Stock Market, Consumer Credit Card Debt, Real Estate, Refinancing, Elon’s Pay Package, Crypto in Small Companies, Company Reporting Consumers, Fast-Food Wages & Luxury brands

Will the stock market crash?

With the market continuing to march higher and setting record high after record high, I do worry more and more that a crash could be coming. It doesn’t mean it will happen tomorrow, next week, or maybe even this year, but I do believe the risk to reward of investing in the S&P 500 at this point is not favorable when you take all the data into consideration. I have talked a lot about the fact that the top 10 companies now account for nearly 40% of the entire index and the forward P/E multiple of around 22x is well above the 30-year average of 17x, but there are also less discussed factors that are quite concerning.

There is something called the Buffett Indicator that looks at the total US stock market value compared to US GDP. Buffet even made the claim at one point that this was “the best single measure of where valuations stand at any given moment." The problem here is that it now exceeds 200%, which is a historic high and well above even the tech boom when it peaked around 150%. Another concerning measure is the Shiller PE ratio, which looks at the average inflation-adjusted earnings from the previous 10 years in relation to the current price of the index. This is now at a multiple around 39x, which is well above the 30-year average of 28.3 and at a level that was only seen during the tech boom. While valuation isn’t always the best indicator for what will happen in the next year, it has proven to be a successful tool for long term investing.

Unfortunately, valuations aren’t my only concern. Margin expansion is even more frightening as the reliance on debt can derail investors. Margin allows investors to buy stocks with debt, but the big problem is if there is a decline and a margin call comes the investor would either have to add more cash or make sells, which causes a further decline in the stock due to added selling pressure. Margin debt has now topped $1 trillion, which is a record, and it has grown very quickly considering there was an 18% increase in margin usage from April to June. This was one of the fastest two month increases on record and rivals the 24.6% increase in December 1999 and the 20.3% increase in May 2007. In case you forgot, both of the periods that followed did not end well for investors. Looking at margin as a share of GDP, it is now higher than during the dot-com bubble and near the all-time high that was reached in 2021. One other concern with the margin level is it does not include securities-based loans, which is another tool that leverages stock positions and if there is a decline could cause added selling pressure.

Unfortunately, this data is not as easy to find since they are lumped in with consumer credit. The most recent estimate I could find was in Q1 2024, they totaled $138 billion and with the risk on mentality that has occurred, my assumption is the total would be even higher now. We have to remember that we now are essentially 18 years into a market that has always had a buy the dip mentality. Even pullbacks that occurred in 2020 and 2022 saw rebounds take place quite quickly. This has created a generation of investors that have not actually experienced a difficult market. I always encourage people to study the tech boom and bust as it was devastating for investors. The S&P 500 fell 49% in the fallout from the dotcom bubble and it took about 7 years to recover. Investors in the Nasdaq fared even worse as they saw a 79% drop and it took 15 years to get back to those record levels. Unfortunately, this isn’t the only historical period that saw difficult returns.

If you look back to the start of 1964, the Dow was at 874 and by the end of 1981 it gained just one point to 875. This was an extremely difficult period that saw Vietnam War spending, stagflation, and oil shocks, but it again illustrates that difficult markets with little to no advancement can occur. So, with all of this, how are we investing at this time? We are maintaining our value approach, which generally holds up much better in difficult markets. For comparison, the Russell 1000 Value index was actually up 7% in 2000 while the Russell 1000 Growth index fell 22.4% that year. We are also maintaining our highest cash position around 25% since at least 2007. I continue to believe there are opportunities for investors, it just requires discipline and patience. One other person remaining patient at this time is Warren Buffett. Berkshire now has near a record cash hoard of $344.1 billion and the conglomerate has been a net seller of stocks for the 11th quarter in a row. I’d rather follow people like Buffett at times like this over the Meme traders that have become popular once again.

Consumers are doing a better job managing their credit card debt 

Data released by Truist Bank analysts show that card holders of both higher and lower scores are doing a better job paying their bills on time. This is based on a drop in the rate of late payments from last quarter. Also improving is debt servicing payments as a percent of consumers disposable personal income. The first quarter shows debt-servicing payments were roughly 11% of disposable income, which is a strong ratio to see considering that level is below what was typical before the start of 2020 and it’s far below the 15%-plus levels that were seen leading up to the Great Recession in 2008.

