Markets look like they are in a balloon. What are investors doing now?

For many, ratings seem to stretch as they hover at levels similar to the 2000 flight days. That being said, just high ratings does not necessarily mean the rally is nearing an end, investors say. History has shown that markets have often managed to climb much higher than previously thought, whether it was the dot-com boom in the late 1990s or the dizzying rise in Japanese stocks in the 1980s.

And recently, the wider stock market has declined. The S&P 500 fell 3.3% last week, although it remains at 66% from the March low. Bubble-like behavior there was largely limited to a handful of individual stocks, not higher indices.

An even bigger problem, arguing against a bubble in the market, is simple math. With interest rates at a basic level and additional incentives on the table, many investors are rewarded handsomely, putting their money into riskier, higher-yielding assets. Moreover, in many cases, gains have remained or been robust, despite a global pandemic.

This combination of factors has helped boost investor optimism. Stock bullishness among money managers is at a three-year high, according to a recent Bank of America survey of 194 money managers overseeing $ 561 billion in assets. Meanwhile, the average share of cash in portfolios – usually protection against market disturbances – is at its lowest level since May 2013.

However, investors are trying to identify what could cause bubbles between individual stocks and whether any of the explosions will spread to the wider market. Next week, investors will take a look at new data on the production sector, revenues from Amazon.com Inc..

AMZN -0.97%

and Google parent Alphabet Inc..

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and the January employment report.

“You know, he ticked all the boxes in a history book,” said Jeremy Grantham, co-founder of Boston money manager Grantham, Mayo, Van Otterloo & Co., who predicted the market crash in 2000 and 2008. Grantham called the current market overheated last year.

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

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

Mr. Grantham is not alone in his worries. Almost 90% of the 627 market professionals believe that some financial markets are in a bubble, according to a recent Deutsche Bank survey. Meanwhile, Google is searching for the term “stock market balloon”, which reached a record high in January.

Jerry Braakman, chief investment officer of First American Trust, says his company, worried about widespread U.S. valuations, has gradually moved more money into shares elsewhere.

Lately, “the market has not been correlated with the macro image,” he said.

While the movements of certain stocks and assets have been discordant, analysts and investors say they are not surprised by the speculative free wheel activity in the financial markets.

A super-accommodative federal reserve, low interest rates and, more recently, optimism about the vaccine and the coronavirus economy have supported much of investor buying in the past 11 months. Many Americans have amassed their savings during the pandemic – and will gain even more if Congress continues another stimulus package. And the prospect of low returns on most other assets has led investors to buy shares more aggressively.

In addition, individual investors trade more than ever. These investors shed their weight last year, shocking Wall Street veterans with an eruption of irrational stock selections, including Hertz Global Holdings Inc.,

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which increased by almost 900% from minimum to maximum, following the demand for bankruptcy protection.

This year’s encores were even more amazing. On Wednesday alone, 24.5 billion shares and 57.1 million options contracts changed hands, a record led by individual investors, according to Rich Repetto, a CEO of Piper Sandler & Co. the video game retailer has gained over 1,700% since the beginning of the year.

“This is just one example of what is becoming tens,” Mr Grantham said. Other retail lovers include AMC, which jumped over 300% on Wednesday, and BlackBerry Ltd.

, whose stock on the same day recorded the largest gain in 17 years.

Companies are rushing to take action.

The companies have raised $ 13.4 billion through 24 IPOs so far this year, a 300 percent increase in listings from the same period last year, according to Renaissance Capital data. Empty check companies continued to flood the market, with 91 raising about $ 25 billion, nearly a third of the value collected over the past year, according to SPACinsider.com. And there were 111 additional stock offers by companies listed in the US, doubling the number from the same period a year earlier, Dealogic data show.

Usually, such a frantic activity would lead big money managers to withdraw from stocks. But many argue that the stock of GameStop, AMC and other flying stocks is their own bubble – and not a threat to the entire financial ecosystem. Analysts at Goldman Sachs Group Inc..

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say that the depletion of unprofitable stocks, which is said to account for about 5% of the global market, has a low risk of contagion.

“These shares do not account for most of the stock market,” said Samantha McLemore, a portfolio manager at a $ 3.5 billion Miller Value Partners. “There are so many areas of the market that we find attractive.”

At first glance, investors’ efforts to measure valuations, the price-to-earnings ratio, suggest that the market seems expensive.

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

But that’s just part of the picture. This level seems less worrying when low interest rates and earnings, which are expected to rise, are taken into account, said several investors and analysts.

A simple explanation for why investors did not withdraw further?

“I’ve seen it in the past – if you think you have a balloon and sell it too soon, it can be a very expensive trade,” said Mr Braakman of the First American Trust.

Write to Michael Wursthorn at [email protected] and Akane Otani at [email protected]