Markets for everything from home-building materials to bitcoin to stocks are soaring, stirring up fresh fears that global markets are in a bubble.
Rarely have so many assets been up this much at once.
The price of lumber has shot up to all-time highs. Residential home sales in the U.S. are at levels last seen in 2006, before the housing bubble collapsed. And stocks are on a tear. Benchmark indexes from the U.S. to France to Australia have all climbed to fresh highs this year, with the S&P 500 and Dow Jones Industrial Average recently hitting their 23rd and 21st records of the year, respectively.
The frenzy has extended far beyond conventional markets tracked by Wall Street firms. Bitcoin hurtled above $60,000 for the first time last month before pulling back, while Dogecoin briefly jumped to a record, driven by fans posting hashtags like #DogeDay on Twitter. In the venture-capital world, investors are offering startups five times or more the amount of money they are requesting, and the average valuation for all startups has hit a new high.
Markets’ wild ride higher has even the most seasoned investors throwing up their hands.
“This is very different to any other bubble that we’ve had ever,” said Jeremy Grantham, co-founder and chief investment strategist of asset-management firm Grantham, Mayo & van Otterloo. Mr. Grantham is best known for correctly predicting the bursting of the Japanese asset bubble in the late 1980s, the dot-com bubble in 2000 and the housing crisis in 2008.
“All of the previous bubbles occurred when economic conditions looked nearly perfect. This has been quite different because the market started its incredible surge in a rather wounded economy,” he said.
Wall Street has seen this movie before. Investors’ excessive exuberance across a variety of assets has stirred comparisons with the heady days of the Roaring ’20s. The lofty valuations of technology stocks have also made for easy comparisons with the dot-com boom and bust two decades ago.
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Both of those episodes were punctuated with dramatic meltdowns from which it took stocks years to recover. The overlapping signals between then and now have led many investors to brace for what could be an even broader pullback—one that has the potential to not only wipe out wrong-footed stock pickers, but also speculators in other markets.
“If we hit a low-confidence phase and they all go together, they will [inflict] more pain on the real world,” Mr. Grantham said.
Bubbles aren’t defined only by excessively high valuations. Instead, analysts and investors say bubbles are fed by investors’ willingness to believe stocks or other assets can only go up, ignoring fundamentals such as whether a company will ever be able to generate enough profits to justify its sticker price.
The problem is that frothy markets have historically run longer than skeptics have thought possible. In the case of Japan, for instance, stocks reached a trailing price/earnings ratio of as high as 60 times in 1989 before beginning their collapse and subsequent decadeslong period of stagnation.
In the U.S., the S&P 500 currently trades at a price/earnings ratio of around 26, according to Dow Jones Market Data. Another measure of valuation, called the CAPE ratio or the Shiller P/E, registers an even higher reading of 37.6, roughly a two-decade high. The measurement, which looks at the past 10 years of earnings and adjusts for inflation, peaked in December 1999 at 44.2.
“Expensive markets don’t have to crash,” said Meb Faber, chief investment officer and portfolio manager at Cambria Investments. Getting out too early means risking out on potentially years of lucrative returns, Mr. Faber said.
There is also plenty of reason to believe swaths of the market could keep chugging along.
Some stocks have lost altitude in recent months as higher government-bond yields dented their allure, making shares appear more reasonable than they have in years. Amazon.com Inc., for example, currently trades at 79 times its earnings over the past year, below its five-year average of 175. Netflix Inc.’s P/E ratio is currently at 62, down from its half-decade average of 195.
Markets also continue to receive extraordinary support from policy makers. After the pandemic hit, the Federal Reserve cut interest rates to near zero and ramped up its bond-buying program, while Congress approved trillions of dollars of stimulus to help the economy recover from the shutdown. Those interventions helped markets stage a powerful recovery from their bear-market lows, even as the economy ended up contracting for the first time since 2009.
One year later, economic activity is rebounding. Markets are soaring. But the Fed has shown no signs of wanting to tighten monetary policy soon. In fact, policy makers have said they expect interest rates to remain near zero through 2023, something that has strengthened many investors’ conviction that markets still have room to run higher. Why? Interest rates are a backbone of often-used valuation models that discount cash flow. Under those models, low rates give a higher value to future cash flows, supporting richer valuations. Higher rates do the opposite.
“People feel they’re investing with immunity,” said Byron Wien, vice chairman of Blackstone’s private wealth solutions group who has experienced a variety of market bubbles over his more-than-three-decade career. “Every cycle is different, but there are always cases of extraordinary valuation.”
Today’s market environment stands in contrast to the boom in asset prices of the 1920s, 1980s, 1990s and mid-2000s, which investors and analysts say was driven by robust economic growth. In most of those periods, the Fed played the role of bubble-popper by raising interest rates to rein in asset prices and, usually, inflation. When the Nasdaq Composite peaked in March 2000, for instance, the Fed had already enacted a series of increases that brought rates to 5.7% in an effort to rein in inflationary pressures. This time around, the Fed has dismissed notions that low interest rates are fueling a bubble in asset prices.
Some of the frothiest corners of the market have already tested investors’ mettle.
Archegos Capital Management, for example, suffered a multibillion-dollar meltdown after a handful of large, highly leveraged bets on stocks such as ViacomCBS Inc. and Discovery Inc. soured. Popular exchange-traded funds run by star stock picker Cathie Wood have been drummed by their heavy exposure to growth stocks, many of which have never turned a profit. The firm’s flagship fund, the ARK Innovation ETF, has fallen 23% from its mid-February high.
And ETFs tracking SPACs, or special-purpose acquisition companies, have retreated from the highs they hit earlier in the year—with analysts attributing the decline to increasing worries about the sustainability of their gains. The SPAC and New Issue ETF traded at $28.66 Friday, down from a closing high of $32.34 in February.
Even bitcoin, which began the year below $30,000, has tumbled about 20% from its high set just a week and a half ago.
Many individual investors, who have played a big part in driving stocks and other assets higher, have indicated they think signs point to an overinflated market. An E*Trade Financial survey earlier this month found that nearly 70% of investors believe the market is fully or somewhat in a bubble, according to a poll of 957 individual investors.
But that hasn’t diminished their appetite for stocks at all. Some $98 billion was added to U.S. mutual funds and ETFs in March alone, the most in a single month ever, according to data provider Refinitiv Lipper. Flows since December now stand at $137.8 billion, on pace for a seven-year high.
“The higher you go, the bigger the price you pay, and I think that’s one of the messages of bubbles…as we chug higher, you can celebrate, but it doesn’t change the pain of where we’ll be,” Mr. Grantham said.
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