According to Fed data, card loan growth was only 3% year over a year, which could be due to lenders increasing their credit standards. Stricter standards also made it more difficult for subprime borrowers to obtain new credit cards considering the fact that as a share of new card accounts, this category accounted for just 16% of all new accounts. This was down roughly 7% from the last quarter in 2022 when it was 23%. Consumers may also be more aware of the high interest costs considering rates stood at 22% as of May. There has been a decrease in rates from the peak last year, but Fed data reveals before interest rates began rising in 2022 interest rates stood at 16% for card accounts. If the Fed were to drop rates a couple of times between now and the end of the year, we could see a small decline in the rate. With that said borrowing money on a credit card and accruing interest is a terrible idea as even a 16% rate would not be worth it! 

Real estate investors may be supporting the real estate market

This may sound like a good thing, but this could be dangerous long-term since investors don’t live at the property. It would be far easier for them to default on the mortgage and let the house go into foreclosure or sell at a price well below market value just to get their investment back. So far in 2025 investors have accounted for roughly 30% of sales of both existing and newly built homes, which is the highest share on record. This is according to property analytics firm Cotality and they started tracking the sales 14 years ago. Most of these investors were small investors, who own fewer than 100 homes as they accounted for roughly 25% of all purchases. This compares to large investors which accounted for only 5% of purchases of new and existing homes.

Within the small investor space, the stronger category is those with just 3-9 properties as this group has accounted for between 14 and 15% of all sales each month this year. The data also shows that the large investors like Invitation Homes and Progress Residential have become net sellers in the market and are selling more properties than they are buying. This is likely due to reduced rents from the high competition in the rental market and a softening of the overall real estate market in certain areas that has not provided the expected return that they wanted. I do worry that the small investor here has less access to good data and is less disciplined with their investment strategy. They are likely buying homes because real estate has been a good investment for the last several years, but if the market were to turn, they would be more likely to panic and sell, and they may not have the means to continue holding the real estate.

I do believe if interest rates remain, housing prices could remain stable or perhaps even drop a little bit. It’s important to remember long term mortgage rates generally stem from longer term debt instruments like a 10-year Treasury, rather than the short-term discount rate set by the Fed.

Financial Planning: When and How a Refinance is Helpful

After several years of elevated mortgage rates, steady declines have made more homeowners candidates for refinancing, but a smart decision requires looking beyond the headline interest rate. The first question is whether the refinance actually reduces the rate, and if so, what third-party closing costs and discount points are involved. Every mortgage carries these costs, and paying points may not make sense if rates are expected to fall further and another refinance could be on the horizon, especially since few 30-year mortgages last their full term before a sale or another refi. The structure of the new loan also matters: should costs be paid upfront or rolled into the loan balance, and how long will the loan likely be kept?

The real goal is to borrow at the lowest overall cost over the life of the loan, factoring in both the rate and the cost to obtain it. A lower rate and payment may feel like a win, but without careful structuring, it may not be the most cost-effective move, something mortgage brokers often overlook when focusing solely on rate reduction. Here’s a real example from just last week. A homeowner with a $580,000 mortgage at 6.875% and a $3,900 monthly payment has the opportunity to refinance to 5.5%, lowering the payment to $3,500 with no additional cash due at closing, and saving roughly $80,000 in total interest over the life of the loan. At first glance, this looks like a no-brainer. However, this structure would only be ideal if the homeowner never had another chance to refinance, which is unlikely given their current rate of 6.875%. In this case, all costs were rolled into a new loan balance of $616,000—an increase of $36,000—explaining why no cash was required at closing.

A better approach might be to refinance to a rate only slightly lower than 6.875%, still reducing both the monthly payment and lifetime interest, but without dramatically increasing the loan balance by rolling in discount point costs. Refinances can continue as long as rates are expected to decline, and the best time to pay points is in a “final” refinance when rates are no longer expected to drop so the benefit can be locked in for the long term.

Is any man worth a $24 billion pay package?

I’m obviously talking about the new pay package that has been put together for Elon Musk to stay at Tesla. The company is trying everything to keep him focused on Tesla as opposed to the many other endeavors that he ends up getting involved in. Mr. Musk said it is not about the money and that he doesn’t want to commit to a company and then a year or two later be thrown out by a group of activist investors who want to go a different direction than he does. If Mr. Musk were to receive this pay package, which would be about 96 million shares worth approximately $24 billion, he would have to stay at the company for two years either as CEO or as some other type of an executive head.

At the end of the two years, he would have to pay $2.2 billion to vest the roughly 96 million shares. It also appears at that time the company would have to take some type of accounting charge for the roughly $24B. This could all change if the Delaware Supreme Court rules in favor of the previous $50 billion worth of stock options that was approved by shareholders, but has faced roadblocks as courts felt Mr. Musk had too much influence with the directors in that deal. While I’m not a fan of the overvaluation of the stock, I have to say it is a great company and has done great things. I do believe much of the top talent would leave if Mr. musk decided to leave and that would likely lead to many problems for the business. I also believe if he was not part of Tesla, the stock would take a huge hit, perhaps as much as a 50% decline!

