Bubble, bubble: how bad will the end of the bull market be?


So the rally has to end someday, right? There is still a catalyst, and the declines of the past two days suggest that inflation may rise. And, after all, we’ve been hearing for some time that the market is in a bubble, which makes the situation particularly precarious.

Ultimately, Nvidia and other names in tech have done well lately. And the so called Shiller P / E Ratio is at a very high level. This version of the price / earnings multiple, or P / E, is at a level that is above the pre-crash period of 1929 and is approaching the record set just before the dot-com implosion of 2000.

Richard Bernstein Associates in June listed five indications of a stock bubble, which sort of matches the current stock market: massive liquidity, increasing leverage, more amateurs involved in stocks, an explosion in initial public offerings (IPOs). ) and increased trade. The cabinet report is still as relevant as ever. “The whole market doesn’t necessarily seem at risk, but the momentum strategies focused on the leadership of the market bubble seem very risky to us,” the company’s research note warned.

Of course, people say we’ve been in a bubble for a while now. But wouldn’t it have been nice to have left the market or, at least, on the technological side, just before the end of March 2000 of the dot-com euphoria? If such a prescient investor moved money into small caps, energy, or financial stocks, the ensuing bear market wouldn’t have been too bad.

Bernstein’s Five Horsemen of the Market Apocalypse have – let’s face it – a weird and familiar look about them:

Liquidity. Thanks to the Federal Reserve, with the help of the Trump and Biden administrations, the money supply (aka M2) has grown tremendously. To compensate for the degradations of the pandemic, M2 has increased by 35% since January 2020. Much, however, has not been deployed in the form of bank loans. The result, as Bernstein’s paper points out, has been stock inflation. As the study says: “The Fed’s stimulus measures have increasingly been trapped in financial markets and fueled speculation rather than healthy economic activity.

Leverage. Margin loans are on the rise. According to a MagnifyMoney survey cited by the report, 40% of individual investors overall, including 80% of Gen Z investors and 60% of Millennials, had borrowed to gamble in the market.

Amateurs. In Bernstein’s opinion, “Despite the noble intentions associated with it, every financial bubble includes a democratization of the market: ‘Everyone should be able to play’. the current speculative fervor includes everyone.

IPO. Stock purchase methods help lower the cost of capital, and low and low interest rates have helped. All these new problems are not great, if the barriers to entry are lowered. Bernstein is focused on increasing Special Purpose Acquisition Companies (SPACs), which are easy ways to go public with less regulatory control.

Trade. The zest of stock traders even dates back to earlier times. The Bernstein Report recounts how “day traders increased transaction volume during the tech bubble and the condo turnaround boosted sales during the real estate bubble.”

If there is a silver lining, concludes Bernstein, it is that only three areas of the current market have been in bubble territory – technology, communications services and consumer discretionary – leaving other areas with less distance to. Browse.

Related stories:

New tech bubble is about to burst, Bernstein warns

Jeremy Grantham thinks the bubble will burst … but he has stock picks

You can’t spot a bubble, so don’t even try, says Eugene Fama

Tags: amateurs, bubble, IPO, leverage, liquidity, Richard Bernstein, trading

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