The crazed action in GameStop and other stocks is viewed by many commentators as further proof that things are getting seriously bubbly right now.
Bond bubbles, bitcoin bubbles, equity bubbles – bubble talk is everywhere right now, said Citi strategist Robert Buckland last week, adding there was "definitely a bubble in bubble talk".
This was echoed by JP Morgan strategists, who are fielding “numerous questions about whether a bubble is potentially forming in financial markets”.
The concerns are understandable. Various indicators suggest sentiment is euphoric. Global equities soared 18 per cent last year in the face of a pandemic-induced earnings collapse. Relative to history, US markets look very expensive on almost all valuation metrics. The number of S&P 500 stocks that are at least 40 per cent above their 200-day average is at levels seen on only four occasions in the past 35 years, according to Absolute Strategy Research.
Still, bubble talk can be overstated. Looking at three major market bubbles in recent decades – Japan in the late 1980s, the Nasdaq and S&P 500 in the late 1990s, and emerging markets in 2007 – Robert Buckland found equity indices almost tripled in the three years prior to the top.
In contrast, the S&P 500 is up just 36 per cent over the past three years, while performance has been much poorer in emerging markets, Japan, Germany and the UK. The bubbliest index today is the Nasdaq, which is up 83 per cent over three years, although even that doesn’t compare to the 285 per cent rise prior to March 2000’s peak.
US indices could rise another 50-100 per cent if valuations hit previous highs, says Buckland. Being cautious is all very well, but don’t assume stocks can’t keep rising.
