Now we have to talk about the B word
No, I can’t just let you enjoy the new highs.
I know. I know.
We’ve only just reached new highs. Can’t we just enjoy it?
You can, but I can’t. It’s deep in the nervous Nellie bones of this markets hack to look at a delicious, frosty glass of lemonade and see only lemons in disguise.
In other words, we need consider the risk that we’re in the midst of a fairly massive stock market bubble.
The mood music is playing everywhere. SPACs are back. Key tech IPOs are going nuts. Traders are piling into the riskiest (or most volatile) stocks. In the options market, call buying is surging. I continue to be astounded by the fact that we have an entire new class of “treasury strategy” corporations, whose sole business is selling stock and using the cash to buy crypto. That’s it. They do nothing else.
To be clear, I’m not the only one out there who sees the froth.
In a note published Friday, Bank of America market analyst Michael Hartnett says he is bullish on bonds, international assets, and gold rather than US stocks, as he sees “bubble risk high as Trump/Powell pivot from tariffs to tax cuts/rate cuts to incite US$ devaluation/US stock bubble (NDX rip toward 30k) as cure to reduce US debt burden via boom.”
I mean, even by the most rudimentary measures of market sentiment, after the romp off the April 8 market bottom, when the S&P 500 closed down 18.9% from its peak, the stock market is back at high levels of valuation.
The good old-fashioned forward price-to-earnings ratios have clawed back to 22x expected earnings over the next 12 months. (I’m old enough to remember when 15x earnings was considered “fully valued.”)
Over the last couple of years, a PE of 22x looks fairly normal. But keep in mind, historically speaking this is really darn high. In fact, it’s a level we’ve only sustainably held during the dot-com boom of the late 1990s, and to a lesser extend, during the stimmie-fueled trading pandemic-era trading boom.
By some other measures, current market valuation is much higher than what we saw during 1990s tech boom. These alternative benchmarks all have their advantages and disadvantages, but ratios like EV to sales, price to sales, and PE ratio to growth (PEG ratio) are in the zone last seen during the tech bubble.
So, what does this mean? Sell everything? Buy a shack in the Utah salt flats and wait for the apocalypse? Beats me.
It’s possible that the “forward-looking” market sees a massive boom in profits and sales on the horizon that will suddenly shift all these metrics back toward more sensible territory, without a steep drop in prices.
It’s also possible that this is, indeed, a bubble — but one that will continue to inflate for a while. Just see Hartnett’s warning above that the Nasdaq 100, currently trading at 22,576, could approach 30,000. That offers the real prospect of making some more fast money, but it also means there will come a time when the best move will be to sock away gains and get off the rollercoaster. And getting that timing right is a really, really hard thing to do.
