March 24, 2021 10:25:09 am
Written by Matt Phillips
The bull market turned a year old Tuesday, a testament to the unbridled enthusiasm that let investors shrug off the economic carnage of the pandemic and buy stocks — and pretty much anything else.
Since the S&P 500 scraped bottom on March 23 last year, the blue-chip index has posted a rally of nearly 75%, even with a 0.8% fall Tuesday. Tesla’s stock is up more than 650%, while true believers have pushed up shares of GameStop by over 4,500%. Bitcoin is booming, and so are even more esoteric assets like NFTs.
It’s enough to pose a question that would have seemed unfathomable a year ago.
“Is this a bubble?” said Garry Evans, chief strategist for global asset allocation at BCA Research. “I would say there are certainly pockets of the market that look bubbly.”
Evans said he didn’t see “a generalized bubble” but believed that individual stocks — like GameStop, which was driven up in January by retail traders gathering on sites like Reddit — and cryptocurrencies were overvalued.
“Those are definitely individual bubbles,” he said.
Few on Wall Street will ever predict a broad-based bubble, the overenthusiastic rise of prices that can be ruinous to investors when they burst. So it’s remarkable that the b-word is on anyone’s lips when you consider the outlook a year ago. The stock market had plunged nearly 34% and finally bottomed out on March 23, 2020.
The sell-off stopped only after the Federal Reserve took steps to cut interest rates almost to zero and restarted bond-buying programs that bought trillions of dollars in government-backed debt to get money flowing through financial markets. Stocks began climbing again and accelerated as the government provided aid including expanded unemployment benefits and three rounds of direct stimulus payments worth as much as $3,200 a person.
That spending gave investors a psychological lift. While the economy still looks weak, the flood of money — along with the rising number of vaccinations — has raised expectations for 2021 economic growth from 2% a year ago to 5.7% Tuesday, according to Bloomberg data. That suggests a rush of corporate profits — key drivers for stock prices — will follow.
All that governmental support “gave the market confidence,” said Quincy Krosby, chief markets strategist at Prudential Financial. “They were quick. They were forceful. In every nook and cranny in the markets, they instilled confidence.”
It also minted millions of new traders as stimulus checks helped touch off an increase in stock-buying by average investors. From the most recent round of stimulus alone, Deutsche Bank recently estimated, some $170 billion could flow into the stock market.
“When you have this much free money sloshing around, it’s not surprising that it’s going to get into some very speculative places,” said Jason DeSena Trennert, chief executive of the institutional brokerage and research firm Strategas Securities.
With commission-free stock trading and easy-to-use trading apps, individual traders have emerged as one of the key drivers of the stock market. Earlier this year, Goldman Sachs analysts estimated that these investors accounted for roughly 25% of trading activity, up from around 10% in 2019.
Nikolaos Panigirtzoglou, a market strategist with JPMorgan in London, said the wave of investment activity sweeping the country was a glaring reason to worry that the rally could falter.
U.S. households are now more heavily invested in stock than ever before, even during the peak of the dot-com bubble, he said. “If that goes away or reverses, then the equity market will have a problem,” he said.
And on Monday, even a Goldman Sachs research note titled “Bubble Puzzle: A Guide to Bubbles and Why We Are Not in One” acknowledged that some indicators of retail trading activity were “worrying.” It mentioned the surging levels of daily trading in stocks and increased buying of tiny amounts of stock options by individuals.
The conditions for a bubble are clearly present, said John Turner, a professor of financial history at Queen’s University Belfast. Turner recently co-wrote — along with his colleague William Quinn — a book titled “Boom and Bust: A Global History of Financial Bubbles.”
To make them, he said, you need three key ingredients, plus a spark. The ingredients are ease of trading, access to credit and mass speculation — all of which are in ready supply right now.
The spark, he said, is the unknown factor. It could be a change in government policy, like the push to supercharge homeownership in the 1990s and 2000s. Or a major technological development, the way electrification contributed to a boom in the 1920s.
So the conditions, Turner said, are all here.
“It smells like a bubble,” he said. “If I had to put money on it, it looks like a bubble.”
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