Hong Kong's Wonder News Agency reported that the stunning rally in the U.S. stock market coupled with the frenzied speculation by amateur investors has sparked fears among Wall Street veterans about a bubble that could rival any other in the last century. But with the help of the authorities' enormous liquidity, the bubble may not burst as quickly as one might think.
Major U.S. stock indexes rebounded sharply after plunging in March and hit record highs in early 2021. The S&P 500 has risen about 67% since bottoming out last March. Hot stocks like Tesla continue to defy the rising valuation concerns.
Seth Klarman, founder of hedge fund Baupost Group, warned that stimulus measures by the Fed and the U.S. government have misled investors into thinking that market risks are "gone, like boiled frogs."
Jeremy Grantham, founder of GMO, an asset management firm known as the "master of value investing," described the stock market's rally since 2009 as an "epic bubble" characterized by "extreme overvaluation."
Fund managers are constantly on the lookout for pullbacks. However, given the unprecedented monetary and fiscal support that underpins the market, bond yields are near historic lows, and institutional and retail investors are sitting on large amounts of cash, the supernatural pattern of the stock market is likely to continue for some time.
David Older, head of equities at Carmignac, said: "The timing of the end of this bubble is difficult to determine. It can last longer than you think. I don't think there will be a big drop... However, we have become more cautious. ”
Analysts at Absolute Strategy Research (ASR) produced a list of bubble indicators in a mid-January report that placed the current rally in U.S. growth stocks with the rise and fall of Japanese stocks in the 1980s, the ups and downs of Internet stocks in the late 1990s, and the long rise and fall of commodity stocks in the first decade of the century.
Common features include low interest rates, relatively high valuations, runaway retail trading, and a rapid acceleration in stock gains. In terms of these points, the current situation of the US stock market is worrying. The ARS notes that more than 10 percent of S&P 500 constituents are 40 percent or more above the past 200-day average, a phenomenon that has only occurred four times in the past 35 years.
"Customers are increasingly worried," said Ian Hartnett, CO-founder of ASR. But he added that if interest rates remain low and fund managers are under pressure to follow suit, the rally may have only just begun. "Missing out phobias pose occupational risks. People always find ways to rationalize every bubble. They have to explain to the chief investment officer or the investment committee why they are going long at this time. ”
Some point out that the surge in trading among less experienced amateur traders is particularly noteworthy. Carmignac's Olde said that in the United States, people have switched to the stock market due to casino closures and the suspension of many sporting events, with most of the investment focused on "super-fast-growing" stocks such as electric vehicle manufacturers, "where there is no upper limit to valuations."
But even with these warning signs, investors are in no hurry to retreat, in part because the surge in retail trading may not be as troubling as it may seem. Unlike previous periods of high-profile retail trading mania, analysts and fund managers suspect that the current rally could be stronger, making it less likely that households will suffer huge losses.
Salman Baig, unigestion's multi-asset investment manager in Geneva, said that now household savings levels are high and people are accumulating cash balances... "In our view, it's not like a bubble." And some expensive stocks may have meaningful corrections."
Optimists also stress that professional investors have not shown the same risk-taking attitude, and instead continue to take precautionary measures to prevent market setbacks.
The Chicago Options Exchange Volatility Index (VIX), which reflects a hedge against sharp swings in U.S. stocks, closed at 21.91 on Friday (Jan. 22), compared to 14 at the beginning of last year. The long-term average of the index is just below 20.
Andrew Sheets, a cross-asset strategist at Morgan Stanley, said: "People are still nervous enough about future volatility, which shows that people are not going all out. ”
This is the same as the precursor to previous market shocks. Still, many investors argue that unless central banks withdraw their support or an inflation outbreak hits bond markets hard, it's hard to imagine anything that could trigger a sharp reversal in risk assets.
Michael Kelly, head of multi-asset investment at PineBridge Investments, said: "In 2021, the market will continue to move higher as earnings are increasing and excess liquidity is still surging. We are in the midst of structural capital growth due to rising savings rates and, more importantly, quantitative easing. This has never been the case before. He believes that it will take at least a decade to eliminate.