The spectacular stock rally and wild speculation by amateur investors are causing stock market veterans to worry that the stock market is overheating and that the size of the bubble may be no bigger than any big bubble in the past century.
After a sharp rebound from last March’s lows and record highs earlier this year, Baupost Group founder Klarman warned that investors’ misconception that the risks in the market have “disappeared” is akin to boiling a frog in warm water. GMO co-founder Gleason Grantham described the stock market rally since 2009 as an “epic bubble” characterized by “extremely overvalued stocks.
Some fund managers are warning that the stock market will pull back. This bizarre stock market pattern is likely to continue for some Time as stocks are supported by unprecedented monetary and fiscal measures, bond yield rates are near historic lows, and institutional and retail investors are sitting on a glut of cash.
Analysts at Absolute Strategy Research (ASR) have produced a checklist of bubble pointers that equate the current rally in U.S. “growth” stocks with previous market overheats, including the rise and fall of The Japanese stock market in the 1980s, the great rise and fall of dot-com stocks in the late 1990s, and a decade-long wave of big heads in commodity stocks in the early 2000s.
Common characteristics of these bubbles include low interest rates, excessive stock price cost/benefit ratios, out-of-control retail trading, and rapidly accelerating equity returns, and based on all of these characteristics, the current market conditions look worrisome.
ASR noted that more than 10% of the Stamp 500 is priced 40% above its past 200-day average, a phenomenon that has occurred only four times in the past 35 years.
Goldman Sachs strategists such as Gostin said that certain corners of the U.S. stock market are showing signs of a bubble, with high-growth stocks and high-cost-to-benefit stocks that have risen significantly and are highly valued “seemingly bubbling,” while the boom in special purpose acquisition companies (SPACs) is “one of many signs that U.S. stocks have gone too far and are unsustainable.
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