My thoughts on markets and money - Caution vs Complacency

  

 

Where are we?

Beginning 2025, a Trump-led Republican government officially took office and, thus, began a sharp shift in domestic and international policies. Coupled with an increasingly expensive US stock market, this led to greater market volatility.  In early April (2025), in response to Trump’s tariff rollout (Liberation Day), the US market had wild 1,000-point daily swings.  To ease corporate and investor jitters, Trump soon softened his stance by lowering tariffs for allies, negotiating with others and ratcheting it up for rivals, foremost China. The ensuing trade war between US and China left investors uneasy.  But, Trump’s willingness to temper his policy stance coupled with the powerful AI narrative helped markets quickly recover. 

 

By Summer, Liberation Day was in the rear mirror, and the US stock market had recouped all of its losses.  By year end, the Dow finished at an all-time high: 48,371.  Again, the US stock market delivered double-digit returns for a third year in a row.  This has only happened 7 times before over the past 100 yrs.  (See tables below.) 

Liberation Day seems to be a template (or pattern) for some of Trump Team’s policy rollouts: GO…s-l-o-w…stop (likely due to market response and/or legal pushbacks).  Latest international policy is joint US and Israel attack on Iran to lessen its (miliary) threat by destroying its nuclear weapons program and forcing a regime change.  Between February and March 2026, as the conflict escalated, the US market pulled back 10% as negative impacts to shipping, trade and prices (oil) became more evident.  (Strait of Hormuz accounts for 20% of global shipment of oil. Source: “Why the Strait of Hormuz matters so much in the Iran war,” BBC, April 2026.)  But, by late-April (now), the overall market had regained much of its previous loss as the S&P 500 clinched yet another record high (7,165).  Such optimism seems to be driven by a number of factors/beliefs: momentum continues upward (AI will deliver); war will end soon (US will prevail); the President “put” – TACO (Trump Always Chickens Out).  

 

Potential risks 

First, as with any life-changing technologies (e.g., railroad, radio, internet), the AI narrative offers a compelling story that’s equal parts hope and fear: hope that this new technology will exponentially advance society and, thereby, render work unnecessary; fear that AI will lead to mass unemployment and eventually render humans unnecessary.  AI’s development and impact are unfolding in real time.  As with any new technological frontier, there’s a strong desire to be first.  The biggest tech companies (Big Tech) in the US, if not the world, are aggressively positioning themselves to win the AI race.  These “hyperscalers” (e.g., Microsoft, Google, Amazon, Meta) have poured and are projected to pour billions into building up infrastructures (capital expenditures or capex): data centers, AI chips.  (See bar graph below.)

Second, at the same time, there seems to be a surge in speculative activities among corporations and investors alike.  Among corporations, Big Tech is diverting billions of dollars of revenue from tried-and-true products and services (e.g., software, search) into capex.  Moreover, some are even taking on more debt to raise more money more quickly. For example, Google is issuing 100-year bonds.  Meanwhile, current AI darling, Nvidia, agreed to increase purchase obligation (from $16B to $95B) from chip manufacturer, TSMC, so the latter would design and manufacture its increasingly more complex, powerful chips.  (Source: “Nvidia Ratchets Up Risk,” Michael Burry sub stack, April 2026.)  To keep investors happy, Big Tech has resorted to financial engineering by extending depreciation period for their software and hardware investments to inflate short-term earnings.

 

As for investors, some are borrowing more money via margin accounts to invest in the “hot” (US) market.  Meanwhile, others remain complacent by letting their portfolio’s run without rebalancing despite the fact that the US stock market capitalization has increased from historical average of 40% to around 70% of global stock market.  (See graph below.)  

    

Additionally, in the face of war with Iran and, thereby, supply chain and inflation risk (higher oil prices for longer), many investors seem to take a wait and see approach.  Initially, at the start of the war, credit market (bond) yields rose against US treasuries as investors expected more return for taking on more risk.  However, yields soon settled back down again, which seems to suggest that investors don’t see the war as a big financial threat. (Source: “Markets Brief: Are Investors Still Too Complacent?” Morningstar, March 2026.)    

