Markets seem to be bubbling. What are investors doing now?

To many, the valuations seem to be stretched while hanging at levels similar to the high-flying days of 2000. That said, high valuations alone do not necessarily mean the rally is coming to an end, investors say. History has shown that markets have often been able to climb much longer than might have been thought, whether the dot-com boom of the late 1990s or the staggering rise in Japanese equities in the 1980s.

And recently, the broader stock market has declined. The S&P 500 fell 3.3% last week, although it was 66% higher than in March. The bubbling behavior there is mostly limited to a handful of individual stocks, not larger indices.

Another bigger problem to argue against a global bubble is simple math. With interest rates at the bottom and further stimulus on the table, many investors are nicely rewarded by putting their money in riskier assets with higher returns. What’s more, in many cases, earnings have persisted or remained strong despite a global pandemic.

This combination of factors has contributed to investors’ optimism. According to a recent Bank of America survey among 194 money managers who oversee $ 561 billion in assets, money management among managers is at a three-year high. Meanwhile, the average cash share in portfolios – usually a protection against market turmoil – is at its lowest level since May 2013.

Nevertheless, investors are trying to determine what bubbles may form under individual stocks and whether any of the bars will spread to the broader market. Next week, investors will look at new data on the manufacturing sector, the earnings of Amazon.com Inc..

AMZN -0.97%

and Google parent Alphabet Inc..

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and the January Employment Report.

“You know, this one looked at all the subjects from a history book,” said Jeremy Grantham, co-founder of the money manager of Boston, Grantham, Mayo, Van Otterloo & Co., who described the market crashes in 2000 and 2008 forecast. Grantham mentions that the current market has been overheated since last year.

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

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

Mr. Grantham is not alone in worrying. According to a recent Deutsche Bank survey, almost 90% of the 627 professionals believe that some financial markets are in a bubble. Meanwhile, Google reached a peak after the term ‘stock market bubble’ in January.

Jerry Braakman, chief investment officer of First American Trust, says his company, which is worried about protracted valuations in the US, is gradually moving more money to equities elsewhere.

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

Although the movements of some stocks and fluctuations have been shocking, analysts and investors say they are not surprised by the free, speculative activity in the financial markets.

A super-accommodating Federal Reserve, low interest rates and more recently optimism about the coronavirus vaccine and economy have supported many of the purchases by investors over the past 11 months. Many Americans have built up their savings during the pandemic – and they could win even more if Congress follows a different stimulus package. And the prospect of low returns in most other assets has led investors to buy more aggressive stocks.

In addition, more individual investors are trading than ever before. Investors lifted their weight last year by shocking Wall Street veterans with a rash of irrational stocks, including Hertz Global Holdings Inc.,

HTZGQ 7.36%

which protected almost 900% from the lowest to the highest in the wake of the bankruptcy application.

This year’s worship was even more amazing. According to Rich Repetto, managing director of Piper Sandler & Co., GameStop shares exchanged 24.5 billion shares and 57.1 million option contracts on Wednesday alone, and the beleaguered shares more than doubled in the short term. a profit of more than 1,700% since the beginning of the year.

“This is just one example of what tens become tens,” said Mr. Grantham said. Other favorite cats include AMC, which rose more than 300% on Wednesday, and BlackBerry Ltd.

, the share of which on the same day achieved its largest profit in more than 17 years.

Companies are rushing to enter the action.

Businesses have raised $ 13.4 billion so far this year through 24 IPOs, according to Renaissance Capital data, a 300% increase over the same period last year. Blank check companies continued to flood the market, with 91 raising about $ 25 billion, which according to SPACinsider.com raised nearly a third of the value increased throughout the year. There are 111 offers of additional shares by US companies, which doubled in number in the same period a year earlier, according to Dealogic data.

Usually, such insane activities would lead to big money managers withdrawing their shares. But many argue that shares of GameStop, AMC and other high-flying stocks represent their own bubbles – and do not pose a threat to the entire financial ecosystem. Analysts at Goldman Sachs Group Inc..

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says the run-up to unprofitable stocks, which they say accounts for about 5% of the total market, poses little risk of contagion.

“These stocks do not make up the bulk of the stock market,” said Samantha McLemore, portfolio manager of Miller Value Partners, a $ 3.5 billion cash manager. “There are so many parts of the market that we really appreciate.”

At first glance, investors’ depreciation of valuations and price-earnings indicates that the market looks expensive.

The S&P 500 is currently trading 22 times projected earnings 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. It looks less like once low interest rates and earnings, which are expected to rise, are taken into account, several investors and analysts said.

One simple explanation why investors have not retreated anymore?

“We’ve seen it in the past – if you think you’re bubbling and selling too fast, it can be a very expensive trade,” he said. Braakman of First American Trust said.

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