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This article is the first in FT’s Runaway Markets series.
Screaming stock rallies and savage speculation from avid amateur investors are raising concern among market veterans about a bubble that rivals anything seen in the past century.
After a dramatic rebound from the coronavirus crash last March, benchmark stock indexes reversed a series of record highs in early 2021. Bitcoin, the most speculative bet of all, has reached new extremes. Popular stocks like Tesla continue to challenge sober valuation efforts.
The founder of the Baupost group, Seth Klarman, has warned that investors have the misplaced impression that the risk in the markets “has simply disappeared”, likening them to slowly boiling frogs. GMO co-founder Jeremy Grantham has described the rally since 2009 as a “epic bubble“Characterized by” extreme overvaluation “.
Fund managers are on the alert for a pullback. “It’s hard to time the end of this foam. It may last longer than you think. I don’t see a huge movement below. . . But we have become more cautious, ”said David Older, Equity Manager at Carmignac.
But with markets floating on an unprecedented wave of monetary and fiscal support, bond yields have reached historic lows and investors – institutional and retail – sitting on piles of excess liquidity, bizarre stock market patterns could persist. for a certain time.
In a note in mid-January, analysts at Absolute Strategy Research produced a checklist of bubble indicators, situating the current rally in US “growth” stocks in the same context as the boom and fall in US “growth” stocks. Japanese stocks in the 1980s, the sharper rise and fall of dotcom stocks in the late 1990s, and the long back and forth of commodity stocks in the first decade of the 2000s.
Common features include low interest rates, stock valuations that exceed earnings, rampant retailing, and rapid acceleration in stock gains. On all these points, the current market conditions appear alarming. ASR points out that more than 10% of stocks in the benchmark US benchmark S&P 500 are 40% or more above their last 200 days average – a phenomenon seen only four times in the past 35 years.
“Customers are increasingly concerned,” said Ian Hartnett, co-founder of ASR. But, he added, the rallies might just start, if interest rates stay low and fund managers feel pressure to jump on the bandwagon. “There’s a career risk in the fear of missing out,” he says. “People find a way to streamline every bubble. They have to explain to an investment manager, or an investment committee, why they stayed here for a long time.
Fugitive markets
In a series of articles, the FT examines the exuberant start of 2021 in global financial markets
Some point to the explosion of trading by inexperienced amateurs as a particular concern. These investors, viewed as “weak hands” by professional fund managers, intolerant of losses and quick to exit bets, gained momentum as foreclosure boredom encouraged them to commission-free trading offered by startups. -ups like Robinhood.
In the United States, Americans are turning to stocks because “the casinos are closed. [and] a lot of sports are closed, ”Older told Carmignac. Much of their investment, he noted, is focused on “hyper-growing” stocks such as electric vehicle manufacturers. “There is no valuation cap for these companies,” he said.
But even with all of these warning signs, investors aren’t rushing for exits. Part of the reason is that the retail boom may be less troubling than it looks. Unlike previous high-profile episodes of retail exuberance, analysts and fund managers suspect the current fight could be more robust and less likely to overwhelm households with huge losses.
“It’s important to remember how retail investors finance these purchases,” said Salman Baig, multi-asset investment manager at Unigestion in Geneva, contrasting with events such as the 2015 Chinese bubble, where a surge in funding over Margin drove stocks higher before a crash.
“Today, household savings are high,” he added. “People have accumulated cash balances. . . It doesn’t seem like a bubble to us. Rather, there are expensive stocks where a significant correction could be made. “
Optimists also point out that professional investors do not exhibit the same brash attitude towards risk-taking: on the contrary, they continue to take precautions against the risk of a market downturn. The Vix volatility index, a reflection of the hedging against sudden movements in the US stock markets, is over 23 points, compared to a long-term average of just under 20. At the start of last year, it was 14 points.
“The fact that people are still quite nervous about future volatility suggests that people don’t quite agree,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley.
The echoes with the previous precursors of the market shocks are strong. But unless there is an almost unimaginable withdrawal of central bank support, or a surge in inflation that is seriously shaking the bond markets, many investors agree that it’s hard to imagine what could trigger a significant reversal of risky assets.
“I don’t think the bubble bugles recognize why stocks are so expensive,” said Michael Kelly, head of multi-asset investments at PineBridge Investments. “In 2021, markets are going up because profits are going up and excess liquidity continues to rise. We are in structural capital growth due to the rising savings rate and, in addition, quantitative easing. We’ve never had this before. It will take at least a decade for this to unfold, he believes.
Additional reporting by Ian Smith
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