By Michael Wursthorn and Akane Otani
For once, everyone seems to agree: Much of the market looks like
it's in a bubble.
Shares of unprofitable companies like GameStop Corp. and AMC
Entertainment Holdings Inc. are rising at a breakneck pace,
propelled by a growing army of individual investors. Options
activity is surging, bitcoin prices are near records and businesses
are rushing to opportunistically sell stock through a flurry of
initial public offerings, listings of blank-check companies and
follow-on share sales.
To many, valuations look stretched as they hover at levels
similar to the highflying days of 2000. That said, high valuations
alone don't necessarily mean the rally is near its end, investors
say. History has shown that markets have often been able to climb
far longer than thought possible, be it the dot-com boom in the
late 1990s or the dizzying rise in Japanese stocks in the
1980s.
And recently, the broader stock market has been on the decline.
The S&P 500 dropped 3.3% last week, though it remains up 66%
from its March low. The bubblelike behavior there has mostly been
contained to a handful of individual stocks, not larger
indexes.
An even bigger issue arguing against a marketwide bubble is
simple math. With interest rates at rock bottom and further
stimulus on the table, many investors are being handsomely rewarded
by putting their money into riskier, higher-yielding assets. What's
more, in many cases earnings have held up or been robust, despite a
global pandemic.
That combination of factors has helped push investor optimism.
Bullishness on stocks among money managers is at a three-year high,
according to a recent Bank of America survey of 194 money managers
who oversee $561 billion in assets. Meanwhile, the average share of
cash in portfolios -- typically a safeguard against market turmoil
-- is at the lowest level since May 2013.
Nonetheless, investors are trying to identify what could cause
bubbles among individual stocks to pop and whether any of the
bursts will spread to the wider market. Next week, investors will
get a look at fresh data on the manufacturing sector, earnings from
Amazon.com Inc. and Google parent Alphabet Inc. and the January
employment report.
"You know, this one has checked off all the boxes from a history
book," said Jeremy Grantham, co-founder of Boston money manager
Grantham, Mayo, Van Otterloo & Co., who predicted the market
crashes of 2000 and 2008. Mr. Grantham has been calling the current
market overheated since last year.
But even he concedes the timing of a market top is
difficult.
"We know each bubble is a little bit different and, with the
help of new trading platforms and the internet, it could set more
records," he said.
Mr. Grantham isn't alone in his worries. Nearly 90% of some 627
market professionals think some financial markets are in a bubble,
according to a recent Deutsche Bank survey. Meanwhile, Google
searches for the term "stock market bubble" reached an all-time
high in January.
Jerry Braakman, chief investment officer of First American
Trust, says his company, concerned about stretched valuations in
the U.S., has been gradually shifting more money into stocks
elsewhere.
Lately, "the market has not been correlated to the macro
picture," he said.
While the moves of some stocks and assets have been jarring,
analysts and investors say they aren't surprised by the
freewheeling, speculative activity in the financial markets.
A super-accommodative Federal Reserve, low interest rates and,
more recently, optimism on the coronavirus vaccine and economy have
underpinned much of the buying by investors during the past 11
months. Many Americans built up their savings during the pandemic
-- and stand to gain even more if Congress follows through on
another stimulus package. And the prospect of low returns in most
other assets has driven investors to buy stocks more
aggressively.
Add to that, more individual investors are trading than ever
before. Those investors threw their weight around last year by
shocking Wall Street veterans with a rash of irrational stock
picks, including Hertz Global Holdings Inc., which spiked nearly
900% from its low to its high in the wake of filing for bankruptcy
protection.
This year's encores have been even more stunning. On Wednesday
alone, 24.5 billion shares and 57.1 million options contracts
changed hands, a record driven by individual investors, according
to Rich Repetto, a managing director in Piper Sandler & Co.
GameStop shares more than doubled that day, briefly giving shares
of the beleaguered videogame retailer a more than 1,700% gain since
the year's start.
"This is merely one example of what's becoming dozens of
dozens," Mr. Grantham said. Other retail darlings include AMC,
which jumped more than 300% Wednesday, and BlackBerry Ltd., whose
stock the same day notched its biggest gain in more than 17
years.
Companies are rushing to get in on the action.
Companies have raised $13.4 billion through 24 IPOs so far this
year, a 300% jump in listings from the same period last year,
according to Renaissance Capital data. Blank-check companies
continued to flood the market, with 91 gathering about $25 billion,
nearly a third of the value raised throughout all of last year,
according to SPACinsider.com. And there have been 111 offerings of
additional shares by U.S.-listed companies, doubling the number
from the same period a year earlier, Dealogic data show.
Usually, such frenzied activity would lead big money managers to
pull back from stocks. But many argue that shares of GameStop, AMC
and other highflying stocks represent their own bubbles -- and
don't pose a threat to the entire financial ecosystem. Analysts at
Goldman Sachs Group Inc. say the run-up in unprofitable stocks,
which they say make up about 5% of the overall market, poses little
risk of contagion.
"These stocks don't make up the bulk of the stock market," said
Samantha McLemore, a portfolio manager at $3.5 billion
money-manager Miller Value Partners. "There are so many areas of
the market that we're finding attractively valued."
At first glance, investors' go-to for measuring valuations,
price-to-earnings ratios, suggests the market looks expensive.
The S&P 500 currently trades at 22 times projected earnings
during the next 12 months, not far off from the 25 times the index
traded at in 2000, just before the dot-com crash, according to
FactSet.
But that's only part of the picture. That level looks less
concerning once low interest rates and earnings, which are expected
to grow, are factored in, several investors and analysts said.
One simple explanation for why investors haven't pulled back
more?
"We've seen it in the past -- if you think you have a bubble and
sell too soon, that can be a very costly trade," said Mr. Braakman
of First American Trust.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and
Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
January 31, 2021 05:44 ET (10:44 GMT)
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