NEW YORK (AP) – Now, even Wall Street professionals are wondering if the stock market has risen too much.
US stocks have been almost non-stop since March, rising by about 70% to record heights and causing outsiders to say the market had lost touch with the reality of the pandemic. But Wall Street continued to justify the gains by pointing to massive support from the Federal Reserve, the lifeline delivery of COVID-19 vaccines, and Congressional efforts to boost the economy further.
Recently, however, some of the stock in the market has become more difficult to explain and not just GameStop’s manic moves. Some investors are so hungry for huge rewards that they invest in investments without knowing where their dollars will go. And, by some measures, the broad stock market seems more expensive than before the fall of 1929.
All the fervor makes Wall Street openly debate whether the market is in a dangerous bubble, after months of wasting the opportunity.
A bubble is what happens when the prices of something run much, much higher than they should be rationally: they have been a common thing throughout history, dating back to the tulips in the seventeenth century and to pets.com at late twentieth century.
“As a market historian, it is a privilege to once again experience a major stock market bubble,” wrote in a recent paper the famous stock investor Jeremy Grantham, who has correctly named several major market turning points. “Japan in 1989, the technical bubble of 2000, the real estate and mortgage crisis of 2008 and now the current bubble: these are the four most significant and captivating investment events of my life.”
Of course, most professional forecasters say the US stock market is not heading for a fall, but is getting slower returns than before. But these optimists need to do more work to convince others.
“You could say there is a bubble when people think the market is going up, but they worry it might fall,” said Robert Shiller, a Yale professor who won a Nobel Prize for his work explaining the movements of the stock prices. “This is where we are.”
He said the market seems vulnerable, but warned that some hallmarks of a classic bubble are not present today, such as investors talking about a “new era” for the economy. He also said it is difficult to predict when the market will run out of momentum and go down.
“People often extrapolate trends and continue more than ever thought,” he said. “And then they disappear.”
The following are the causes of concern that drive the bubble debate:
FRENZY DAY TRADE
– The most obvious example of Wall Street’s oversupply now is GameStop shares, which shot up 1.625% in January. The shares of the troubled video game retailer have since fallen, but remain well beyond a price that Wall Street analysts say is rational based on its profit prospects. Other companies that have lost money have also increased, demonstrating the ease with which some investors raise the prices of an investment, despite its risks. And with smaller investors driving much of the stock, experts make comparisons with the shoe worker giving stock advice in 1929.
NO DISCOUNTS TO FIND
– Perhaps more worrying is that prices have skyrocketed across the stock market at a much faster rate than corporate profits. The two tend to follow each other long-term, so large dissociations give pause. One of the measures popularized by Shiller de Yale analyzes the price of the S&P 500 against the profits produced by companies in the previous 10 years, adjusted for inflation. Since 1881, it has only once been more expensive than it is now, during the dot-com bubble. He approached just before the crash that helped start the Great Depression.
IPWhoa
– The massive support of the Federal Reserve means that dollars are spreading through markets looking for investments and young companies that are losing money are rushing to take advantage by selling their shares to the public for the first time. Companies raised more than $ 60 billion last year through IPOs of their shares, the highest since the dot-com bubble peaked in 2000, according to data compiled by Jay Ritter at the University of Florida. Within technology companies, only 19% of IPOs were for profitable companies last year, compared to the more typical 49% of the last two decades.
SPAC, CRACKLE, POP?
– The fervor to invest in the next hot young company is so voracious that some CEOs completely skip the IPO step. Instead, they are sold to companies armed with cash by investors and in charge of finding young companies that do not yet have shares traded on the public market. These special purpose acquisition companies or SPACs have exploded in popularity. Last year, SPACs raised $ 76 billion from investors, up from $ 13 billion the previous year. In the first three weeks of 2021, they raised another $ 16 billion, according to Goldman Sachs.
Despite all the worries, much of Wall Street remains optimistic and expects more gains in advance.
COVID-19 vaccines have raised expectations that daily life will return to normal this year and return the economy to health. If profits rise sharply and stock prices only make modest moves, prices would seem more reasonable, and that is precisely what much of Wall Street expects to happen.
In early 2018, the market was in the middle of a long and powerful period, and the S&P 500 was almost as expensive as it is now by some measures, which caused a bubble to be talked about. However, the bullish market ignited until the pandemic hit.
Then there’s the Fed. Past bubbles have emerged after the Federal Reserve began raising interest rates in hopes of cooling an overheated economy or markets. For now, the Fed seems to be years away from doing so. It is even said for the first time that it is willing to keep rates low for a while after inflation exceeds its 2% target.
With such low rates, investors don’t have too many options to get good returns out of stocks.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed has virtually indicated to Wall Street that it will not allow a major market recession.
“As long as interest rates are so low,” he said, “it’s hard for me to see how you could make a big stock correction.”