Are stock markets in a bubble?
We never know when we are in a bubble, and that’s the fun part. That’s fun because we can have an advantage over the others when playing the market game.
But how can we have an advantage? Even not being sure about something, we have some clues that can help us to understand where we are in a market cycle and to indicate to us how to manage our money.
First of all, we have the psychology of the masses. Investing in stocks has become a popular trend. We are full of “experienced” investors making money and supporting theirs believes like they are pros. Simultaneously, people looking to their friends making money feel the FOMO (fear of missing out). That is like compound interests and can become a snowball. That trend is not unique from developed countries. We also see this in emerging countries, although the harmed currency from these countries.
Second, we are living in an age of low-interest rates. With real interest near to zero or at some cases negative, we see a migration from bonds to stocks. This reality, followed by the FED stimulus, makes the trend even more substantial. People are seeking extra gains and at the same time protecting their saves against inflation that may come.
Third, we have a massive wave of IPOs, and all of them with excessive gains in the first day. Also, a SPAC Boom. It seems that investors are confident about their future profits and willing to pay more. That’s an anomaly to me because when the margin of safety is lower, the risks are higher.
Forth, when the kids are playing games, we should be cautious. With substantial bizarre movements like Game Stop, we can see vast space for speculators and not investors. Serious investors do not play in the market. It doesn’t matter if it is a legit movement.
In this graph, we can spot how the p/e rations are high. Does that say something to us? Maybe. It isn’t easy to be sure because we are living in an intangible economy. Unlike prior years, we are witnessing companies with advantages in scale, brands, and management usually taking a considerable stake in the market (winner take it all). When a company’s power is in its software, we can’t give a usual p/e when evaluating them. But as we can see in the graph above, the overall p/e ratio is high.
The second graph is the buffet indicator. Equities/GDP ratios are high, and this should be alarming. If the economy is not growing, or the equities valuation is growing faster, we have a problem. Or we are doing the valuation wrong, or we are assuming that our company will steal the market share of other companies. Still, if every company believes it will expand its market share, something is wrong.