NEW YORK (AP) – Even Wall Street professionals are asking if the stock market has shot too high.
U.S. stocks have been tearing almost continuously since March, with about 70% higher than record highs, prompting outsiders to say the market has lost touch with the reality of the pandemic. But Wall Street still justified the gains by pointing to massive support from the Federal Reserve, life-saving release of COVID-19 vaccines and efforts by Congress to pump more stimulus into the economy.
Recently, however, some of the market’s actions have become more difficult to explain, and not just the manic moves for GameStop. Some investors are so hungry for big payouts that they radiate investments without knowing what their dollars are going to stretch to. And by some standards, the broad stock market looks more expensive than before the 1929 crash.
All the zeal Wall Street has openly debated over whether the market is in a dangerous bubble, after months of possibility.
A bubble is what happens when prices for something are much higher than it should have been rational: it was a regular occurrence throughout history and returned to tulips in the 17th century and pets.com at the end of the 20th.
“It is a privilege as a market historian to once again experience a major stock bubble,” well-known investor Jeremy Grantham, who rightly mentioned several key turning points in the market, wrote in a recent article. “Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage crisis, and now the current bubble – these are the four most important and exciting investment events of my life.”
To be sure, most professional forecasters say that the US stock market is not heading for an accident, but only a slower return than before. But the optimists need to do more work to convince others.
“You could say a bubble occurs when people think the market is going to rise, but are worried it could go down,” said Robert Shiller, a Yale professor who won a Nobel Prize, for his work on stock price movements. to declare. “This is where we are.”
He said the market looks vulnerable, but warns that some features of a classic bubble are not available today, such as investors talking about a ‘new era’ for the economy. He also said that it is difficult to predict when the market’s momentum will run out and lower.
“People often extrapolate trends, and they go on longer than you ever think,” he said. “And then they disappear.”
Here is an overview of the causes of concern for the bubble debate:
DAY SHOPPING FRENZY
The most notable example of Wall Street’s surplus now is GameStop’s share, which rose 1,625% in January. Shares of the struggling retailer for video games have fallen since then, but remain much higher than a price that Wall Street analysts say is rational based on its profit outlook. Other money-loss companies have also risen, showing how easily some investors raise prices for an investment, despite its risks. And because smaller investors are driving much of the action, experts compare it to the shoemaker who gave shares in 1929.
NO DISCOUNT TO FIND
– Perhaps it is more worrying that prices have risen rapidly higher than the corporate profit in the stock market. The two tend to locate each other in the long run, and large dissociations therefore give silence. One benchmark popular with Yale’s Shiller looks at the price of the S&P 500 versus profits produced by companies over the past ten years, adjusted for inflation. Since 1881, it has been only once more expensive than it is now – during the dot-com bubble. It came close just before the accident that could usher in the Great Depression.
IPWhoa
Massive support from the Federal Reserve means that dollars are searching for investment-seeking markets, and that young and money-losing companies are rapidly benefiting from the sale of their shares to the public for the first time. Businesses raised more than $ 60 billion last year through IPOs of their shares, the most since the dot-com bubble peaked in 2000, according to data compiled by Jay Ritter at the University of Florida. Within technology enterprises, last year only 19% of IPOs were for profitable enterprises, compared to the more typical 49% of the last two decades.
SPACE, CRACK, POP?
The zeal to invest in the next hot young company is so greedy that some CEOs completely skip the IPO step. Instead, they sell themselves to companies that are armed with cash by investors and have the task of finding young businesses that do not yet trade shares in the public market. Such special-purpose procurement firms, or SPACs, have exploded in popularity. Last year, SPACs raised $ 76 billion from investors, up from $ 13 billion a year earlier. According to Goldman Sachs, they raised another $ 16 billion in the first three weeks of 2021.
For all the concerns, much of Wall Street remains optimistic, and still predicts profits.
COVID-19 vaccines have raised expectations that daily life will return to normal and the economy will recover. If earnings rise sharply and stock prices move only modestly, prices will look more reasonable, and that’s exactly what Wall Street expects to happen.
In early 2018, the market was in the midst of a long and powerful run, and the S&P 500 was almost as expensive as it is now, according to some measures, which created a bubble. However, the bull market turned on until the pandemic hit.
Then there’s the Fed. Previous bubbles have surfaced after the Federal Reserve began raising interest rates in hopes of cooling an overheated economy or markets. For now, it looks like the Fed is still years away from that. It is even said for the first time that it is prepared to keep rates low for a while after inflation reaches its 2% target.
With such low rates, investors do not have much choice for good returns outside stocks.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed had told Wall Street quite a bit that it would not allow a major downturn in the market.
“As long as the interest rate is so low,” she said, “it’s hard for me to see how you can fix the stock a lot.”