I.Investors usually do not see trends as buying signals. But even as protesters ousted the U.S. legislature last week, stock market records hit new highs in New York, adding another chapter to a 12-month downturn in economic challenges.
Wall Street, measured by the S&P 500 benchmark, was not alone in starting 2021 with a bang. The FTSE 100 London jumped more than 6% in the first week of the year when investors introduced a strong cocktail of President Joe Biden ready and able to spend money, cheap loan costs, and the hopes that vaccines will termination of coronavirus locks. But among the exiles there is great concern: are we near for another great calamity?
Some old investors believe that. Jeremy Grantham, the British co-founder of US investment firm GMO, stopped some of his investors last week when he described a “massive bubble” that has grown out of a void. on the 2008-09 financial crisis.
“With massive forecasts, explosive price increases, frenzied issuances, and speculative investment behavior, I believe this event will be recorded as one of the major bubbles in financial history,” he wrote in a letter. to investors. Bank of America analysts joined him last Friday, warning of “frothy prices, greedy conditions” and urging their clients to sell shares.
Separation is growing in the investment world: on the one hand there are believers that recovery from the pandemic will further boost stock markets; on the other hand there are those who think that bubbles are going up to explosion level.
Few investors do not acknowledge that there are speculative bubbles in some parts of the financial markets. The mania for bitcoin, the cryptocurrency, seemed to spread in December 2017, when prices fell from just under $ 20,000 to go below $ 4,000 in 2019. But the enthusiasm for bitcoin is back: after for him to pass the $ 20,000 mark in December, his price has doubled and hit highs of nearly $ 42,000 last Friday.
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Other rivals for Tesla’s bubble status and electric car’s pioneer rivals such as Nikola and China Nio, whose shares have risen in value as investors scramble to pledge claims in a gold race the green movement. As a result of the dramatic tenfold increase in Tesla’s market value since the beginning of 2020, leader Elon Musk was the richest man of the week. The carmaker owes more than its seven most valuable legacy retailers combined, despite making a fraction of their profits.
But bitcoin and Tesla are not the only ones to benefit at all. While 2020 will be remembered for most of us as the year we were confined to our homes, for financial markets it was a year when prices overcame their constraints. Billion hedge fund manager Paul Tudor Jones pointed out last month that more companies were priced at more than 100 times more earnings than at any other time in history – and about 50% more than before. them at the time of the dotcom bubble in the early 2000s.
Guy Monson, chief investment officer at Sarasin & Partners, a London-based investment firm, said 2020 was marked by “near universal asset price inflation”, a direct result of central banks injecting trillions of dollars. into the economy by buying government bonds through it. a process called quantitative easing (QE).
In fact, the virus caused a “flawless decline,” Monson said, meaning there was little political push back against government and central bank funding. Unlike overextended bankers in the 2008-09 banking crisis, it was difficult to blame pub owners or a hairdresser for a government order to close a shop. The purchase of central bank assets under QE was running at nearly three times the level of the financial crisis at the height of the pandemic, Monson said.
The key question that keeps investors awake at night is whether Federal Reserve chairman Jerome Powell and peers such as Christine Lagarde of the European Central Bank or Andrew Bailey of the Bank of England will be able to raise interest rates. build to anything like their pre-2008 levels. Even an advertisement that the Fed may be trying to reduce stimulus flows has been enough to slow markets in the past, especially during the “tantrum taper” in 2013. The jump was there their loan costs are enough to force central bankers to realize that the withdrawal of support would cause a painful stock market crash.
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Some argue that, by some criteria, market valuations are not as high. The S&P 500 is worth about 22 times the expected earnings for 2021, higher than the long-term average of about 16, but lower than the 30 that hit before the dotcom bubble burst, according to Kiran Ganesh , a multi-asset strategist at UBS Global Wealth Management.
“This is an environment that wants to be dangerous,” he said, pointing to cycling companies struggling with the early stages of the pandemic, such as large industrial manufacturers, banks and utilities. . However, he warned against “Fomo” – the fear of losing a bubble – attracting people who had seen their values as rockets.
Ganesh said there was little sign that central banks had the desire or ability to raise interest rates and bond yields, which move abruptly to prices, above historically low rates, providing the conditions for market gains. continuous stock. There were particular opportunities for UK companies to seize the US, he said, in part because of the Brexit deal that reduced uncertainty, even though it was at the expense of building other trade barriers.
But others believe that central bankers’ efforts to halt financial collapse have stored problems in the future, and already low interest rates mean they will have little room to maneuver if inflation rises. or – perhaps more likely – that growth will not meet high investor expectations. .
Central banks had “already done too much” before the pandemic, said Sven Henrich, founder of market analysts NorthmanTrader. Central bankers knew that their policies were feeding the stock market bubble with the effect of promoting inequality between already wealthy shareholders and those who could not participate. take part in the promotion of equality, he said. However, they could withdraw without causing panic causing problems if they lost control, he said.
“My concern is that they have created huge asset bubbles and price movements,” Henrich said. “They have created this monster that they need to feed. ”