. households owned stocks in 2022, according to the Federal Reserve's survey of consumer finances released this fall. That is up from 53% in 2019 and marks the highest household stock-ownership rate recorded in the triennial survey. Now, this stat isn't necessarily an indicator that stocks are overvalued or due for a drop. A certain amount of the rise in U.S. equity ownership must be due to the tendency for employers to offer 401(k) programs as the primary retirement savings vehicle. The money just flows in automatically on payday every two weeks. And as each successive generation enters the workforce, more and more households wind up owning equities. I can't help but wonder, though... Would Americans be so eager to put money into stocks with the Fed's implicit promise to keep the market propped up? And taking this point one step further, as we've discussed a few times in the past year... More Americans are in love with seven specific stocks than any others... I've told you more than once about the so-called "Magnificent Seven" of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Nvidia (NVDA), and Tesla (TSLA). If you have any money in an S&P 500 or similar fund in your 401(k), you're putting about $0.30 of every $1 invested into these seven stocks. On Wednesday, the folks at online publication The Kobeissi Letter posted some interesting stats about the Magnificent Seven on social media platform X. As they wrote... How big have the Magnificent 7 become? The market cap of the Magnificent 7 is now the same size as the combined market cap of the stock markets in Japan, Canada, and the UK. Soon, the market cap of the Magnificent 7 will cross a record $12 trillion. This means that these 7 stocks now account for over 30% of the entire S&P 500. Also, the Magnificent 7 has a market cap bigger than the GDP of every country in the world other than China and the US. The post ended with a question... Is this a bubble or the new normal? Regular Digest readers know where I stand... It's not only a bubble. It's the biggest mega-bubble in all recorded history. I don't want to speak for you, though. Instead, I encourage you to think about everything I've said up to this point in today's Digest and answer the question for yourself. I'm sure plenty of folks don't think we're in a massive bubble and that the market is more than 12 months into a new bull market. I can understand that viewpoint. But again, I'm a long-term fundamentals-based investor. And based on everything I see, I'm skeptical that the S&P 500 will generate much of a return from its current exorbitant valuation. Of course, it's more valuable for all of us to know what to do about this mega-bubble... The higher stock valuations go, the better I feel about my mantra, "prepare, don't predict." It's more important than ever to prepare for a wide range of outcomes. You should own some assets that will do well during inflationary periods, some that will do well during deflationary periods, and others that will do well during various market regimes. My colleague Corey McLaughlin and I recently had a great conversation with value investor Jeff Muhlenkamp for an upcoming episode of the Stansberry Investor Hour podcast. Jeff echoed these sentiments and discussed several stocks that his fund owns – including a new idea that's still a great buy today. You can sign up for Investor Hour updates right here. My colleague Mike Barrett and I specialize in finding great businesses in our Extreme Value newsletter. We look for the kinds of companies that can weather (or even exploit) tough times and grow during good times. In The Ferris Report, I focus more on building a diversified portfolio. This publication includes a little bit of everything. And I'm proud to say I've built a model portfolio that fits the current environment perfectly. Now, it's not the kind of portfolio that will help you make 30% returns on your money when the Nasdaq soars. But it's the kind of portfolio that'll protect you and even help you make money when the Nasdaq corrects. It'll help you earn good, safe returns from bond funds, currency trades, and strategic stocks in energy, homebuilding, and other key markets. I'm not a doom-and-gloom guy with everything... I don't think the younger generation is destroying civilization. I don't think the next election will cause a civil war. And I don't think society is on the brink of collapse. I'm only a doom-and-gloom guy on overvalued securities. I know that expensive securities tend to be losers. So when I see them, I feel like it's my job to warn you – and help you navigate the heightened risk. Americans are in love with the market today. And the VIX is telling us all the risk is low. But the market valuations I've spent my career learning to evaluate tell me otherwise. Fortunately, as long as you're prepared for a wide range of outcomes and don't leverage your portfolio too heavily to a single outcome, you should do well. And perhaps you'll even profit handsomely no matter what happens over the next few years.
