Connect with us

Uncategorized

Markets Look Like They’re in a Bubble. What Do Investors Do Now? – The Wall Street Journal

https://www.wsj.com/articles/markets-look-like-theyre-in-a-bubble-what-do-investors-do-now-11612089001

For once, everyone seems to agree: Much of the market looks like it’s in a bubble.

To many, valuations look stretched as they hover at levels similar to the highflying days of 2000. That said, high valuations alone don’t necessarily mean the rally is near its end, investors say. History has shown that markets have often been able to climb far longer than thought possible, be it the dot-com boom in the late 1990s or the dizzying rise in Japanese stocks in the 1980s.

And recently, the broader stock market has been on the decline. The S&P 500 dropped 3.3% last week, though it remains up 66% from its March low. The bubblelike behavior there has mostly been contained to a handful of individual stocks, not larger indexes.

An even bigger issue arguing against a marketwide bubble is simple math. With interest rates at rock bottom and further stimulus on the table, many investors are being handsomely rewarded by putting their money into riskier, higher-yielding assets. What’s more, in many cases earnings have held up or been robust, despite a global pandemic.

That combination of factors has helped push investor optimism. Bullishness on stocks among money managers is at a three-year high, according to a recent

Bank of America

survey of 194 money managers who oversee $561 billion in assets. Meanwhile, the average share of cash in portfolios—typically a safeguard against market turmoil—is at the lowest level since May 2013.

Nonetheless, investors are trying to identify what could cause bubbles among individual stocks to pop and whether any of the bursts will spread to the wider market. Next week, investors will get a look at fresh data on the manufacturing sector, earnings from

Amazon.com Inc.


AMZN -0.97%

and Google parent

Alphabet Inc.


GOOG -1.47%

and the January employment report.

“You know, this one has checked off all the boxes from a history book,” said

Jeremy Grantham,

co-founder of Boston money manager Grantham, Mayo, Van Otterloo & Co., who predicted the market crashes of 2000 and 2008. Mr. Grantham has been calling the current market overheated since last year.

SHARE YOUR THOUGHTS

Do you believe the current market exuberance is ready for a reversal or that it could stretch on for longer than previous cycles? Join the conversation below.

But even he concedes the timing of a market top is difficult.

“We know each bubble is a little bit different and, with the help of new trading platforms and the internet, it could set more records,” he said.

Mr. Grantham isn’t alone in his worries. Nearly 90% of some 627 market professionals think some financial markets are in a bubble, according to a recent

Deutsche Bank

survey. Meanwhile, Google searches for the term “stock market bubble” reached an all-time high in January.

Jerry Braakman,

chief investment officer of First American Trust, says his company, concerned about stretched valuations in the U.S., has been gradually shifting more money into stocks elsewhere.

Lately, “the market has not been correlated to the macro picture,” he said.

While the moves of some stocks and assets have been jarring, analysts and investors say they aren’t surprised by the freewheeling, speculative activity in the financial markets.

A super-accommodative Federal Reserve, low interest rates and, more recently, optimism on the coronavirus vaccine and economy have underpinned much of the buying by investors during the past 11 months. Many Americans built up their savings during the pandemic—and stand to gain even more if Congress follows through on another stimulus package. And the prospect of low returns in most other assets has driven investors to buy stocks more aggressively.

Add to that, more individual investors are trading than ever before. Those investors threw their weight around last year by shocking Wall Street veterans with a rash of irrational stock picks, including

Hertz Global Holdings Inc.,


HTZGQ 7.36%

which spiked nearly 900% from its low to its high in the wake of filing for bankruptcy protection.

This year’s encores have been even more stunning. On Wednesday alone, 24.5 billion shares and 57.1 million options contracts changed hands, a record driven by individual investors, according to

Rich Repetto,

a managing director in Piper Sandler & Co. GameStop shares more than doubled that day, briefly giving shares of the beleaguered videogame retailer a more than 1,700% gain since the year’s start.

“This is merely one example of what’s becoming dozens of dozens,” Mr. Grantham said. Other retail darlings include AMC, which jumped more than 300% Wednesday, and

BlackBerry Ltd.

, whose stock the same day notched its biggest gain in more than 17 years.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Companies are rushing to get in on the action.

Companies have raised $13.4 billion through 24 IPOs so far this year, a 300% jump in listings from the same period last year, according to Renaissance Capital data. Blank-check companies continued to flood the market, with 91 gathering about $25 billion, nearly a third of the value raised throughout all of last year, according to SPACinsider.com. And there have been 111 offerings of additional shares by U.S.-listed companies, doubling the number from the same period a year earlier, Dealogic data show.

Usually, such frenzied activity would lead big money managers to pull back from stocks. But many argue that shares of GameStop, AMC and other highflying stocks represent their own bubbles—and don’t pose a threat to the entire financial ecosystem. Analysts at

Goldman Sachs Group Inc.


GS -1.40%

say the run-up in unprofitable stocks, which they say make up about 5% of the overall market, poses little risk of contagion.

“These stocks don’t make up the bulk of the stock market,” said

Samantha McLemore,

a portfolio manager at $3.5 billion money-manager Miller Value Partners. “There are so many areas of the market that we’re finding attractively valued.”

At first glance, investors’ go-to for measuring valuations, price-to-earnings ratios, suggests the market looks expensive.

The S&P 500 currently trades at 22 times projected earnings during the next 12 months, not far off from the 25 times the index traded at in 2000, just before the dot-com crash, according to FactSet.

But that’s only part of the picture. That level looks less concerning once low interest rates and earnings, which are expected to grow, are factored in, several investors and analysts said.

One simple explanation for why investors haven’t pulled back more?

“We’ve seen it in the past—if you think you have a bubble and sell too soon, that can be a very costly trade,” said Mr. Braakman of First American Trust.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and Akane Otani at akane.otani@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Exit mobile version