Three conditions for stock market mania
THE necessary conditions for an asset bubble are falling into place, Pie Funds chief executive Mike Taylor says.
The sharemarket has roared back since the Covid19 crash in March, erasing most of its losses despite the world facing a dire economic outlook.
That is raising concerns that we may be facing a ‘‘market mania’’ artificially inflating values into bubble territory.
‘‘In order to blow an asset bubble you need three conditions,’’ Mr Taylor said.
‘‘You need easy money, We’ve seen interest rates drop to zero . . . so we have the conditions of free flowing credit.’’
The second thing was ‘‘something for people to get excited about’’.
Since the Covid19 crash, that role had been filled by the big tech stocks like Amazon, Tesla and Netflix.
The third thing to create a bubble was a ‘‘herd’’ mentality, Mr Taylor said.
That was evident where share investing crept into everyday conversations.
‘‘People talking about it at the barbecue and saying how much money they’ve made on the stock market.’’
The return of retail investors was being driven, at least in part, by the rise of easytouse investing apps like Robinhood in the US and Sharesies in New Zealand.
These allowed people to trade shares easily and directly from applications on their mobile phones and had been responsible for a big surge in interest from younger retail investors.
For example, the ownership of something like Tesla shares via Robin Hood had skyrocketed to more than half a million investors.
But while these trends were something to watch closely, Mr Taylor did not believe we were yet into the danger zone.
‘‘We’ve got the conditions to blow a bubble and to create mania, but we haven’t done it yet,’’ he said.
‘‘We could quite easily, in the next one to two years, get into a situation where those household name stocks become ridiculously overvalued.’’
Normally what bursts a bubble is rising interest rates.
Mr Taylor said his confidencethe bubble would not burst soon was founded on expectations that interest rates would remain on hold ‘‘for at least the next year’’.
The other indicator of a bubble ready to burst was extreme price spikes.
‘‘Typically when you get to the end of a bubble or mania phase valuations go extreme,’’ he said.
‘‘If you look at the Nasdaq in the last nine months of 19992000 period, it went up something like 100%.’’
‘‘We haven’t seen that yet. We’re not there yet but I think we have the conditions for it to happen.’’
Meanwhile, the latest US earning season had proved relatively strong, but only in the context of low expectations set due to the Covid19 economy, Mr Taylor said.
‘‘Profits for the quarter are expected to be 43% lower than they were last year, with revenue down about 10%. What that’s meant is Wall Street has got into a habit of lower expectations almost too far. So they’ve set the bar quite low.’’ — The New Zealand Herald