When the valuation of the market is high, a portfolio manager looking to allocate available cash is a bit like General Zaroff stalking fellow big-game hunter Sanger Rainsford in the O’Henry award-winning short story “The Most Dangerous Game” by Richard Connell. In the famous story, Rainsford, on his way to hunt jaguar in the Amazon, falls off his ship and swims to Ship-Trap Island where he encounters Zaroff, who forces him to be his quarry on a manhunt in the jungle.
Rainsford proceeds to set various traps around the island hoping to snare Zaroff including a Malay Mancatcher, a Burmese Tiger Pit and a Ugandan Spring Trap1. If you would like to know what each are, try to imagine various man-made and creative ways you might become impaled in a jungle.
Drinking the water in a jungle of stocks when the S&P 500 is at its lowest dividend in history at 1.21%2, (meaning the rising value of the stocks has shrunk the dividend percentage that’s paid out based on the higher price in the stock), has its own dangers. In other words, when the S&P 500 dividend yield is the lowest in history, the valuation of the stocks is highest relative to the income, which is at its lowest. For us it means you look before you leap and even then, you very lightly put your foot down to test the ground – you don’t put your weight on it. In managerspeak that means you don’t weight your allocations too heavily as it’s very hard to know if you are about to spring a trap a step ahead of you.
To illustrate the point, take the case of semiconductor stocks earlier in the year. The threat of the Chinese development of low-cost DeepSeek in late January, hammered the semiconductor and Mega cap tech stocks, even taking market king Nvidia from all-time highs to down 17% in one day3. Today we’re seeing evidence of faltering momentum as the cult-followed Palantir, a stock at a PE of 185 FWD and up 338% over the last year, is down 9% in the blink of an eye with reports of a reduced Department of Defense budget. It’s a bad day to be a cruise line as the major lines have run aground after Commerce Secretary Lutnick foreshadowed the intent of the administration to finally tax the industry which has so far used offshore status to evade Uncle Sam on the high seas. In response, Royal Caribbean lost 11% today, while Norwegian dropped by 10%. (The latter must have been my fault for cancelling my cruise with them yesterday. My bad.)
The point is that expectations for growth are so high while valuations are so stretched that it creates a volatility in which it only takes the hint of a leaky boat that may never come to port for everyone to jump ship. (OK last pun). There’s a higher likelihood of loss everywhere you look, so while we love to hear positivity radiating from our clients in our meetings, just remember that these high expectations may come crashing against high market valuations at some point soon. We’re not the only ones blowing the foghorn at the moment (OK one more), but we are likely in the minority. Time will tell the tale. There are alternative strategies that may serve you well during volatile environments such as our Monthly Cashflow Strategies that focus on income (with the volatility even increasing that income) while allowing you to ring the register by selling some growth positions.
We love to hear your optimism in our meetings. But let’s put it like this: we’ve just sent someone up into the Crow’s Nest to look out for the lighthouse. So, hear us when we tell you that there’s a storm on the horizon and the rocks may be closer than you think …
If you listen to us, we’ll change your financial world …
Sincerely,
The WTA Investment Committee
Sources:
2https://www.multpl.com/s-p-500-dividend-yield/table/by-year
3https://www.cnbc.com/2025/01/27/nvidia-sheds-almost-600-billion-in-market-cap-biggest-drop-ever.html
