For SpaceX, and for tech stocks in general, it seems like not even the sky is the limit!
SMI's Mark Biller joined host Rob West yesterday on American Family Radio's Faith & Finance program to talk about why it's crucial for long-term investors to keep a cool head even when the market is super-hot.
Mark and Rob also answered listener questions.
To listen, click the play button below. Scroll down to read the transcript.
Faith & Finance airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(For more radio appearances by members of the SMI team, visit our Resources page.)
Transcript
Rob West:
A lot of investors are wondering whether the market is getting ahead of itself, especially in AI and tech. Hi, I'm Rob West.
Well, what if the better question isn't whether we're in a bubble, but how we should respond if we are?
Mark Biller joins us today to talk about what investors should do when markets look overheated and why trying to predict the exact peak usually backfires. Then, it's on to your calls at 800-525-7000.
This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (opening music ends)
Well, it's always great to have Mark Biller with us. Mark is executive editor and senior portfolio manager at Sound Mind Investing, a faithful underwriter of this program. For decades, Sound Mind Investing has helped believers make wise, biblically informed investing decisions with clarity and confidence.
By the way, Mark will stick around today to take your phone call. So if you have questions on the market, your portfolio, how you should respond in the midst of this incredible upward trend that just seems to have no end, call right now: 800-525-7000.
Mark, great to have you back.
Mark Biller:
Thanks, Rob. Great to be back with you.
Rob West:
Mark, you have a timely article in the latest issue of your newsletter on how investors should handle a potential bubble. And it comes at a good moment because there's plenty of chatter right now about whether AI and tech stocks are getting overheated. So what's fueling those concerns?
Mark Biller:
Well, the AI story's been increasingly driving markets for really the past three years or so now. We can really see that in the performance of the tech-oriented Nasdaq index, which is up about 160% since the end of the 2022 bear market. And that performance is about a third better than that of the broader S&P 500 index, which is up closer to 120% over the last three and a half years. So the action has definitely been in tech.
Now, more recently, we just finished an earnings season where a lot of companies showed profit acceleration that they attributed specifically to AI in their businesses. That was a wake up call on a couple of levels. It really helped to show, Rob, that this AI story is gaining traction and is something real and tangible —that a lot of companies across many different industries are starting to show a benefit to their bottom line from AI. And by extension that really drove home the point that companies are going to demand a lot more AI computing power than we currently have and that sent everything related to AI stocks just soaring higher.
Now, at the center of all of this are the semiconductor stocks. They've gone pretty parabolic the last few months. We did have a decent little correction of about 12% in semiconductors over the last couple of weeks. So that helped knock a little bit of the froth down. But whenever investors see a sector start going almost straight up, they naturally start getting nervous because it does bring to mind past "blowoff tops" that ended with sharp declines.
Rob West:
Yeah. At the end of the day, it sounds like those concerns are warranted. So are we really looking at a bubble, or is something different going on beneath the surface here?
Mark Biller:
Well, it's always really hard to call a bubble in real time or at least to call it in a way that's helpful to anybody. And I point back to the dot-com era when a lot of people suspected that internet stocks were in a bubble all the way through that late '90s bull market. Fed chairman Alan Greenspan famously said the market was irrationally exuberant at the time. He called it in real time.
The problem was that comment came three and a half years before the end of that bull market. So anybody who sold their stocks based on the idea that a bubble was forming left a lot of money on the table and had to wait a long time for that bubble to pop.
So I think the big theme here, Rob, is the stock market's forward-looking, and investors always care a lot more about what companies are going to earn in the future than what they're earning today. When future expectations improve dramatically like they did this last earnings season, it is appropriate for stock prices to adjust higher in kind.
All of that said it's entirely possible we could be seeing a bubble forming in say semiconductor stocks specifically, even if the rest of the market isn't really looking bubbly.
Rob West:
What I'm hearing is, from your perspective, this isn't necessarily market hype. There may be legitimate innovation and growth beneath some of the excitement. Is that right?
Mark Biller:
Yeah. Well, a lot of the enthusiasm is tied to this genuine earnings growth. Companies are starting to see that trickle through. They're getting the same or more output from the same, or fewer, employees because of these AI tools and that's a recipe for higher profits. Investors at the same time are kind of getting past the, is AI just "smoke and mirrors" kind of stage.
And as a result, you've got corporate America really plowing a lot of money into the AI infrastructure because these tools are starting to pay off in terms of higher profitability.
