I am not sure if we are in the bottom of the ninth inning with two outs or perhaps just the eighth inning. Regardless, the end of the crazy valuations for high-tech stocks is close to over. Many of the current popular mutual funds and ETF’s are filled with potential tech-wreck stocks. They are probably accidents waiting to happen. As inflation and interest rates move up, bonds and stocks will suffer a severe correction.

There are times in investing when you need to get out of the way of the investing public. This is one of them. The investing public includes many professional money managers. Greed takes over and they do what they think is astute investing. It is not astute, it is just momentum chasing. Everyone appears to be making money and they want in. When I see otherwise conservative senior citizens, anxious to buy high valuation stocks based on the expectation of the price continuing to go up, it tells me we are close to the end. Currently the public appears fearless. Many current investors have never seen a bear market or its results. Charles Schwab reports new accounts are at a record high and are at levels not seen since the dot.com boom of the late nineties. Bank of America’s wealth management division reports a recent survey of high net worth clients finds cash balances at an all-time low of 10.4%. Machines are trading accounts based on moving averages and computer programs rather than fundamentals. ETF funds continue to attract large amounts of capital without the investors knowing how the fund works. Forty-one years of experience in the investment field tells me all the above is not healthy for the investment markets.

Interest rates set the capitalization rates for stocks. The higher the interest rate the lower the valuation put on stock earnings. Inflation rates help to set the general level of interest rates. Both inflation and interest rates are currently moving higher albeit at a slow pace. The true level of interest rates is being artificially held down by the Central Bank of Europe. When this manipulation ends, the markets will determine the true level for interest rates on 10-year German, Spanish, Italian and French bonds. The new level will be significantly higher than today. This will also move interest rates up in the U.S. as world buyers slow their purchases of U.S. bonds in favor of the much higher rates in Europe. This is before the U.S. Federal Reserve Bank begins to unwind their massive bond buying program. The Fed is on record as saying they will begin in the fall of this year. This will only put additional pressure on interest rates to move higher.

Three stocks to remember from the early seventies are:

Polaroid. Disruptive technology with an instant camera that would revolutionize our daily lives. Stock fell 91% when the obvious came forward. Great invention but, didn’t change daily lives. Everyone seemed to buy one then moved on to something else.

Xerox. Disruptive technology. Fantastic copying machines that changed every day work in the office. Put makers of carbon paper out of business and some typewriter firms. Stock fell 71% when customers stopped buying upgrades. The second and third generation copying machines clients purchased, were good enough for them. They had no desire to spend the money to buy another new one. Japanese firms also entered the market with quality machines at cheaper prices.

Avon. Disruptive technology. The first king of “home delivery”. What a great concept. Present the product so people can select items from the comfort of their home. No need to go to a store. Your merchandise is delivered to your house. Avon was going to put all stores out of business as they expanded to more and more products. Stock fell 86% from its high when consumers tired of the service and went back to shopping in the store.

(Years later this same “home delivery” story was repeated when the stock price of “The Home Shopping Network” soared. The common thinking of the day was consumers would sit in the comfort of their home and buy all types of products as presented on TV. Best part of the story was they received home delivery. No need to go to the store. Sometime later the stock price crashed. Turns out HSN had trouble making money doing home delivery on average products. They needed high margin products to make money, namely jewelry. Consumer habits also changed and for most consumers buying at home lost its appeal.)

The stock market is up over 15% for 2017 when the high-flying tech stocks are included. Without that group, the market is up approximately 5%.

The era of super low interest rates encouraging people to buy stocks (TINA. There is no alternative), is about over. We are accelerating our opinion with stock and bond prices at record highs, it is a great time to be cautious and remember that things can sometimes go an unexpected direction.