NEW YORK (AP) – Now even Wall Street professionals are asking if the stock market has touched too much.
US equities have risen almost non-stop since March, rising by about 70% to record heights and causing outsiders to say the market has 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 rescue release of COVID-19 vaccines and efforts by Congress to pump more stimulus into the economy.
Recently, however, some market actions have become more difficult to explain and not just the manic moves for GameStop. 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 market seems more expensive than before the 1929 collapse.
All the ferocity makes Wall Street openly debate whether the market is in a dangerous bubble, after months of eliminating the possibility.
A balloon is what happens when prices for something go up much, much more than it should be rational: they have been a common occurrence throughout history, going back to 17th century tulips and pets.com at the end of the twentieth century.
“It is a privilege for a market historian to experience once again an important stock balloon,” wrote in a recent paper the famous stock investor Jeremy Grantham, who correctly named some important turning points in the market. “Japan in 1989, the technology bubble of 2000, the real estate and mortgage crisis of 2008 and now the current bubble – these are the most important and captivating investment events in my life”
To be sure, most professionals in the forecast say that the US stock market is not heading for an accident, but only slower returns than before. But these optimists need to do more work by convincing others.
“You could say a bubble appears when people think the market is going to rise, but you’re worried it could go down,” said Robert Shiller, a Yale professor who won a Nobel Prize for his work explaining stock price movements. . “There we are.”
He said the market seemed vulnerable, but warned that some features of a classic bubble were not present today, such as investors talking about a “new era” for the economy. He also said that it is difficult to predict when the market will run out of momentum and become smaller.
“People often extrapolate trends and continue more than you ever thought possible,” he said. “And then they disappear.”
Here is a look at the causes of concern that drive the bubble debate:
FRENZY DAY TRADING
– The brightest example of excess Wall Street now is the GameStop stock, which rose 1.625% in January. The shares of the video game retailer have fallen since then, but remain well beyond a price, Wall Street analysts say it is rational based on its profit prospects. Other companies have also lost money, showing how easily some investors raise prices for an investment, despite its risks. And with smaller investors leading much of the stock, experts make comparisons with the footwear worker, offering stock advice in 1929.
NO DISCOUNTS TO FIND
– Perhaps more worrying is the fact that prices have risen on the stock market at a much faster rate than corporate profits. The two tend to follow each other for a long time, so large dissociations pause. A measure popularized by Shiller Yale refers to the price of the S&P 500 compared to the profits produced by companies in the last 10 years, adjusted for inflation. Since 1881, it was once more expensive than it is now – during the dot-com balloon. It approached just before the collapse that helped introduce the Great Depression.
IPWhoa
– Massive support from the Federal Reserve means that dollars are slipping around markets looking for investment, and young, money-losing companies are rushing to profit by selling their shares to the public for the first time. The companies raised more than $ 60 billion in IPOs from their shares last year, the most since the dot-com bubble peaked in 2000, according to data compiled by Jay Ritter of the University of Florida. Among technology companies, only 19% of IPOs were for profitable companies last year, compared to 49% in the last two decades.
SPAC, CRACKLE, POP?
– The fervor to invest in the next young and hot company is so voracious that some CEOs completely ignore the IPO step. Instead, they are sold to companies armed with cash by investors and tasked with finding young companies that do not yet have shares traded on the public market. Such special purpose procurement companies or SPACs have exploded in popularity. Last year, SPACs raised $ 76 billion from investors, up from $ 13 billion a year earlier. In the first three weeks of 2021, they raised another $ 16 billion, according to Goldman Sachs.
For all its worries, much of Wall Street is still optimistic, predicting more gains in the future.
COVID-19 vaccines have raised expectations that daily life will return to normal this year and bring the economy back to health. If earnings go up a lot and stock prices make only modest moves, prices would seem more reasonable, and that’s exactly what a lot of Wall Street expects to happen.
At the beginning of 2018, the market was in a long and strong period, and the S&P 500 was almost as expensive as now, by some measures, which led to talk about a balloon. However, the bull market started until it hit the pandemic.
Then there’s the Fed. Bubbles from the past came 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 the 2% target.
With such low rates, investors do not have many options for good returns out of stock.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed has signaled enough to Wall Street that it will not allow a large market downturn.
“As long as interest rates are so low,” she said, “it’s very hard for me to see how you can make a big stock correction.”