Wesley Chapel, FL
“It’s not what you buy, it’s what you pay that counts. Good investing doesn’t come from buying good things, but from buying things well.”
My plan for this month was to give you a peek behind the curtain at Elevate to show you how we determine a company’s intrinsic value and how that compares to its share price. I mentioned this plan on the last Elevate Market Chat with Kyle and said:
“I am hoping that nothing too crazy will happen between now and April 7th, when the next commentary is supposed to be published.”
Well, as we like to say, hope is not a strategy.
Despite my hopes, I think we can all agree that some craziness has happened - and is still happening. Given the craziness, we have been a little busy protecting and seeking to grow your family’s hard-earned capital. I haven’t had much time to write about our preferred valuation methodologies or anything else for that matter. So, this will be relatively short and sweet. Depending on how things evolve from here, I may write another abbreviated commentary before next month.
While markets may be crazy and volatile, our process has not changed. We show up every day and execute our process with zero emotion—ice cold. Sometimes, that means raising cash and exiting stocks that have fallen to our predetermined exit levels, and other times, it means deploying the cash raised from those sales into new positions that have fallen into buy range. Often, we do both. What we don’t do is show up to work wondering what to do and speculating about macroeconomics.
RIP Val Kilmer
The S&P 500 opened today down a little over 19% from its all-time high on February 19th and about 12.6% lower than where it closed less than three trading days ago on April 2nd. Today, the index managed to eke out a small gain and just barely dodged entering a technical bear market. The Nasdaq was not so lucky, as it closed in bear market territory on Friday, down 21.5% from its all-time high.
Here is a look at how the indexes that we track performed in March, and for the year through the end of March. Gold is still flying!
This morning, the S&P 500 was down as much as 4.71% from where it closed on Friday. From there, it rose 8.51% before falling 5.64%—and that was all before 11:30 a.m. ET—less than two hours into the trading day. That is some wild volatility.
Don’t forget to check out and subscribe to our monthly financial planning commentary written by Ken Armstrong, CFP®, RICP®, ChFC®, CLU®, CASL®, CLTC and Kyle Lottman, CFA, CMT, CPA.
There is no shortage of news articles and opinion pieces on the tariffs imposed by the Trump administration. So, I won’t bother with writing another one.
One thing I will say though, there is more to this drop in the stock market than just tariffs. As with every market bubble that inevitably pops, there is a scapegoat. In 2022, it was rising interest rates. In 2020 it was what today amounts to a flu virus… the list goes on.
The term "scapegoat" goes back (at least) to Old Testament biblical times (check out Leviticus 16:6-10). It is probably as old as time. But it never tells the whole story, and when all is said and done here, tariffs won’t be the only thing to blame. Let’s not forget how long it took to amass these trade deficits and the $36 trillion of debt, $12.5 trillion of which needs to be refinanced in just the next 20 months.
Today, the scapegoat is tariffs.
But make no mistake—the market wouldn’t fall this far, this fast, without starting at extreme valuations. There was always going to be a “rapid unscheduled disassembly,” as SpaceX calls it when a rocket explodes. The only question was what (or who) was going to be the scapegoat.
Most of you are probably wondering how bad it can get. And what you really want to know is how far the stock market can fall.
Answer: It can get worse, and the market can fall further than you think possible.
Let me get a little more specific.
Over the past twenty years, the S&P 500 has averaged a price-to-earnings (PE) ratio of 16.1 and a price-to-sales (PS) ratio of 1.9. Those averages are the dashed/dotted horizontal lines in the middle of the two charts below. You can click them to enlarge.
Analyst estimates of S&P 500 earnings are $268.43, and sales are $1,974.54 for the year 2025. If you take the expected earnings and sales and multiply them by their long-term average ratios, you get:
Earnings: $268.43 x 16.1 = 4,321.72
Sales: $1,974.54 x 1.9 = 3,751.63
These become your relative “fair value” estimates. Today, the S&P 500 closed at 5,062.25.
The index needs to fall another 14.6% to reach the long-term average PE and another 25.9% to reach the long-term average PS.
Even then, it would only be “fairly” valued—not cheap and certainly not a bargain price.
These estimates also assume that the denominator in the ratio (earnings estimates and sales estimates) doesn’t fall. The longer the tariffs are in play, the more likely analysts will revise these estimates lower, which leads to even lower fair value estimates.
To be clear, these aren’t necessarily my price targets. As you know, we don’t predict; we prepare. We are prepared for stocks to keep falling, but we are also prepared for them to stop falling and bounce hard.
As always, there is more that I wish I could write, but time is limited and writing these commentaries isn’t the top priority right now. I will continue to to follow our time-tested rules-based process to get us out of stocks that misbehave while scouring the market for wonderful businesses that we can buy at fair prices - and then hold for as close to forever as possible. This is not a time for panic. It is a time to execute. That is what we are doing, and what we will continue to do.
If you are losing sleep and very concerned about the stock market, it is because you have too much money in stocks. If that is you, please let us know so we can help you get appropriately invested.
Thank you for your trust and confidence.
If you aren’t currently a client, and your advisor is just telling you to sit tight, and ride it out, please know that there is a better way. Our minimum for investment management services is $500,000 and we’d love to chat with you if you are tired of riding Mr. Market’s roller coaster.
Until next time, I thank God for each of you, and I thank each of you for reading this commentary.
Clients, I encourage you to click here to access your personalized performance portal to see how your portfolio performed vs. the markets last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.