Small companies buying crypto, what could possibly go wrong?

The crypto craze has caught on with some small businesses, including small public corporations likely trying to boost their stock price. In the last couple of months almost 100 companies have announced that they will be raising almost $50 billion to buy bitcoin and other cryptocurrencies. Since the beginning of 2025, almost $90 billion dollars has been raised to purchase cryptocurrencies on their balance sheets. You may be wondering if this is a smart move, I have to say no and it appears to be done for greed.

There have been reports of companies’ stocks jumping 200 to 300% after the announcement, only to fall back very close to the price before the announcement. It appears some company executives were able to profit on these moves as it has been reported some executives sold shares after making the announcement, giving them a nice windfall before the stock dropped. I thought it was interesting to note that Meta and Microsoft had shareholder proposals to see if their shareholders wanted to add cryptocurrencies to their balance sheets. The shareholders voted it down by a wide margin. The board of directors also recommended voting against the idea. The craziness of cryptocurrencies continues and I will continue to remind people, the only reason why bitcoin continues to go up is people continue to buy it. Unfortunately, most are only buying it due to the fear of missing out, rather than for a fundamental reason, which never ends well.

Company reports show the consumer is still doing well

We look at a lot of data to get a pulse on the consumer, but sometimes the best source is to see what businesses are saying, especially consumer focused businesses. This past week we got earnings from several companies that rely on the consumer and overall, the economy still looks healthy. Uber reported bookings for mobility were up 18% compared to last year and bookings for delivery were up 20% compared to last year. I was surprised it’s a pretty even split with mobility accounting for $23.76 B of revenue in the quarter and delivery accounting for $21.73 B of revenue. CEO of Uber, Dara Khosrowshahi, also added, “At this point, we’re not seeing weakness in the consumer. It’s steady as she goes, and for Uber, that’s great news.” Shopify also had good news with Q2 sales surging 31% year over year to $2.68 B. Shopify President, Harley Finkelstein, said, “So far we’re seeing no slowdown from the tariffs and that includes up until early August, where we are today.

The millions of stores on Shopify are doing really, really well.” Looking at Disney, the company had some weakness in the traditional TV business, but the experiences segment, which includes theme parks, resorts, cruises, and some consumer products, did very well. Revenue for this segment was up 8% to $9.09 billion and domestic theme parks were even stronger with revenue up 10% to $6.4 billion. There was an increase in spending at theme parks and higher volumes in passenger cruise days and resort stays. The CFO, Hugh Johnston, said, “I know there’s a lot of concern about the consumer in the U.S. right now. We don’t see it. Our consumer is doing very, very well.” There are companies reporting softness and concerns, but I do believe the consumer as a whole is still doing alright at this time. 

Proof that increasing the fast-food worker minimum wage in California hurt more than it helped

Politicians in Sacramento a year ago thought it would be a great idea to help people out working in the fast-food industry by giving them a raise to $20 an hour. Our concern when it was announced was that businesses would have to either increase prices or cut staff and use automation, or maybe a combination of the two. Based on recent numbers, 18,000 fast food workers have lost their jobs and employment in the fast-food industry is down 3 to 4% because employers are putting more money into automation versus hiring new employees. This is sad because many of these jobs were helping out kids in high school or college. I always thought it was a great space for kids to earn a little bit extra money and now many of those jobs are gone. Minimum wage is always a tough subject to discuss, but ultimately businesses need to make a profit to survive and if labor costs become too problematic businesses will look for other alternatives. 

Luxury brands still seem to be struggling

It has now been two years since luxury brands like Christian Dior, LVMH and Cartier, just to name a few, started having problems with declining sales and struggling stock prices. It appears younger consumers, like Gen Z shoppers have really exited the luxury space considering last year sales to this cohort fell 7%, which is roughly a $5.7 billion decline in spending and the biggest pullback of any of the generations. Evidence of continued problems for these retailers was LVMH’s 9% decline in Q2 sales from one year ago.

Those in generation Z were born between 1997 and 2012 and their ages range from 13 years old to 28 years old. This group grew up with the Internet, smart phones, and social media and may not be into high fashion as much as what is going on digitally. They also seem to be more excited about experiences rather than material items. This could also hurt prices in the secondhand market as the appeal to pay thousands of dollars for purses or other luxury brands seems to be declining.

The secondhand market is currently booming with demand as consumers realize they can get luxury brand items below the initial cost. It should also be noted that for the last few years, the economy has been doing rather well and that has likely helped increase prices. Unfortunately, it’s possible that some of these luxury items that people paid high prices for end up selling them for $.50 on a dollar or maybe even less when a slowdown in the economy appears.