Now all that said, you can kind of have both things at once, Rob. So you and I are both "veteran" enough investors to remember the dot-com era when it was kind of a similar story where there really was a dynamic underlying theme with the internet build out and what was to come.
Y'know, when we think back over the last 20 years and what the internet has done, it's mind-blowing. It really did fulfill the hype. And yet eventually those stock prices disconnected enough from that future reality that we went through that painful 2000 to 2002 bear market.
So it's not always kind of an obvious one side of this is 100% right. People were calling that bubble for a long time before it actually came. It did eventually come and pop.
But I guess the main point we're driving at here this morning is that it's really, really difficult to get that timing right. And so there's a real question of whether it's really good for investors to try to predict, one, are we in a bubble, and two, where in that bubble are we — and should I try to take action to protect myself? That can be a really tricky proposition and that's really what this article's trying to get to.
Rob West:
So even if there are legitimate forces behind the rally, that doesn't mean investors can ignore the risk. So how should they think about that tension?
Mark Biller:
Yeah, that's absolutely right and that is the heart of this article. Trying to predict exactly when a bubble or even just a long running bull market is going to end, that usually doesn't work very well. In practice, that type of market timing is really difficult. You typically see investors either selling too early and missing a lot of gains or selling too late after stocks have already plunged and fear has already taken over.
So we tend to emphasize, at SMI, staying invested but managing risk in a thoughtful way. And partly that's because when we look at the historical record, some of the markets biggest gains come late in bull markets right before things eventually cool off.
Rob West:
So if someone is feeling uneasy about the market right now, what are some wise practical steps they can take without reacting out of fear?
Mark Biller:
Yeah, there are a couple of real tangible things people can do, and thankfully they're not real hard to do either. The first point I would offer is just that diversification really matters in a market like this. If you've got a well-balanced portfolio that's going to help reduce the danger of becoming overly exposed to any particular hot area.
Right now, it's pretty easy to tell if you're truly diversified. If everything you own is going up or if nothing you own is going up, you're probably not very well-diversified. On the other hand, if some of your holdings are racing higher and others feel like they're kind of just sitting there playing dead, well, that probably means you've got a pretty well diversified portfolio.
The second really tangible thing that people can do is just simple rebalancing. That can be really powerful in moments like this. So, say you own some semiconductor stocks, you've got big profits in those or AI stocks. If one part of your portfolio has grown dramatically like that, well, rebalancing is naturally going to shift some profits out of those fast-rising assets and into the areas that haven't run up as much yet. And that's a really disciplined way to manage risk without feeling like you've got to predict the future.
Rob West:
Yeah. And there's an emotional benefit to that, too. A clear process helps you respond with discipline rather than reacting impulsively, right?
Mark Biller:
Oh, absolutely. Y'know, emotional decision-making is where investors typically get into the most trouble. A disciplined approach, a really well-defined process removes a lot of that pressure. It changes things from asking, "Should I sell everything right now? to, "Well, I'm following a plan and I'm making these measured adjustments over time.
Rob West:
Yeah. Check out this article we're talking about today, How to Handle a Bubble. You'll find it at soundmindinvesting.org.
Mark's here today sticking around taking your phone calls. Let's go to Michigan. John, how can we help?
Caller:
God bless you brother, and Mark Biller, God bless you as well.
Rob West:
Thank you.
Mark Biller:
Thanks.
Caller:
Just a question in regards to SpaceX and Elon Musk. [I've] kind of watched him from a distance and I think he's had quite a lot going on in a lot of areas. And so when my CKA a few months back said that SpaceX would offer, possibly, some shares to the public if I was interested and I said, "Absolutely. Sign me up."
Well, he said, "I'm not sure how many they're going to offer if they offer." I said, "Okay."
Well, he just called me the other day and he said, "Hey, they released some shares. They're at $135 a share, and I think he said you get 34 or 35 shares." So I'm like, "Yeah, great. We'll see where this goes. See if God grows it."
But with SpaceX having a valuation of around two trillion, I understand, somewhere around there, just wondering your comments, gentlemen.
Rob West:
Yeah, it's already quickly become the fourth biggest U.S. company. It just surged past Microsoft in market cap. Mark, your thoughts on this euphoria here?
Mark Biller:
Yeah, it's fascinating, John. This is one that if you enjoy the investing game, you can't help but have your eyes just glued to this.
