U.S. stocks have recently reached record highs, and many analysts smell danger.
Based on valuation, position and price momentum data, JPMorgan’s indicators show that cross-asset investor complacency is approaching its highest level since the dot-com bubble burst. Global investor fear is at its lowest level in two decades, while greed is likely to be at its peak.
Meanwhile, the Buffett Indicator recently sent out another warning signal, reminding investors that it’s Time to be cautious while others are greedy.
This indicator is actually a simple ratio: the total market capitalization of the U.S. stock market divided by the total dollar value of U.S. GDP, which has been a favorite indicator of Warren Buffett, who promotes value investing. The index it has been trending upward for the past few decades, and in 2019 broke through its previous Internet-era peak for the first time.
More recently, the indicator rose into warning territory: the total market capitalization of the U.S. stock market is more than twice the estimated U.S. GDP, and the reading has broken above long-term trend levels.
Signs of mania are everywhere. Retail investors are thinking about making a quick buck, bitcoin is challenging the $50,000 mark, marijuana companies are in hot demand, retail investors are waging a speculative war on cheap stocks and more …… Since the New Year, global stock market capitalization has increased by $7 trillion; digital currencies have surged, reaching a market cap of $1.4 trillion; and high-yield bonds have been issued in record numbers.
All of this has raised concerns about asset valuation bubbles; but on the other hand, investors continue to pour money into the market in the belief that unprecedented monetary and fiscal easing will keep the market hot for some time.
Strategists at JPMorgan Chase also seem to agree. Despite warnings about this frenetic market performance, while pointing out that the stock market rally may now appear “pause”, but on the other hand, the small MoM analysts such as John Normand also pointed out that there is no reason to think that the rally triggered by the release of trillions of dollars of funds will appear substantial retreat. The main immediate risk is that the Fed will taper its bond purchases once employment and Inflation return to target levels, but this is not likely until later this year:.
“We have been advising investors to remain long on most markets. When monetary policy is super-easy and fiscal policy is in overdrive, markets tend to exhibit a Newton’s law-type pattern: they stay in motion until intervened by another force.”
Michael O’Rourke, chief market strategist at Jones Trading, said.
“This underscores the extraordinary frenzy we’re seeing in the U.S. equity markets. Even if people expect those Fed policies to support stock prices, it doesn’t make sense to pay twice the 25-year average level of valuation for stocks.”
Recent Comments