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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Ofgem proposes new energy tariffs with low or no standing changes
Standing charges have invited public backlash as households battle high energy bills
By Katie Williams Published
-
Google shares bounce on Gemini 2.0 launch
Google has launched the latest version of its Gemini AI platform, and markets have responded positively. Is it time to buy Google shares?
By Dan McEvoy Published
-
India's stock market drops - why it's thrown investors into frenzy
Nifty 50, India's stock market index, has dropped 8% from a September record amid concerns of an economic slowdown and foreign investors pulling out
By Alex Rankine Published
-
Warren Buffet invests in Domino’s – should you buy?
What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
By Dr Matthew Partridge Published
-
4Imprint makes a strong impression – should you buy?
4Imprint, a specialist in marketing promotional products, is the leader in a fragmented field
By Dr Mike Tubbs Published
-
Invest in Glencore: a cheap play on global growth
Glencore looks historically cheap, yet the group’s prospects remain encouraging
By Rupert Hargreaves Published
-
Should you invest in Trainline?
Ticket seller Trainline offers a useful service – and good prospects for investors
By Dr Matthew Partridge Published
-
Key takeaways from the MoneyWeek Summit 2024: Investing in a dangerous world
If you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
By MoneyWeek Published
-
DCC: a top-notch company going cheap
DCC has a stellar long-term record and promising prospects. It has been unfairly marked down
By Jamie Ward Published
-
How investors can use options to navigate a turbulent world
Explainer Options can be a useful solution for investors to protect and grow their wealth in volatile times.
By James Proudlock Published