A Quick Macro Pit Stop

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I’d be lying if I said everything feels great in the broader market.

In fact, my gut is starting to tap me on the shoulder and say: “Hey Danny… this can’t last forever….”

Here’s why.

1. Record Valuations: The S&P 500 is trading at the highest valuations in history.

2. Soaring P/E Ratios: Earnings multiples are stretched to levels we only see before major corrections, i.e. PLTR is trading at 650x TTM P/E.

3. Concentration Risk: The Magnificent Seven now make up 32% of the S&P 500.

   1. That’s double what it was just five years ago.

   2. One sector, one small group, carrying the index. That’s fragility.

4. Credit Market Risks: Wall Street is lending at historically narrow spreads aka overconfidence is propping up companies that shouldn’t survive in a tougher rate environment, aka lenders are treating risky borrowers like they’re nearly as safe as blue-chips, sound familiar? It’s the same playbook we saw in 2008.

5. Inflation & Policy: Between sticky inflation and global trade tariffs, the Fed has a tough choice:

   • Keep rates high and risk recession.

   • Cut rates and risk inflation roaring back.

Howard Marks has said this tug-of-war almost guarantees a recession “... sooner than otherwise.”

And every time these conditions come together, record valuations, narrow spreads, concentration in leaders, stretched multiples, and Fed policy cornered by inflation, they’ve been followed by either a sharp correction (2000, 2008, 2022 mini-bear) or a deep recession (1929, 1970s, 2008).

Could this time be different?

Maybe.

Could markets keep running?

Also yes.

But risk is building…

Upside is getting smaller and smaller as valuations continue their upward trends.

And I’m leaning toward caution mode.

Even Warren Buffett is flashing the caution signal.

And has been for a while, despite starting to finally buy some more stocks recently.

But still, Berkshire Hathaway is sitting on more than $350 billion in cash.

And every time he piles up cash ahead of a downturn, people ask: “What does he know that we don’t?!”

The writing is on the wall.

The real question: Do you want to risk being greedy for another couple of percentage points, or start to shift to cash, possibly some commodities, and other hedges ahead of the next big reset?

This isn’t about panic-selling.

It’s about positioning:

• DCA into new positions.

• Take profits where you can.

• Keep trailing stops in place.

• Hedge smart — maybe some out-of-the-money S&P or QQQ puts.

• Private Placements? Go with the free-trading deals, with warrant coverage, for the ultimate hedge

Last but not least, September is the weakest month of the year for the S&P 500.

• Since 1928, the S&P has averaged about a –1% return in September, making it the only month with a consistent negative average.

• It’s often referred to as the “September Effect”. Even though no single reason explains it.

When the music stops, the ones with cash on the sidelines aren’t victims, they’re predators.

And we at NWC are predators!

Smart Predators, not predatory, per-se; we just take advantage of great situations when they’re presented.

I’m reminded of that famous Buffett line: “Be fearful when others are greedy, and greedy when others are fearful.”

Right now?

The greed is thick, almost suffocating.

And for me, that means keeping my head on a swivel and getting ready for bargain-hunting season.

As always, Happy Hunting!

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