On April 4th, the S&P 500 Index (S&P) closed at 4,582, less than 5% off its historic highs. At the time, this somewhat benign drop could have been viewed as 1) A short-term blip, and we would soon be heading higher in no time, or 2) The beginning of a stock market correction as higher inflation reared its ugly head, forcing the Fed’s hand to raise rates. Either direction was plausible.
Another newsworthy event took place on this date. Elon announced (via Twitter, no less) that he had amassed a 9% stake in said company, foreshadowing what was to come… a buyout offer for all of Twitter! This event at the time and now could only be viewed one way… Crazy. I would venture to say this was the jump-the-shark moment for the “easy money” stock market of the past two years (or, shall I say, the past decade-plus). Did Mr. Musk call the proverbial top of the market with his outrageous buyout offer?
From the point of Elon’s announcement, the S&P declined nearly 20% thru mid-June (only to bounce back recently). With all bull markets, they don’t end until stocks are overvalued. And many times, something triggers the subsequent correction. While we kiddingly say The Techno-King called the top, his action was a microcosm of the investment environment's building issue(s) just a few months back. Specifically, two issues that are tied together.
An offer price that overtly overvalued Twitter was issue number one. I don’t think there is a respected professional investor out there who didn’t think his offer was over the top. Not much to discuss here. The second reason is what drove the first… Easy money! Whether it's Elon’s wealth driven by Tesla’s stock price or his ability to make a few calls and secure free to cheap capital (in the form of debt or other investors’ money), Mr. Musk could make this happen overnight.
Elon is just one billionaire dealing with one somewhat defunct company that always has some promise. Time will tell how this one shakes out. But, extrapolate this story to hundreds, thousands, even millions of investors, companies, etc. Easy money has gotten many folks involved in areas they do not belong… can you say “crypto” or “home flipping.” Everything is great until it's not!
Fast forward to today, and the Fed has removed the easy money punch bowl. While high inflation is not the norm, higher interest rates are par for the course. The Fed kept rates abnormally low for way too long, but we all had to know that rates would have to rise at some point. Even with the short-term pain we have and will endure, we welcome a more normal environment with higher rates. Based on Mr. Musk’s recent about-face on Twitter, I’m not sure he welcomes this brave new world (or old & normal) of actual interest rates. Unfortunately, I’m sure he’s not alone.
Note: Nothing in this letter should be considered investment advice, research, or an invitation to buy or sell any securities.