 

Third, highly respected market and economic indicators seem to signal that the US market has entered dangerously expensive territory.  Based on Shiller PE (inflation-adjusted price per earnings), the S&P 500 has a Shiller PE = 40, ending 4-16-26…graph below).  This is the second most expensive US market in history with the exception of the late-1990s (Shiller PE=44) when investors were exuberant about another new technological wonder – the internet.  This was driven by aggressive investments in infrastructure (fiber optics).  (See a pattern?!!)   

 

In addition to the Shiller PE, the (Warren) Buffett Indicator [(Total US Stock Market Value ÷ Gross Domestic Products (GDP)] is also signaling that the US market is dangerously hot at 230%, ending December 31, 2025.  (See graph below.)  At such elevated valuation, the current stock market is 75% above historical trendline and is more prone to reversion to the mean (translation: fall).  But, action speaks louder than words.  At the end of 2025, Buffett’s Berkshire Hathaway was holding record level cash (~ $370 Billion) via short-term treasury bills.  (Source: “Warren Buffett: Cash is necessary ‘like oxygen’—but it’s ‘not a good asset,’ CNBC, March 2026.)   

 

Finally, there’s the elephant in the room – the US national debt ($39.1 Trillion USD).  (Source: www.usdebtclock.org).  Currently, about 30% of Federal tax revenue goes to pay for the interest on our debt.  Biggest holders of US debt are other countries (e.g., Japan, UK and China), domestic mutual funds and the Federal Reserve.  (Source: “One-Third of Income Tax Revenue Goes For Interest On Government Debt,” Forbes, February 2026.)  If we don’t take steps to address our national debt, we will have to face increasingly painful choices: make more money by increasing productivity via technology and innovation; keep interest low to slow down growth of debt (“kick the can some more”); cut public programs/services (e.g., Social Security, healthcare, defense); raise taxes; default on loans (“come to Jesus moment”).   

Potential returns

Despite the uncertainties and risk-taking displayed by corporations, investors and US government, collective optimism and FOMO (fear of missing out) seem alive and well.  Experienced billionaire hedge fund manager, David Tepper, captures the current market and investor sentiment best:
 

How do you not stay around for some of this party?  I don’t have to be as big.  But, you gotta stay for some of the party, because the punch bowl is still there. They haven’t taken it away yet. (Source: “I go back and forth on Nvidia,” CNBC, September 2025.)

(Interestingly, he seems to be hedging his bets with this quick admission: “I don’t have to be as big.”)

 

As investors, we must accept risks in the pursuit of returns.  (It’s financial law!)  But, success is built on how we balance the ongoing interplay between risks and returns; money and emotions; short-term and long-term; etc. To do so well, we need to look within and ask ourselves some key questions: How much do I need to lead my life?  How long do I need it for? What is the potential return for the risk I need to take?  With that in mind, here are some ways to hedge our risks in pursuit of (adequate) returns. 

 

First, since corporations and investors alike seem to be taking on more risks, we would be wise not to imitate them.  We would be wiser still if we take advantage of the (still) economically “sunny” weather to strengthen our financial house.  For example, consider taking steps to lower debts: pay off credit card balance in full; make extra payments to our mortgage, car loans, student loans and so on.  Additionally, make sure there’s have enough emergency (rainy day) funds stashed away in an FDIC-insured, high-yield savings account.  Lower financial obligations and higher cash reserve can help us withstand future (economic) storms with greater resilience.        

 

Second, not only is the US stock market at its second most expensive in history, but 40% of its key benchmark (S&P 500) is concentrated in Big Tech (Magnificent 7) and AI-driven.  (See graph below.)  While there’s a strong collective pull for investors to stay longer at the “party,” now is a likely a good time to rebalance and diversify one’s portfolio. 

 

The US stock market is expensive as a whole, but there are pockets of opportunity within value, quality and healthcare stocks.  Value stocks are typically companies characterized as “boring” and cheap: financials (banks, insurance); industrial (auto, big machines) and energy (oil); and consumer staples (everyday products – shampoo, toilet paper).  Value stocks are the opposite of growth stocks: stodgy vs innovative; cheap vs expensive; present value vs future value.  Having been out-of-favored for the past 15 years, value stocks currently carry a PE of 21 vs 27 for the US stock market.  Additionally, value stocks pay a decent 2% dividend vs 1% for US stock market. 

 

Meanwhile, quality stocks are usually best-in-class for their industries (modern “shinise”): strong balance sheets; consistent earnings and cashflow; high return on equity and prudent management with a strong track record.  Key industries with the highest concentration of quality stocks are: industrials, tech, healthcare and consumer stables. 

