Stock Prices Face Many Challenges

Stocks go up over time and can help improve the wealth of holders. Many understand and appreciate this, and some believe that one should never sell a stock.

I am very bearish on stocks right now and have been since the end of 2022. I feel like my thinking was wrong or very early, though, as stocks rose a lot in 2023 and 2024. The S&P 500 pulled back last week, but it is still up in 2025 so far.

Professionally, I used to be involved in stocks as a portfolio manager at a small firm in Houston and then as an adviser to other professional investors, providing them research. For the last decade, though, I have been devoting my efforts to cannabis stocks. They are in a big bad bear market, but no one cares except for the ones suffering with their prior investments.

I have written here about regular stocks almost a year now. My first piece was a warning about two stocks, NVIDIA (NVDA) and Super Micro Computer (SMCI). NVDA, which I recently shorted again, is up 58%, while SMCI has dropped 48% even after a huge rally recently. I have written several articles about non-cannabis stocks that can be viewed here.

Stock Market Challenges

The market faces many challenges right now - high prices for the very largest stocks that are mainly technology companies, rising rates, and a huge debt load for the federal government. The valuations for the largest stocks seem to make little sense.

Looking at the price action of the S&P 500 and the NASDAQ 100, as represented by the large ETFs SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust, Series 1 (QQQ), the last five years show explosive moves higher:

Of course, we are little below the recent highs, which were both all-time highs. I often mention the Russell 2000, an index for small-cap stocks, and IWM has returned 39.1% during the past five years.

Since the federal elections were announced, stocks are generally higher, though the iShares Russell 2000 (IWM) has dropped:

It's too early, I think, to say the bull market is over, but the things I cited above concern me. I have written about interest rates and the increasing federal debt, most recently on January 12th, when I pointed out that rates were soaring. Since then, while they have been volatile, rates are lower:

The Federal Reserve seems to be done, for now, on cutting Fed Funds, which have declined by 1.25% since September. Over the past year, the 2-year Treasury has dropped, but not by as much as Fed Funds. The longer-term Treasuries yield more today than a year ago!

Valuations for many stocks still look too high to me, and not just the very biggest stocks. There are some retailers too that stand out. Broadly speaking, when I look at the S&P 500, technology and financials stand out as looking expensive to me. These can best be seen by looking at ETFs for the sectors, Technology Select Sector SPDR Fund (XLK) and Financial Select Sector SPDR Fund (XLF). Financials are up 5.0% year-to-date, ahead of the 2.4% return in SPY. Over the past year, XLF has returned more than SPY, which has actually outpaced XLK:

As much as I dislike the NASDAQ 100 and the S&P 500 currently, we are already in a bear market for many stocks, as I have said before. Typically, a 20% decline is considered a bear market in a stock or an index, and a 10-20% decline is considered a correction. I think that SPY and QQQ could drop more than 20%. If they were to retrace 31.8% (a Fibonacci retracement) of their post-pandemic lows to their recent all-time highs, SPY would drop 19% to 488 and QQQ would plunge 20% to 421. Of course, it could get worse!

Investment Ideas

As one who expects stocks to decline, I have positioned my portfolios accordingly. I understand that investors have all sorts of portfolios, and my ideas are broadly for long-term investors with equity exposure looking to reduce their risk.

There is more to investing than just stocks. Bonds have lost favor, but may be appealing to some. There are risks to bonds of rates going higher. When it comes to bonds, I used to be a portfolio manager at a large firm. When it comes to investing, though, I don't really invest much in bonds. The yield curve has steepened but remains relatively flat, meaning that long-term rates aren't that much higher than short-term rates. For those who think that inflation isn't sticking around at all, longer maturity bonds could make sense. For those who expect inflation to stay, shorter-term investments are the way to go. In general, yields can be increased by moving beyond just Treasuries, though corporate bonds and high yield bonds might suffer during a recession. Mortgage-backed securities would suffer if were to rise a lot or to fall a lot.

I really like a certain type of bond, the Treasury Inflation-Protected Securities (TIPS). I last wrote about them in January, and I boosted my weighting in short-term TIPS in the charitable account that I manage through Vanguard to 40%. TIPS are for those who want to protect against inflation, and I have discussed 3 ETFs that are big and appealing to me. Each one is focused on a different part of the yield curve. Here is the 10-year return profile for each of the three TIPS ETFs, a large cash fund and SPDR Gold Trust (GLD):

I actually wrote about PIMCO 15+ Year U.S. TIPS Index Exchange-Traded Fund (LTPZ) at Seeking Alpha, calling it a Buy due to its potential capital appreciation. I like TIPS in general, but see the most opportunity in longer maturity TIPS.

Some may want to buy put options on stocks they own or sell covered calls. I like leveraged inverse ETFs, which can be purchased in IRAs, though they can be very hazardous to portfolios if not handled properly. These include the major indexes as well as some stocks.

I wrote about a book I read about REITs near the end of the year and have been more involved with that sector, a universe I tried to help my readers understand. I don't have any interest in the sector directly (through an ETF), but I am actively monitoring 4 REITs now that I think make sense. REITs can provide good income and can protect against inflation, though inflation can present some challenges for many of them too.

Finally, while I am nervous about stocks, I do own several in my own IRA. They tend to be small-cap and out of favor. There are 8 currently in my IRA, and I own two of these in my trading account. These stock since the end of 2023 are mainly down, while one has increased 16.8% since then. The other seven have dropped 9% to 87%. The S&P 500 since then is has returned 61%.

So, there are things that investors who are bearish on stocks can do: sell stocks and raise cash, use stock options, hedge with inverse securities (or short stocks), rotate away from certain sectors, buy more bonds (especially TIPS), and pick some beaten up stocks to go long. I wish everyone the best!