Your Financial Future: A market correction is coming
Image a little deli operating in one of our small towns. If its combined sales for the last two years were $35,748, what would it be worth? That works out to an average weekly sales volume of $343.73 or just over $52 per day if it was closed on Sundays.
Most people would wonder how it could even stay in business. Rent, utilities, property taxes, payroll and all of the other cost have to be much more.
Yet, this past Feb. 8, a single deli with these financials, had a stock market cap of $113 million.
This tiny 鈥淗ometown Deli鈥� is located in Paulsboro, New Jersey 鈥� the sole location of Hometown International. According to tracking firm FactSet, it appears to have started trading on the over-the-counter market in 2019. According to the company蘑菇视频 latest 10-k filing, the store was closed from March 23, 2020 until Sept. 8 because of the pandemic.
During this time, the stock price rose from $3.25 to $9.25 per share. It last traded at just under $14 per share.
It must be part of the name 鈥淚nternational鈥� that attracted so much interest and investment. It clearly was not profitability. Similar things happened during the Dot Com crash in 2002. All you had to do was come up with a catchy name that ended with .com and your company instantly had a high value. You did not even need a profitable operation as many of those companies went bankrupt and millions of investors lost a lot of money.
Warren Buffett believes the best way to judge if the market valuations are correct is to look at the ratio of gross domestic product (this is the total market value of goods and services produced within the borders of a country) with the total market index value. This is the market value of all stock and debt obligation of American companies. It currently stands at 201% which correlates to significant overvalue. This should be a concern. In the last 10 years, the Dow has gone up 264%.
Is this realistic?
The market over the last few years has been primarily driven by a few large tech companies. Recently, they have slowed and a broader sector has been increasing. This is a good thing. Comparable sales volumes to last year are pretty easy for many companies because we were in a pandemic. However, this does not mean the stocks have to go up as the market already had this change priced this growth in. Inflation is picking up as anyone who has bought groceries, gasoline, lumber and many other things knows. Anyone trying to buy a new house must pay more than market value. Sometime soon, the Fed has to end the unrealistic world of 0% interest rates. This will have a large impact on the stock market. Washington will have to stop distributing Monopoly money to everyone. Taxes must sky rocket to pay off all of the money coming off the printing presses.
Thirty years ago the Japanese Nikkei 225 stock market crashed. It still has not recovered and Japan蘑菇视频 economy was in much better shape than ours. They were not a debtor nation. It has been a rough journey for the people of Japan who happened to retire at that time. What could this do to your retirement? Rebounds can take decades.
By all measures, today蘑菇视频 stock market is highly valued, thankfully not as much as Hometown Deli. Retail investors are entering the stock market in droves. They do not understand the complexities of their investments People have been spoiled into thinking that corrections happen like last March and a month later the market recovers only to go higher. Sooner or later, economist and mathematicians will tell us, we will have revision to the mean and history will repeat itself.
That will be the day of reckoning. A pound of pastrami is only worth so much.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.