Is the retail trade frenzy a sign that the market is near its peak?
Edward Smith, head of asset allocation research at UK investment firm Rathbones, is skeptical.
“Often, in some corners [of the market] things get excited, “he said.” In the shortest names, clearly this is happening today. “
Historically, bubbles in the broad market have been preceded by an increase of 300% or more in the three years before they burst, far exceeding the advance of US stocks in recent years, said Smith.
Certainly, US stock valuations are high by historical standards. “But investors who apply a mean reversal approach to valuations are wrong,” said Smith. “We are living in a world of structurally low interest rates that were exacerbated, but not caused, by Covid.”
“Structurally lower interest rates mean structurally higher valuations,” he added, saying that future profits are worth more in terms of present value when the rate at which they are discounted decreases.