Warning: Our Expert Thinks Another Correction Is Coming…

Sometimes, it can feel like you’re trying to drink from a fire hydrant. There’s just so much news out there to process.

In a bit of good news, this morning’s jobs report showed that 1.8 million jobs were added to non-farm payrolls in July. This beat the consensus expectation for 1.48 million. The jobs, which were largely comprised of folks returning to work, brought the unemployment rate down to 10.2%.

So while the jobs numbers don’t come close to the 4.8 million added in June, we’ll take it. However, it seems as if talks between Congress and the White House for another coronavirus relief bill have reached an impasse once again.

The stakes are high: benefits from the Paycheck Protection Program expire tomorrow. Democrats and Republicans need to decide whether the enhanced unemployment benefits should continue at the same level or not. This is just a few of the issues at hand.

Meanwhile, we as investors are faced with an important question: Do we keep riding this rally or prepare for a pullback? And if so, what actions should we take?

In an effort to gain more perspective, I turned to my colleague Jim Pearce.

Jim is another expert over at our sister website, Investing Daily. As the Chief Investment Strategist of Personal Finance, he’s in charge of one of the nation’s oldest and most popular investment advisory services.

Jim is one of those people you definitely want to know better. So we had a chat on all manner of things… we discussed everything from his background, his thoughts on the market rally, his controversial decision to sell Apple after a 600% gain, why he thinks we’ll have another correction, and more. You can read our exchange below…

Jim, this is the first time a lot of our readers have heard from you. Can you tell us a little about yourself?

My interest in investing came from my father, who spent most of his career working for the Securities & Exchange Commission. So a lot of our dinner table discussions while I was growing up were about the stock market.

I started out as a stockbroker in 1984, a few years after graduating from college. Back then, information about companies was much harder to come by since there were no desktop computers, smartphones, or the internet. Instead, we spent hours poring over financial statements of businesses, making calculations by hand. That was good training because it forced me to think hard about which factors matter most in determining how a stock is likely to perform.

Over the next thirty years, I was a financial advisor, managing client accounts. Eight years ago, I decided to take that skillset and apply it to the financial publishing business and am now the Chief Investment Strategist for Personal Finance, which I enjoy immensely.

What’s your take on the overall market right now? It seems like like the big tech names are outrunning just about everything else…

I believe the stock market has become disconnected from the economy so I am expecting a correction later this year. In fact, I’m surprised it hasn’t already happened given the recent spike in Covid-19 cases and the corresponding rise in new unemployment claims as more states and cities reinstate social distancing restrictions.

I hope I turn out to be wrong about this, but I just don’t see how we are going to get through this crisis without a lot of small businesses going under. If that happens, then unemployment will spike again and consumer spending will drop. At some point, even the huge tech companies will feel the pain.

You just recently issued a recommendation for Personal Finance readers to sell Apple. Some might consider that a little controversial, but it’s been a good run for you and your readers. Can you fill us in on the basics of your decision?

When we added Apple (AAPL) to our portfolio seven years ago, it had just lost half its value and was viewed by Wall Street as more of a value stock. Since then, we have realized a gain of nearly 600% in AAPL as it consistently outperformed Wall Street’s modest expectations. However, over the past two years, most of the appreciation in Apple’s share price has been due to two factors: an expansion of its forward price-to-earnings ratio (FPER) and share repurchases. Until then, Apple’s FPER was less than the multiple for the S&P 500 Index. Now, Apple’s FPER is 27 compared to a multiple of 22 for the index.

I knew when I made the decision to remove Apple from the portfolio that it would not be a popular decision, but making tough decisions comes with the territory. I like Apple as a company but feel its share price has become overvalued and vulnerable to a major selloff if the stock market does go through another correction later this year. During the past two years, AAPL has gone through two separate declines of 39% and 35%. I think that could happen again within the next six months.

Where are you seeing the best values right now?

I believe income stocks offer tremendous value right now. For example, AT&T (T) is paying close to 7%, Altria (MO) is yielding over 8%, and Chevron’s (CVX) yield is above 6%. All three of those companies have unequivocally stated their intent to continue paying cash dividends at current levels throughout the coronavirus crisis. And they have the cash flow to do it.

A lot of REITs (real estate investment trusts), MLPs (master limited partnerships), and BDCs (business development companies) are cheap right now, too. With the 10-year Treasury note paying interest at 0.5%, the yield spread is as wide as it has ever been. Opportunities like this do not come along often, so income investors should be loading up these oversold names while they are still cheap.

What’s the biggest area of opportunity you’re seeing?

From a long-term (5-10 year) perspective, I believe 5G (fifth generation) technology stocks offer tremendous opportunities. Soon, a nationwide network of 5G communications will be available to every type of user throughout the United States. That will enable a surge in robotics, artificial intelligence, and IoT (internet of things) applications.

We got a sneak preview of how explosive that growth might be over the past five months as the coronavirus pandemic forced millions of Americans to work and shop from home. As a result, Zoom Video Communications (ZM) saw its share price rise by 400% since the beginning of the year. Extrapolate that type of performance over dozens, or perhaps hundreds, of companies, and you get a sense of what the next decade could look like.

ZM chart

What keeps you up at night?

At the moment, my biggest worry is the degree of political divisiveness in this country. We have the resources to solve any problem, but that requires both parties working together towards a common goal. If nothing else good comes out of the coronavirus crisis, I hope our elected representatives realize they have to work together to get anything useful done. If not, I’m afraid there will be more social upheaval that makes us economically and spiritually weaker as a nation.

I think we can all agree on that. Tell me, are you reading anything interesting you’d like to recommend to our followers?

I wrote an article in April called “Three Books Every Investor Should Read Now” that I believe would be helpful in understanding the long term ramifications of the coronavirus pandemic.

This is not going to be a short-term event. Instead, it is going to have a long tail that will have economic repercussions for many years to come. Those three books are:

  • The Great Influenza, by John M. Barry
  • The Splendid and the Vile, by Erik Larson
  • Upheaval: Turning Points for Nations in Crisis, by Jared Diamond

Of those three books, the one that may seem out of place is The Splendid and the Vile since it discusses the early years to World War 2. However, I believe the same type of bunker mentality that got Great Britain through the darkest days of the war will be necessary to get us through the current crisis and come out the other side in one piece. To do so, we must remain committed to using every resource at our disposal to win this war.

I want to thank Jim for joining me today. We covered a lot of ground in a short amount of time, so we’ll have to check back in with Jim at another time in order to explore his thinking further.

In the meantime, there’s never been a better time to join Jim and his followers over at Personal Finance. In uncertain times like these, it’s good to know that an analyst like Jim isn’t afraid to make bold moves like cashing out monster gains on Apple or telling readers to prepare for another correction.

And for a limited time, Jim is also showing readers how they can potentially collect an extra $1,569 in extra “benefits” under a little-known legal loophole. To learn more about it, check out this special report.