There are too many signs of rampant speculation to be entirely comfortable with asset markets as they currently stand.
The Gamestop Corp. trading frenzy, the popularity of special purpose acquisition vehicles and non-fungible tokens, this week’s blow-up of the massively overleveraged Archegos Capital hedge fund and a domestic housing market with prices rocketing higher are all signs of over-confidence and maximum risk tolerance.
Have markets reached bubble proportions? To help answer this question, long-time U.S. finance writer Jonathan Clements cited a new book, The Delusions Of Crowds: Why People Go Mad in Groups, by acclaimed author William Bernstein, that included the four signs of a market bubble.
The four signs are “easy credit, exciting new technologies, amnesia about the prior bubble and bust, and the abandonment of old, prudent methods for valuing investments.”
No reasonable investor can deny we’re in an era of easy money. Global central banks have flooded both asset markets and households with funds. Thanks to the Bank of Canada and the federal government, domestic households saw the biggest spike in inflation-adjusted disposable income in 2020, and also a record increase in the savings rate according to National Bank Financial research.
Tesla Inc., trading at 876 times trailing earnings, is the clearest example of what happens when transformational technology meets outsized investor interest. Fuel cell manufacturer Plug Power Inc. jumped 116 per cent in January before announcing it would restate its corporate profit history and falling sharply, providing another sign of speculative excess.
The first two conditions of a bubble have been reached, but it’s a matter of opinion on whether the last two have manifested. The justifiable market nervousness as the pandemic took hold a year ago is still a fresh memory for investors so there’s likely no amnesia. Most market participants, however, have learned to trust loose monetary policy to protect stock prices by now and this could represent another type of bubble.
As for prudent valuation methods, stocks are expensive by historical standards, but perhaps not out of line relative to still low bond yields. Russell 1000 Value index has outperformed the Russell 1000 Growth index by 27 per cent to 7.1 per cent since Sept. 1, 2020 - if anything, investors appear to be re-discovering prudence.
There are obvious pockets of valuation excess but I don’t think we’ve reached a stage like 2000 or 2007 where the deflation of any bubble will take down all markets with them. This gives asset markets, in aggregate, further room to run.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Brookfield Asset Management Inc. Series 2 (BAM-PR-B-T) The forward momentum in the stock market is so strong that even preferred shares are rising with gusto. But there’s one corner of the preferred market that could still be undervalued – floating rate preferreds. If interest rates rise as expected in the years ahead, these floating rate shares would be especially appealing, writes Rob Carrick.
Real assets vs. stocks: which is the right investment for you?
One sure sign inflation is back in the spotlight is the flurry of new pitches for investing in “real” assets ranging from vacation homes to vintage cars. It is easy to see why so many people find this strategy compelling. Bonds and stocks are boring things. Beach houses, vintage cars, fine wine, diamonds and art are not. Ian McGugan looks at the changing environment.
Is the economic recovery already reflected in stock prices? These charts hold the answer
Things were nice and orderly for a while there. We were led to believe that in 2021 a recovering global economy would lead to outperformance for economically sensitive market sectors such as industrials and materials, small caps, and companies emerging from value-oriented investing strategies. All this would happen at the expense of technology stock valuations and bond prices. That’s more or less what we got this year, until March 15, writes Scott Barlow.
‘Wall of worry’: Investors brace for inflation threat as global stimulus spending surges
After months of worrying about the baneful effects of COVID-19, investors now have a very different threat to ponder. It is inflation, something that has not been a major concern in developed economies for decades. What has put it back at centre stage is the combination of vaccines, rock-bottom interest rates and massive government stimulus – US$20-trillion globally, according to JPMorgan. Ian McGugan examines the reemergence.
Others (for subscribers)
Wednesday’s Insider Report: C-suite executives scoop up this tech stock as it nears oversold territory
Tuesday’s Insider Report: Multiple trustees are buyers of this REIT yielding over 5%
Others (for everyone)
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Compiled by Globe Investor Staff