NEW YORK (AP) – Now even Wall Street professionals are asking whether the stock market has skyrocketed.
US stocks have been on an almost continuous bullish decline since March, rising about 70% to record highs and causing outsiders to say that the market has lost touch with the reality of the pandemic. But Wall Street continued to justify the gains by pointing to massive Federal Reserve support, the release of COVID-19 vaccines and Congressional efforts to inject more stimulus into the economy.
Recently, however, some of the market’s shares have become more difficult to explain, and not just GameStop’s manic movements. Some investors are so eager for big rewards that they are investing without knowing where their dollars will go. And, according to some measures, the broad stock market looks more expensive than it did before the 1929 crash.
All the fervor has prompted Wall Street to openly debate whether the market is in a dangerous bubble, after months of rejecting the possibility.
A bubble is what happens when prices for something are much, much higher than they should be rationally: they have been a regular occurrence throughout history, dating back to tulips in the 17th century and pets.com in the late 20th century.
“It is a privilege, as a market historian, to experience a large stock bubble once again,” famous value investor Jeremy Grantham wrote in a recent newspaper, who correctly cited several turning points in the market. “Japan in 1989, the technology bubble of 2000, the housing and mortgage crisis of 2008 and now the current bubble – these are the four most significant and exciting investment events of my life.”
To be sure, most professional analysts say the US stock market is not headed for a crash, just slower returns than before. But these optimists are having to work harder to convince others.
“You can say that a bubble occurs when people think the market is going to rise, but they fear it will fall,” said Robert Shiller, a Yale professor who won a Nobel Prize for his work in explaining stock price movements. “It’s where we are.”
He said the market looks vulnerable, but he warned that some brands of a classic bubble are not present today, as investors talking about a “new era” for the economy. He also said it is difficult to predict when the market will lose momentum and fall.
“People often extrapolate trends and take longer than you think,” he said. “And then they disappear.”
Here is a look at the causes of concern that drive the bubble debate:
DAY-TRADING FRENZY
– The most striking example of the excess that is sweeping Wall Street now is GameStop shares, which rose 1.625% in January. The struggling video game retailer’s shares have since fallen, but remain well beyond the price Wall Street analysts consider rational based on their profit prospects. Other companies that lose money have also increased, showing how easily some investors are pushing the prices of an investment, despite the risks. And with smaller investors conducting much of the action, experts are making comparisons with the shoeshine boy giving stock tips in 1929.
NO DISCOUNTS TO BE FOUND
– Perhaps most worrying is that prices are rising in the stock market at a much faster rate than corporate profits. The two tend to track each other in the long run, so big dissociations take a break. A measure popularized by Shiller de Yale analyzes the price of the S&P 500 in comparison with the profits produced by companies in the previous 10 years, adjusted for inflation. Since 1881, it has only once been more expensive than it is now – during the dot-com bubble. He came close shortly before the accident that helped usher in the Great Depression.
IPWhoa
– The massive support of the Federal Reserve means that dollars are circulating in the markets in search of investments, and young and losing companies are running to take advantage, selling their shares to the public for the first time. The companies raised more than $ 60 billion last year through IPOs of their shares, the maximum since the peak of the dot-com bubble in 2000, according to data compiled by Jay Ritter at the University of Florida. Within technology companies, only 19% of IPOs went to profitable companies last year, compared with the 49% most typical of the past two decades.
SPAC, CRACKLE, POP?
– The fervor to invest in the next young and attractive company is so voracious that some CEOs are skipping the IPO stage. Instead, they are selling themselves to companies armed with money by investors and tasked with finding young companies that do not yet have shares traded on the public market. These special-purpose acquisition companies, or SPACs, have exploded in popularity. Last year, SPACs raised $ 76 billion from investors, up from $ 13 billion a year earlier. In the first three weeks of 2021, they raised another $ 16 billion, according to Goldman Sachs.
Despite all concerns, much of Wall Street is still optimistic, anticipating further gains ahead.
COVID-19 vaccines have raised expectations that daily life will be closer to normal this year and the economy will return to health. If profits go up too much and stock prices make only modest moves, prices will seem more reasonable, and that is exactly what much of Wall Street expects to happen.
At the beginning of 2018, the market was in the middle of a long and powerful run, and the S&P 500 was almost as expensive as it is now by some measures, which led to talk of a bubble. The bull market, however, has advanced to the pandemic.
Then there is the Fed. Previous bubbles came after the Federal Reserve started raising interest rates in hopes of cooling the economy or overheated markets. For now, the Fed appears to be years away from doing this. It is even said for the first time that it is willing to keep rates low for a while after inflation reaches its 2% target.
With rates so low, investors don’t have much of a choice for good returns out of stocks.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed signaled to Wall Street that it would not allow a major market downturn.
“As long as interest rates are so low,” she said, “it is very difficult for me to see how you could have a significant correction in stocks.”