So I think, John, where I would start with this is, one of the hardest distinctions for most individual investors is the idea that you can think very differently about a company than you do about that company's stock. So there are lots of businesses, lots of companies, that I really like. I think they're a great company with a great business. But when I evaluate their stock, I go, "Yeah, I don't really want to own that — at least at this price," because the price can get so disconnected from the value of the business."
And so when I look at SpaceX, there's a lot to like. You've got the Elon factor, of course. You've got Starlink, which is a great business. It's a profitable business as I understand it. It's making money there. It's got lots of robotics and, of course, the whole space theme are all bundled in there. So lot to like about the business.
On the "con" side, the bad side, SpaceX has yet to turn a profit as a whole as a business. And yet, like Rob just said, it's just zoomed past Amazon and Microsoft in terms of the public valuation of this company.
I can't help, as an older investor, to go back in my memory to one of the darlings of the dot-com era, Sun Microsystems — super-hot stock through that '90s bubble. And a couple years, about a year and a half after that bubble popped, the CEO of Sun Microsystems was giving an interview where he walked through all the reasons why it had been crazy for investors to value his stock at 10 times their current sales and he ended that little speech with, "What were you thinking buying my stock at 10 times current sales?"
Well, at SpaceX's current valuation, it's over a hundred times SpaceX's current sales. So we're at an order of magnitude that's well beyond what was even considered crazy during the dot-com era. So I say all of that just as a caution toward this valuation, which admittedly is super hard to value. How do you value the first company that could conquer space travel? I mean, it's really difficult.
But at the same time, I think caution is warranted. And the history of big IPOs in the past shows us that it's very common that investors get a chance to buy those stocks at anywhere between 33% to 50% below their IPO price within the first six to 12 months after they start trading. And that's even with great companies. That's what happened with Facebook when it IPO'd in 2012, it traded down about 50% over the next year.
So for you, John, you got in, you got shares at that 135 — you're already up considerably, that's great. For somebody who's not in yet, I would say if you own any index funds, you're probably going to get stuffed with a good bit of SpaceX because it's going to come into those indexes as the fourth-largest company in the index.
So you're going to get it whether you want it or not if you're an index investor. And if you're not and you're just thinking about buying it outright, I would maybe lean towards being patient and trying to get a shot at it at a lower price.
Rob West:
Yeah, very good. John, great question on a lot of people's minds. I appreciate you asking it. Thanks for your call.
More questions with Mark Biller — call right now 800-525-7000. We'll be right back.
Rob West:
Mark, anything else you might want to add on SpaceX? I know we got to the end of that segment.
Mark Biller:
Yeah. I think the biggest thing, Rob, is that this is just the first. This is the first of at least three major tech IPOs that are expected to come in pretty short order.
You've got two of the big AI companies themselves, OpenAI and Anthropic have already filed to go public or at least are expected to do that very, very soon. You've also got some of the big tech companies like Google kind of front-ran this SpaceX IPO by jumping to the front of the line two weeks ago and offering a big new equity offering themselves.
So this is really interesting because we have not seen a lot of IPO action in recent years. In fact, it's kind of been a trend change from the past where most of these big companies are — or most of these companies, hot companies — have been staying private a lot longer. And so they're coming public at much, much more advanced stages of their business and much bigger valuations. And so it is interesting to watch that contrast. These aren't little tech companies coming public anymore. These are behemoths coming public, and so it'll be interesting to see the implications of that.
One thing that has a lot of investors concerned about that dynamic is just that so much of the benefit of IPOs in the past has been kind of "getting in at the ground level" — at an early stage of the business — and being able to ride a lot of that future growth higher. And so a lot of people are wondering if the insiders who owned this when it was private got that benefit and now that these companies are already so big, if the public really is the "exit liquidity" for these insiders to get out and cash in their gains, and now that the indexes and the individual people have a chance to buy these companies if they're kind of buying, in a sense, "too late."
And of course nobody knows this. These are just speculative questions. But they are things to think through — that buying SpaceX or Anthropic or OpenAI later this year, it's not really the same thing as buying Microsoft when it came public at a much, much earlier stage of its company history.
Rob West:
And that does then take us back to this idea of having reasonable expectations, because that's another point you make in this article we've been discussing today.
So kind of reset us there. Why is it so important to have reasonable expectations, especially in a market like this, given everything you just described?
Mark Biller:
Yeah. Investors need to recognize that markets don't move in straight lines forever. We always have a tendency to extrapolate what the market's doing now indefinitely into the future. So in a big bull market when things are going well, like right now, we tend to extrapolate that forever and think things are going to be rosy forever. We do that in bear markets too. When things are terrible, everybody looks at that and goes, "Man, they're going to be terrible forever." And that's how you get to those "despair" lows that put bottoms in bear markets.
