Signs that stock markets are in a bubble

One can argue that the current stock-market bubble isn’t as big as the one that burst in 2000, when the dot- com implosion occurred. But so what? A bubble is still a bubble. But how do you define a bubble? Here are the five ways.

Price

The FAANGM stocks ( Facebook Inc., Amazon. com Inc., Apple Inc., Netflix Inc., Google ( Alphabet Inc.) and Microsoft Corp.) soared 50 per cent in 15 weeks. That is completely abnormal. As is the 30-per-cent gap between the level of the Nasdaq and its 200- day moving average heading into last Thursday’s correction (the index is down 6.2 per cent from Wednesday’s close). The 15- percent gap we had last week between the S&P 500 and its 200- day trendline classified as a 2.5 standard deviation event.

Valuation

The S& P 500’ s trailing P/ E multiple has soared to 29.8x from 18.6x in March. The cyclically adjusted priceto- earnings ratio ( CAPE) multiple has expanded from 24.8x to 30.6x — right where we were in February this year. Consider that at the market peak in October 2007, the CAPE was 27.3x. We are in bubble territory. Trailing or forward, valuation multiples last week on the S& P 500 were in the top 0.5 per cent of all time.

This is a classic bubble sign, and equity customer margin debt soared five per cent in July, 5.8 per cent in June, 5.3 per cent in May and 9.5 per cent when the party started in April. All this the product of the “Don’t fight the Fed’’ mantra. How does U. S. Federal Reserve chairman Jay Powell feel about being responsible for encouraging people to take on debt to buy stocks? In any event, between April and July, margin debt balances have absolutely ballooned at a 110- per- cent annual rate. This is exactly what we had on our hands in March 2000 and July 2007, when nobody saw any trouble brewing (“bubble, what bubble?”).

Sentiment

In two words, sentiment is wildly bullish. The Citigroup panic/euphoria index is at a record high and two standard deviations above the norm. The Investor’s Intelligence poll shows 64-percent bulls and 16- per- cent bears — a gap that in the past has always presaged a market pullback. Market Vane sentiment has gone from 40- per- cent bullish at the end of July to 50 per cent at the end of August to 53 per cent now. We were at 50 per cent in mid-february just before the bear market, and we have not been this high in 14 months.

New era thinking everywhere

But there are no “new eras.” I’m not sure how many Tesla Inc. investors actually own a Tesla product, but it has surpassed Toyota Motor Corp. in market- cap terms even though the former has sold 367,500 units in the past year and the latter has sold 10 million autos. It is only via a speculative frenzy that a stock such as Tesla commands a market capitalization of about US$400 billion — a five- fold increase since March. Go figure.

Or what about Zoom Video Communications Inc. overtaking International Business Machines Corp. in market valuation? The former with US$ 663 million in sales and the latter with more than US$ 18 billion. Hmm. And Apple Inc., the darling of darlings, has a market cap that has soared at an average annual rate of 27 per cent over the past five years … and yet its total profits and revenues have only risen four per cent per year.

Tesla makes no money, Apple has no growth and Amazon makes no money in its delivery business. These are the stocks everyone feels they need to own. It is a bubble mentality; anyone with a sense of history knows exactly what I’m talking about.

Tesla makes no money, Apple has no growth.