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New 52-week highs (as of 1/4/24): Cencora (COR), Novo Nordisk (NVO), and Novartis (NVS). In today's mailbag, one subscriber shares his thoughts about what the Fed will do this year and why... and another satisfied subscriber shares some praise. Do you have comments or questions – good or bad? As always, you can send your notes to feedback@stansberryresearch.com. "I have a very high level of confidence that the Fed will cut interest rates two times prior to November 2024 based on nothing more than the fact that the totalitarian government in Washington, D.C. will do everything possible to stimulate the economy and the stock market(s) prior to the election. Such actions will foster the lies being told about how inflation has been mitigated and what great jobs the Fed and the Washington politicians have been doing. "After the election and in 2025 all hell will break loose as interest rates once again increase very quickly to fight the nasty inflation that came 'out of the clear blue sky.' Happy New Year!" – Subscriber Michael U. "You all do an excellent job keeping us informed. You are not the reason I turned the television off some time ago, but you are certainly the reason I leave it off. Thank you." – Subscriber Frank K. Good investing, Dan Ferris
Eagle Point, Oregon
January 5, 2024
Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios | Stock | Buy Date | Return | Publication | Analyst | MSFT
Microsoft | 11/11/10 | 1,272.5% | Retirement Millionaire | Doc | MSFT
Microsoft | 02/10/12 | 1,162.8% | Stansberry's Investment Advisory | Porter | ADP
Automatic Data Processing | 10/09/08 | 847.8% | Extreme Value | Ferris | wstETH
Wrapped Staked Ethereum | 02/21/20 | 771.1% | Stansberry Innovations Report | Wade | WRB
W.R. Berkley | 03/16/12 | 664.1% | Stansberry's Investment Advisory | Porter | BRK.B
Berkshire Hathaway | 04/01/09 | 544.8% | Retirement Millionaire | Doc | HSY
Hershey | 12/07/07 | 464.2% | Stansberry's Investment Advisory | Porter | AFG
American Financial | 10/12/12 | 417.5% | Stansberry's Investment Advisory | Porter | BTC/USD
Bitcoin | 01/16/20 | 391.5% | Stansberry Innovations Report | Wade | PANW
Palo Alto Networks | 04/16/20 | 315.1% | Stansberry Innovations Report | Engel | Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals | | 4 | Stansberry's Investment Advisory | Porter | | 3 | Stansberry Innovations Report | Engel/Wade | | 2 | Retirement Millionaire | Doc | | 1 | Extreme Value | Ferris |
Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio | Stock | Buy Date | Return | Publication | Analyst | wstETH
Wrapped Staked Ethereum | 12/07/18 | 1,701.2% | Crypto Capital | Wade | ONE/USD
Harmony | 12/16/19 | 1,154.4% | Crypto Capital | Wade | POLYX/USD
Polymesh | 05/19/20 | 1,081.7% | Crypto Capital | Wade | BTC/USD
Bitcoin | 11/27/18 | 1,053.3% | Crypto Capital | Wade | MATIC/USD
Polygon | 02/25/21 | 859.1% | Crypto Capital | Wade | Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio.
Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios | Investment | Symbol | Duration | Gain | Publication | Analyst | | Nvidia^* | NVDA | 5.96 years | 1,466% | Venture Tech. | Lashmet | | Microsoft^ | MSFT | 12.74 years | 1,185% | Retirement Millionaire | Doc | | Band Protocol crypto | | 0.32 years | 1,169% | Crypto Capital | Wade | | Terra crypto | | 0.41 years | 1,164% | Crypto Capital | Wade | | Inovio Pharma.^ | INO | 1.01 years | 1,139% | Venture Tech. | Lashmet | | Seabridge Gold^ | SA | 4.20 years | 995% | Sjug Conf. | Sjuggerud | | Frontier crypto | | 0.08 years | 978% | Crypto Capital | Wade | | Binance Coin crypto | | 1.78 years | 963% | Crypto Capital | Wade | | Nvidia^* | NVDA | 4.12 years | 777% | Venture Tech. | Lashmet | | Intellia Therapeutics | NTLA | 1.95 years | 775% | Amer. Moonshots | Root | ^ These gains occurred with a partial position in the respective stocks.
* The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. | 
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