But I think the application for us here as we're looking at like semiconductors, AI tech, these hot parts of the market, you want to stay invested in those strong-performing sectors. I'm not saying you want to get out of those because that's where a lot of those gains are likely to come. But having reasonable expectations means you need to realize that you're probably going to give back some of those gains eventually when the bull market is over, when the leadership changes.
Y'know, with John who got those SpaceX shares early, I wouldn't necessarily say, "Oh, John, you got to sell those shares." Maybe John holds those shares, but having reasonable expectations means, as he sees those shares double, maybe he's realistically thinking, "Okay, at some point this is going to end and I'm going to give back some of those gains."
And that's okay. That's part of investing. Our goal isn't to avoid every decline in the market. The goal is to participate in the market's long-term growth while managing our risk in a thoughtful way along the way as we go.
So you want to have that diversification, you want to have these reasonable expectations. Rebalancing can help you get back in line with your long-term portfolio goals. If certain sectors get really, really hot and you get big gains, you rebalance back.
So these are some of the principles to kind of keep it between the lines even when the market is feeling like it's getting a little bit wild and crazy out there.
Rob West:
Yeah, that's helpful. By the way, if you want to read this article we've been talking about today, How to Handle a Bubble, just go to soundmindinvesting.org.
Speaking of diversification, Maria has a question along those lines in Indiana. Maria, go ahead.
Caller:
Thank you for taking my call.
Rob West:
Sure.
Caller:
I'm 71 years old, and I gave a proviso to my CFP [certified financial planner] to just make my portfolio be biblically invested. So that is the number one, and apparently, I'm now completely biblically invested.
But the question that I have and views of the market, my own portfolio, which I think is more conservative than I like, but according to him, biblical stocks, or whatever, are more expensive and blah, blah, blah.
So I need to understand that. Does being biblically invested preclude being part of the "wild" market?
Rob West:
Let me just jump in there, and then we'll get Mark's take. No, I don't think so.
When you talk about being "biblically invested," that's kind of a segment of the investing universe where you've got certain asset managers that are screening investments to make sure that maybe they're eliminating industries that would be misaligned with your values. So something connected to a pharmaceutical that has a portion of its revenues from an abortion drug, maybe an alcohol or a tobacco company that might be eliminated. So various industries — gambling would be a good example.
In other cases, there's screening in companies that are specifically promoting human flourishing, and using that as kind of a biblical approach.
But that doesn't really have to do with how aggressive or conservative you have to be with your portfolio. It just limits the universe to only those companies that would pass the various screens that you and/or your advisor put in place. But the allocation to stock and bonds and precious metals, y'know, could be completely the same even if you're using a screen approach.
But, as we think about the right allocation for you, give us a sense of what do you have roughly invested today, if you're comfortable sharing that, and are you drawing an income from it? And if so, how much?
Caller:
I'm not drawing an income from it. It is a very conservative — well, just to give you an idea, there was a time when I only had the pension, and it was a very minimum pension and I didn't do anything else except to live on the pension. Then, when I turned 70, I took my Social Security and now I'm living — almost like saving most of that. So I'm not actually now touching the stock portfolio.
Rob West:
Yeah. Okay, great. How much do you have invested?
Caller:
Not exactly sure. Maybe [a] total of $500K.
Rob West:
All right. And do you have a sense of what the current breakdown is between stocks and bonds, and maybe some precious metals?
Caller:
No precious metals. It's 60[%] bonds and 40[%] stocks.
Rob West:
Okay. Mark, obviously living very modestly, not touching it — 60/40, 71 years old. Thoughts on that?
Mark Biller:
Yeah. The personal situation matters so much. So it's really good that we went through all of that. The advice for somebody who's likely going to spend all of their savings on their retirement spending is going to be a little different than someone who has enough assets that they're likely to have some assets left over. They might choose to be a little more aggressive than the person who really has to be careful to make these assets stretch through their retirement.
If I heard correctly, Maria, you're at 40% stock, 60% bond. That would be a little bit maybe more conservative than I would suggest for somebody who is being able to continue adding to their savings right now.
