The S&P 500 has been red hot for a while now. Indeed, it’s up a stonking 67% in just over two years! Naturally, this has led many bears to come out of their caves to proclaim a market correction is imminent. A few have even read the tea leaves and see a crash coming.
As a reminder, a correction is a drop of 10-20% from a recent peak, while a crash is basically a much more dramatic fall (a hard reset, essentially).
Crashes are notoriously difficult to call, so it’s pointless trying, in my opinion. But I’ve been wondering if a correction is in the works after a recent Uber trip. Let me explain.
Shoeshine boy indicator
In 1929, at the end of the Roaring Twenties, Joseph Kennedy (father of JFK) was working as a Wall Street stockbroker. According to legend, he sat down for a shoeshine one day, and while polishing his shoes, the young boy started giving him stock picks.
Kennedy reasoned, correctly as it turned out, that it was time to get out of the market if a shoeshine boy was openly dishing out advice. Speculation must have reached a peak.
Shortly after, the stock market entered a free fall, making Kennedy a fortune (he’d betted against it).
This informal signal — now known as the ‘shoeshine boy indicator’ — is seen as a cautionary signal that markets might be overheating.
Bullish Uber driver
I was reminded of this story recently in a taxi when an Uber driver went from talking about Trump’s election victory to owning shares of Trump Media & Technology Group (NASDAQ: DJT). This is the parent company of Truth Social, the alt-tech social media platform.
He’d bought a load of Trump Media shares a few weeks before the election and was sitting on some nice paper profits. I suggested he might want to crystallise some gains, especially as it was the only stock he owned.
But he was adamant he was holding on because Trump’s presidency would lead to millions more users flocking to the platform in future. And that would make it more attractive to advertisers. The stock would go up further, he assured me.
Perhaps he’s right. However, the firm generated just $2.6m in revenue in the first nine months of 2024, while racking up a net loss of $363m. The price-to-sales ratio is an insane 1,000!
In other words, Trump Media is a meme stock. And this was the first such everyday conversation I’ve had since 2021, at the height of the last meme stock craze.
High valuations
Now, Trump Media stock isn’t in the S&P 500, and is very unlikely to ever join the index because of its steep losses and poor record of growth. But it highlights to me how overvalued many US shares are today.
Unlike Kennedy however, I won’t be selling all my holdings and I don’t short (bet against) stocks. I see no evidence that an epic crash is on the horizon (again, those are unpredictable).
Yet the S&P 500’s price-to-earnings ratio isn’t far off 30 — a historically high multiple. So if the index heads even higher in early 2025, I’ll start keeping more powder dry.
If a correction does happen next year, there might be some lucrative buying opportunities for my portfolio.
This post was originally published on Motley Fool
