Major bubble?
It’s not just GameStop worrying Wall Street right now
NEW YORK — Now, even the pros on Wall Street are asking if the stock market has shot too high.
U.S. stocks have been on a nearly nonstop rip higher since March, up roughly 70% to record heights and causing outsiders to say the market had lost touch with the pandemic’s reality. But Wall Street kept justifying the gains by pointing to massive support from the Federal Reserve, lifesaving deliverance from COVID-19 vaccines and efforts by Congress to pump more stimulus into the economy.
Recently, though, some of the market’s action has become tougher to explain, and not just the maniacal moves for GameStop. Some investors are so hungry for huge payoffs that they’re pouring into investments without knowing what their dollars will go toward. And by some measures, the broad stock market looks more expensive than it did before the 1929 crash.
All the fervor has Wall Street openly debating whether the market is in a dangerous bubble, after months of batting away the possibility.
A bubble is what happens when prices for something run much higher than they should rationally be. They’ve been a regular occurrence through history, going back to tulips in the 17th century and pets. com at the close of the 20th.
“It is a privilege as a market historian to experience a major stock bubble once again,” value investor Jeremy Grantham wrote in a recent paper. “Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage crisis, and now the current bubble – these are the four most significant and gripping investment events of my life.”
Most professional forecasters say the U.S. stock market is not headed for a crash, just slower returns than before. But those optimists are having to do more work convincing others.
“You might say a bubble occurs when people think that the market is going to go up but worry that it may drop,” said Robert Shiller, a Yale professor. “That is where we are.”
Here’s a look at the causes for concern driving the bubble debate:
DAY-TRADING FRENZY: The most glaring example of excess sweeping Wall Street now is GameStop’s stock, which soared 1,625% in January. Shares of the struggling video game retailer have since fallen, but they remain way beyond a price Wall
Street analysts say is rational based on its profit prospects. Other money-losing companies have surged as well, showing how easily some investors are pushing up prices for an investment, despite its risks.
NO DISCOUNTS TO BE FOUND: Perhaps more worrisome is that prices have been soaring across the stock market at a much faster pace than corporate profits. The two tend to track each other over the long term, so big dissociations give pause. One measure popularized by Yale’s Shiller looks at the S&P 500’s price against profits produced by companies in the prior 10 years, adjusted for inflation. Since 1881, only once has it been more expensive than it is now — during the dot-com bubble. It came close just before the crash that helped usher in the Great Depression.
IPWHOA: Massive support from the Federal Reserve means dollars are sloshing around markets looking for investments, and young and moneylosing companies are rushing to take advantage by selling their stock to the public for the first time.
For all the worries, much of Wall Street is still optimistic, forecasting more gains ahead. COVID-19 vaccines have raised expectations that daily life will get closer to normal this year and return the economy to health.