What’s going on: “We’re getting a lot of questions [about] if a bubble is potentially forming in the financial markets, “said Mislav Matejka, head of strategy for global and European equities at JPMorgan, in a note to clients on Monday.
But research teams at major banks are hesitant to sound the alarm, pointing to historically low interest rates and the huge sums of money still being printed by central banks.
“Taking into account the yield on Treasury bills, corporate credit or cash, the aggregate stock market index is trading at a below-average historical appreciation,” Goldman Sachs told clients on Friday.
“With low interest rates and probably so, stocks will continue to look attractive, especially when compared to bonds,” wrote Shiller.
This does not mean that there is no reason to be cautious. Goldman noted that “market pockets have recently appeared to demonstrate investor behavior consistent with a bubble feeling.”
“This is not to say that the ‘hot’ areas of the financial universe may not be much more volatile and may be subject to profit-making spurts, which may even spread to equities more widely,” wrote Matejka.
Both Goldman and JPMorgan highlighted special-purpose acquisition companies, or SPACs, as a potential problem area. In 2020, 229 U.S. SPACs – or “blank check” funds that investors return while looking for takeover targets – raised $ 76 billion, six times more than in 2019, by Goldman. In the first three weeks of 2021, an additional 56 SPACs raised $ 16 billion.
JPMorgan also noted that 2020 was the best year for IPOs since the dot-com boom, while those who made their public debut “recorded unprecedented gains in a short space of time.” Matejka called the movements “surprising”.
There is no sign that this enthusiasm is building. A scaled-down video app that competes with the Chinese version of TikTok is preparing for what is expected to be the largest initial public offering in the world since the pandemic began, reports my CNN business colleague Laura He.
One step back: major investors like Carl Icahn and Jeremy Grantham have expressed anxiety about the state of affairs.
“The long, long bull market since 2009 has finally matured into a full-fledged epic bubble,” Grantham wrote in a letter earlier this month. “With extreme overvaluation, explosive price increases, frantic issuance and hysterical speculative investor behavior, I believe this event will be recorded as one of the biggest bubbles in financial history.”
But banks – although they define some areas of concern and weakness – are not going that far and think that systemic risk remains limited.
Foreign companies withdraw from the US and bet heavily on China
The details: direct investment in the United States by foreign companies plunged 49%, to $ 134 billion last year, according to a report released on Sunday by the United Nations Conference on Trade and Development. In contrast, foreign direct investment in China grew by 4%, to $ 163 billion in 2020.
2020 marked the first year in history when foreign direct investment in China outperformed the United States, the UN said. China is now the world’s largest recipient of investment from foreign companies.
Remember: China’s economy grew 2.3% last year, while the rest of the world’s major economies shrank. The country’s ability to control the spread of the virus “helped to stabilize investment after the initial blockade,” according to the report.
It is important to note that the fall in American investments by foreign companies started well before the pandemic. After hitting a $ 440 billion high in 2015, according to the United States Department of Commerce, foreign investment in the United States has dropped dramatically.
Former President Donald Trump’s autonomous trade policies have hurt foreign investment – especially from China, which has represented the sharpest drop in U.S. investment in recent years. The growing economic uncertainty around the world has also contributed to this.
GameStop shares rocket while Reddit applauds
The most recent: the stock of GameStop, a traditional company whose stores are usually located in struggling malls, shot up 51% on Friday to $ 65.01. They rose another 41% in pre-market trading on Monday, with investors publicizing their shares on social media with increasing zeal. The stock price more than tripled last month.
The hype surrounding GameStop has increased since the company added Chewy founder Ryan Cohen, who is promoting digital reform, to the board. Last week, social media investors increased GameStop’s ferocity when short seller Citron Research outlined the reasons he believed the stock would drop to $ 20.
“We are investors who put safety and family first, and when we believe this has been compromised, it is our duty to abandon action,” wrote managing partner Andrew Left in a letter, citing harassment and hacking attempts.
My reading: we’ve spent the past 10 months talking about how free trading apps like Robinhood are affecting market dynamics – and this episode provides a clear example.
It also talks about what is happening in the financial markets more broadly. Day traders, watching the meteoric stock boom despite the pandemic, are convinced that bets like GameStop can pay off. But such moves are, of course, incredibly risky – and Wall Street points to the retail frenzy as an area of great concern when asking whether stocks have gone up really, really fast.