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Stocktake: Bubbly stocks may continue ‘bubbling up further’

‘Many similarities’ between today’s US market and the late 1990s tech bubble

On the boil. Photograph: iStock

Proinsias O'Mahony's face
Proinsias O'Mahony
Tue Jun 1 2021 - 00:00

US markets are close to bubble territory but it's not time to cut back on risk just yet. That's according to a recent Allianz note that assessed US equities based on a 10-criteria bubble checklist inspired by market historian and bubble expert Charles Kindleberger.

Of the 10 criteria, the most worrisome are overvaluations of multiple asset classes (both bonds and US stocks are expensive), ultra-easy monetary policy (a factor in all historical bubbles and “clearly present” today), financial sector deregulation (regulations were scaled back under the Trump administration), and a boom in innovative financial instruments (cryptoassets and special purpose acquisition companies, or Spacs).

Other concerns include overtrading and exponential price moves (growth stocks have roared higher in this economic cycle while recent retail speculation has driven “weird” price action) as well as high hopes for a new era (soaring earnings expectations amid talk of another “roaring 20s” as well as technological breakthroughs in the field of artificial intelligence).

As for valuations, European, Japanese and Asian markets are trading at or below historical norms, but the US trades on a cyclically adjusted price-earnings (Cape) ratio of 37 – a reading last seen in late 1998, during the tech bubble. The Nasdaq’s Cape ratio of 55 is similar to early 1998 levels. Almost all sectors – not just tech – look expensive.

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Overall, most indicators “are waving red flags” and there are “many similarities” between today’s US market and the late 1990s tech bubble.

However, bubbles don’t burst until central banks hike rates or rein in easy-money policies. Consequently, Allianz remains “nervously ‘risk on’ for now”, saying US stocks will likely “continue bubbling up further”.

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