We would normally say somewhere in the neighborhood of 50/50 in the early retirement years is appropriate. Although as we've covered in recent years, that bond allocation we at SMI are increasingly looking at that allocation as also including things like gold, precious metals, maybe some commodities — and some of that is just that in a rising interest rate environment, like we've had the last several years and I tend to think we'll continue, bonds are not as attractive as they have been in the past.
Now, thankfully, the fact is that as these interest rates are getting higher, you can actually lock in some good bond yields, especially if you're buying individual bonds. So they're actually getting a little bit better in that regard. But all of that just to say, you might have a conversation with your advisor about if that 40/60 could bump up a little higher in equities, get a little more aggressive, and maybe working in some precious metals and/or commodities as a small portion of that bond holding.
Rob West:
Yeah, very good. Thanks for your call, Maria. I hope that was helpful. We'll be right back.
Rob West:
Is the market overheated? Well, it's certainly on the rise, and it has been for some time — and it seems like it's not slowing down, especially with some of the news out there in particular this new deal with Iran.
Mark, that could pave the way potentially, Lord willing, for a new era of peace in the Middle East, perhaps that we haven't seen before. I realize a lot of questions surrounding that, but that could be a big deal. Isn't that right?
Mark Biller:
Oh, it definitely could. And we're all, I think, hoping for that, praying for that. Peace is a good thing. It's what we want.
I think probably the most immediate impact, Rob, that I see if we do get a real peace deal is we've had a pretty strong inflation surge these last few months since the war started. Of course, a lot of that is the energy cost flowing through from the Strait [of Hormuz] being closed and oil prices going up. As we've seen optimism on this deal, oil prices have dropped dramatically. You're already seeing some of that at the gas pump.
So I think one really positive dynamic that we could be in for is if those inflation pressures abate, then that takes pressure off of the Fed in terms of potentially needing to raise interest rates, which is kind of the direction they had been talking, and getting back on the track from the beginning of the year, which was that the Fed was talking more about lowering interest rates.
Lower interest rates are generally stimulative and helpful for the economy. Of course, markets love lower interest rates. So that could even add a little bit more fuel to this already strong market should that continue to flow through in that direction.
Rob West:
Mark, as you look at that, I mean, obviously inflation is key, but let's say to your point, given the dramatic fall in oil — and it's down another 5% today and we've got oil at $77 a barrel, brent at 80 — and let's say that trend continues and that's helpful. Just given the strength of this economy, low unemployment, earnings continuing to come in at record numbers, do you feel like that causes the Fed to perhaps maybe not increase but hold steady just so we don't continue to fuel maybe a market that's already overheated or an economy?
Mark Biller:
I definitely think that that is likely in the short term. And we had a taste of that the Friday before last, that little market wobble that I referenced at the beginning of the program that knocked semiconductors down briefly, the immediate cause of that was the week ago Friday's job report, which came in better than expected. So that was good economic news. Everybody likes the fact that the economy is strong and is gaining more jobs than we had thought.
The problem with that is just what you said, Rob — a atronger than expected economy makes the Fed nervous that these inflationary forces that have been troublesome here these recent weeks and months are taking root, and nobody wants to see a second wave of inflation following what we just went through in 2022 and '23. So the Fed is hyper-sensitive to that.
And so I think at this point — and tomorrow will be the very first meeting with the new Fed Chair Warch, this will be his first time at the helm — so I expect definitely for them to hold steady, probably with a little bit of a hawkish or a bias towards tightening higher rates, that kind of thing. But I don't think we're actually going to get those higher rates. I think that hopefully the end of this war kind of knocks us back to that equilibrium of holding tight for a little while — just holding steady would be a better way to say that — until they can get a better handle on what the implications of the war ending, the Strait opening, how hot really is the U.S. economy and is that something that they actually need to try to address through higher interest rates.
Of course, you have a very strong thumb on the scale from the Trump administration and the fact that they picked Warsh, who's the new chair — they want lower rates. So it's not exactly a fair fight there either. But it'll be interesting to watch these first two or three Fed meetings with the new chair and this real battle between these inflationary forces and the desire by the administration to have lower interest rates.
Rob West:
Mark, always appreciate your time, my friend.
Mark Biller:
My pleasure, Rob.
Rob West:
That's Mark Biller, executive editor and senior portfolio manager at Sound Mind Investing. Remember folks, a disciplined, diversified long-term plan helps us respond with wisdom rather than react out of fear.
Big thanks to my team today: Devin, Taylor, Sandy, Patty, and everybody here at FaithFi.
We'll see you next time. Come back and join us tomorrow. Bye-bye!
