Back in early January, I identified four key investment bubbles that looked extremely risky to me. I warned readers that investing in Bitcoin, US tech stocks (the FAANGs), the S&P 500 and expensive small-cap shares was a recipe for disaster.
Three months on, let’s look at how these investments have performed so far in 2018.
When I warned investors about asset bubbles in January, Bitcoin was trading at around $15,000. Sentiment towards the cryptocurrency was still relatively high. At the time, I advised investors to steer clear as cryptocurrencies were exhibiting all the classic symptoms of an investment bubble.
Fast forward three months, and that call looks good. Bitcoin has fallen over 50% and today trades at under $7,400. Yet, I think it can fall much further. To me, Bitcoin has very little use as a currency simply because of its inherent volatility. Would you want to be paid in a currency that fluctuates 20% in a day? No thanks. While blockchain technology does look interesting, I believe it’s sensible to keep avoiding Bitcoin.
US tech stocks
Next up, the FAANGs: Facebook, Amazon, Apple, Netflix and Google. In January, I warned that several of these stocks looked “extremely overvalued.” I pointed out that Amazon had a P/E of 300 and that FAANG directors were dumping stock like there was no tomorrow.
Fast forward to today, and we are now in the midst of a tech stock meltdown in the US. In the last few weeks alone, Amazon and Google shares have each fallen 13%, while Facebook has declined 16%. Despite the falls, these stocks still look excessively valued. Proceed with caution.
In January, I also warned investors about the massive passive flows into the S&P 500 index in recent years. The valuation of the index looked dangerous, to my mind.
Three months later and the index has fallen around 10%, dragging down global markets with it. Despite now being in ‘correction’ territory, the US index still looks expensive to me as it currently has a trailing P/E ratio of a high 21.5 and a trailing yield of just 2%. In contrast, our own FTSE 100 has a P/E of 16 and a yield of 3.1%. Given that the FAANGs have high weightings in the index, I believe that investors should be careful with their exposure to the US one. Morgan Stanley recently warned that we may have seen the market top for the year already.
Lastly, this call has been more of a mixed bag. Plenty of expensive small-cap stocks have been sold off this year. For example, Boohoo.com is down around 25%. However, others such as Fevertree Drinks have continued to perform. Its shares are up almost 25% year-to-date.
Nevertheless, it’s always worth being a little cautious towards highly-rated stocks that are trading at lofty valuations. As I stated in January, the key is to have sensible risk management processes in place and ensure that you’re not overexposed to any one stock, as the share prices of smaller growth companies can be extremely volatile.
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Edward Sheldon owns shares in Boohoo.com. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, 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. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.