If this is a bubble, what’s going to prick it?

The US stockmarket crash might not come this year. But all indicators say it will happen at some point.

When historians write about this year, will they focus on the roll-out of the various Covid-19 vaccines and the end of our pandemic? Or will that excitement be lost in the background of another, bigger story: the great US stockmarket crash of 2021? For market guru Jeremy Grantham of GMO (who has an excellent record in this kind of thing) it is the latter. The post-2009 bull market has, he says, “finally matured into a fully fledged epic bubble”. It has all the usual characteristics of the likes of the South Sea bubble; Japan in 1989; the US in 1929; and of course the one most of us had some dealings in – 2000. 

There is wild speculation – Tesla’s market cap at over $600bn amounts to over $1.25m per car sold vs $9,000 for GM (see this week's magazine for more on the tech funds that outperformed last year). There are bonkers “big picture” metrics: the Buffett indicator (market capitalisation to GDP) has smashed through its all-time highs. It has huge retail participation: Grantham notes that the volume of small purchases of call options on US equities is up eightfold on 2019 (a year in which the volume was already “well above” long-term averages). It has a “this-time-is-different” explanation: the bulls say that with money printing a go-go everywhere and interest rates stuck at zero, it is entirely rational to assume valuations to infinity (see page 6). Finally it has emotion, in the form of “hostility towards bears,” something Grantham has noticed just before all great bulls come to an end. So, if this is a bubble, what pricks it? The answer might be the vaccine itself – as investors look around in relief at their newly immune fellow men, they might also see that the fiscal and monetary stimulus Covid-19 brought will be cut back and that “valuations are absurd”. 

These are dangerous times for professional investors: get out too soon and their clients will desert them for those still making money. But they aren’t so dangerous for ordinary investors: we can get out when we like. At MoneyWeek we still think growth will surprise to the upside in 2021 as will inflation (as pent-up demand meets limited supply) so we wouldn’t be surprised if the US market kept going a bit longer. But we are also very aware that we don’t need to be particularly exposed to its excesses. Instead we can note that value stocks are as cheap in relative terms as they have been since 1999 and that emerging markets equities are as cheap against US equities as they have been for 50 years – and rebalance into both these things. Look as well to UK stocks (still cheap), to the dull but worthy insurance sector and of course to gold. None of these carry the excitement of Tesla but that doesn’t mean there aren’t fortunes buried in them. 

For more on this in this week's magazine, Bill Bonner is building wealth for the long term – something that means preferring deep value over momentum (value outs, momentum fades). Investing is as much an endurance game as anything else: note that over 90% of Warren Buffett’s wealth has been delivered to him via the magic of compounding since he turned 65. The US crash Grantham is convinced is coming might not come this year (the joy of Covid-19 freedom might addle brains for many more months to come) and the UK might not come good this year either. The US stockmarket crash might not come this year. But all indicators say it will happen at some point. Perhaps get that rebalancing done sooner rather than later. Happy new year to all our readers.  

Recommended

What will happen to the price of gold in 2022?
Gold

What will happen to the price of gold in 2022?

Gold is traditionally the go-to asset during inflation. But with inflation at 30-year highs, it has gone nowhere. Dominic Frisby investigates why, and…
20 Jan 2022
UK inflation is at a 30-year high and it hasn’t peaked yet
Inflation

UK inflation is at a 30-year high and it hasn’t peaked yet

UK inflation has hit 5.4% - its highest in 30 years. And it could be heading higher. John Stepek explains what it means for you and your money.
19 Jan 2022
Index fund
Funds

Index fund

Index funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.
18 Jan 2022
Model Y: Tesla has nailed it once again
Cars

Model Y: Tesla has nailed it once again

The electric carmaker’s new SUV crossover, the Model Y, sets the benchmark in the sector.
18 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022