 

Finally, US healthcare stocks have taken a beating over the past year or so due to regulatory uncertainties, higher medical costs and investor rotation into tech.  Currently, healthcare sports a PE of 17 vs 27 for US stock market. About ~40% cheaper than the US market, healthcare is at its cheapest in the past 30 years.  (Source: “Looking for Cheap Stocks? Healthcare Shares Haven’t Looked This Good in 30 Years,” Barron’s, July 2025.)  Interestingly, there appears to be a good deal of overlap between value, quality and healthcare stocks.  Perhaps that’s the sweet spot in today’s market.

 

Unlike the US market, international markets (PE = 18) seem to offer more upside.  Historical pattern between US and international markets is such that when one outperforms, the other underperforms and vice versa. Additionally, leadership typically changes within a 10-year rotation.  In 2000s, US market was in a slump (dot.com crash), and international market was on a tear.  But, since 2010, US market has been outperforming international stocks by a mile. However, beginning in 2025, beaten down, unfavored international market seem to be gaining some tractions in its comeback.  For the year, it delivered 32% return vs 18% for S&P 500.  As of 4-22-26, international market has returned 9.5% vs 4.1% for the S&P 500.  (See graph below.)    

 

Does 2025 signal the reemergence of international stocks?  Hard to say.  But, if history is any guide, now may still be a good time to test out that theory.  Not only are international stocks still very cheap (PE=18), but US stocks still are very expensive (PE = 27).  Moreover, over the past year or so, the devaluation of the USD has helped lift international stocks by enabling profits and dividends to be converted into more USD.   (See graph below.)

Source: US Dollar, Trading Economics, April 2026.

 

Third, given the large and growing US national debt and expensive US market, currently, a bond ladder of high-quality short- and mid-term bonds (e.g., TIPs and corporate bonds) may provide much needed ballast in one’s portfolio. Yielding between 4% − 5%, these short- and mid-term bonds offer slightly more than cash (3.2%) and, at the same time, can ease inflation’s bite (3.3%).  (Source: US Bureau of Labor Statistics, March 2026.) 

 

Moreover, should US national debt erode confidence in the USD as the global reserve currency, holding some hard assets may be a good hedge against a weakening dollar.  Two possible hard asset options are energy and raw materials.  While both are fairly volatile, currently, they are relatively cheap (energy PE = 19; raw materials PE = 18).  Also, they pay a decent dividend (1.5% – 2.5%), which could help smooth out the ride.  Additionally, in a world facing declining resources, allocating a small portion of one’s portfolio to hard assets may not only help anchor one’s finances, but also one’s emotions in the face of scary headlines.        

Final thoughts… 

Given the (stock) market we’re currently in, I want to conclude with insights and investing lessons from two highly respected hedge fund managers: Michael Burry and Warren Buffett.  Trained as a doctor, Burry quickly pivoted to hedge fund manager where his correct call on the housing market bubble (2007-2008) netted $700M in profits for his investors and $100M for himself.  On the spectrum, Burry rarely gives interviews, but does have a large, rabid following via his Twitter (X) account and more recently via his Substack (both titled Cassandra Unchained).  Earlier this year, Burry observed:  

In the 1920s there was radio mania focused mostly on one stock, RCA. The stock fell peak to trough about 98% during early 1930s, and yet radio’s growth never slowed for many more decades. Even if you predicted a half century of radio dominance, you would have lost money on RCA. $NVDA

LESSON 1: There’s a big difference between spotting a (technological) trend and profiting from it.  Corporations and investors alike are prone to confuse one for the other, especially in a (long) bull market. 

Finally, when asked what he wants to be remembered as, Warren Buffett said “teacher.”  To drive home his point regarding the importance of margin of safety in investing, Buffett shared the following story:  There once was a driver who came upon a bridge with this sign: weight limit = 10,000 pounds.  Remembering that his car weighed 9,900 pounds, the driver decided to back up and find another route to his destination.  Even if the detour meant more time and greater inconvenience, it was better than crossing and potentially falling into the river far below. 

LESSON 2: Surviving is success.  

DISCLAIMER: These are the general views and opinions of the author.  Those who choose to implement on these views and opinions do so at their own discretion and risk.