Are global markets in a bubble?

In case you missed it, the International Monetary Fund (IMF) recently warned for a sharp adjustment (read: downward correction) in the financial markets. And the IMF is not alone, several organizations have indicated that the party (on Wall Street) might be over soon. And they might have a point. Financial assets have soared significantly over the past ±10 years. Don’t believe me? Just look up any US Tech stock and you’ll see a near exponential graph.

Furthermore, brokers have seen their client base grow significantly (yes, BUX too!). In the Netherlands, the number of households investing has increased by 17% to 1.75 million in 2020 compared to the year before (FD 2020). The improved accessibility to the financial markets seems to push stock prices up and increase price volatility. This, together with the increased willingness to take risks by retail investors, has pushed markets to record-high levels. Software firm Yodlee even observed that in the US, a significant part of the social checks that are part of the government’s Covid-19 support for households is injected straight into the stock market. More importantly, Central Banks, most notably the ECB and the FED, are buying bonds (public+private) and ETF’s on a mass-scale, to keep the economy from sliding into a depression. Meanwhile, Rating agencies like Moody’s, Fitch, and Standard and Poor’s have adjusted their ratings on several companies in the S&P 500 downwards. As a result, it is harder for companies to attract new credit, potentially hurting their business.

At the same time, interest levels are at historic lows and public and private debts are rising around the world. The markets seem to disconnect more and more from the real economy. Apart from most tech stocks the pandemic has hurt many companies significantly. This leads to the question of whether the current stock prices are justified. Is it a logical consequence of the enormous increase in the money supply and government spending? Investors do not seem to care at the moment. Stock and housing prices are approaching all-time highs. The big question is whether these levels are sustainable.

Or is it just a matter that the economy post corona is already priced in and enormous growth is to be expected? Let us know what you think!

4 Likes

If upward trends on the stock market are by definition a sign of a bubble forming, then we’d be screwed all the time. I see your point and I can see why the IMF warned for this, but you basically already answered your own question. Interest is at its lowest point in history and more people are looking for ways to do something with their money. It’s not strange for stocks to go up in that case. Yes, volatility is definitely a bigger risk with all the amateurs entering the playing field. Then again, institutional investors, hedge funds and experienced private investors will remain the ones who provide a stock with a support level.
As such, I do notice myself being more careful when investing in a stock, but I’m not so worried about a complete collapse and definitely not one of such proportion.

2 Likes

Thank you for the reply!

Interesting view, and yes I guess it’s true. Stock markets have more or less been going up forever when taking a big picture view.

However, I do think that the financial markets should give a good indication of how the real economy is performing. To say the least.

Last few years (and Covid-19 has accelerated this trend), the market vs the real economy does seem to grow apart. Also, is money flowing into the stock market because investors are very positive about the future outlook of certain companies, or is it because their money doesn’t have any other place to go to?

Formulating this differently:

Is it better to keep your money at your bank account (and watching your euro’s being slowly eaten away due to negative interest rates + inflation), OR, do you invest in the stock market which could be considered as relatively expensive?

Just sharing my thoughts here :smile:

4 Likes

Overall, the stock market is indeed in a bubble now. Most companies trade at (relatively) high historical PE ratios and other stocks (which I won’t name) trade at blatantly euphoric and irrational future expectations.

There is still value to be had, mostly in the (currently) lagging sectors like REIT’s, Utilities and financials for instance.
Tech etc. are currently the most risky part of the bubble and stand a lot to lose once the correction comes.

Do I think the stock market is in a bubble?

Yes, and No let me explain why.

Market’s will always want to have bullish sentiment.

Currently, we are at all-time highs as you have probably noticed but there is a good reason which is able to support this behavior. First of all retail traders have completely exploded. Look at the revenue from E-Toro, Robinhood, BUX??? if you look at the data they published there has been a lot more trading activity. Combine this with Stimmy checks and people being bored at home. BOOM Bull run achieved.

If you look at the great depression for example we saw a huge freak out after the bank back in the day raised interest rates and a collapse that kept feeding on its self as a downward spiral. Growing bond yields is one of the biggest reasons the NASDAQ in the past few weeks has been hit hard.

Personally, I don’t think the market is acting up all that weird. After all, it’s a very uncertain time to be alive with current events going on.

But I do have created this way of thinking because I am only 24 at this point and I am not using leveraged trading. I can survive a “lost decade” if the market would collapse since there is not that much at stake for me. If the market would collapse I would just continue buying in which would lower my average price of the stocks I bought at all-time highs.

Long term I am very bullish. But if you’re retirement fund is on the line I can’t blame you for panicking a little.