Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?

Last week, Tesla’s founder Elon Musk sent a two-word message on social-media site Twitter: “Use Signal”. It referred to an encrypted messaging service. But by the start of this week, a tiny unrelated medical devices firm – Signal Advance – had seen its value surge by more than 5,100%, reports Bloomberg. Mistaken identity is not unheard of in markets, but a 50-fold gain in three days for an unknown stock suggests that right now investors are far more afraid of missing out than they are of any downside.

No wonder Jeremy Grantham, a respected market historian and co-founder of US asset manager GMO, is now convinced we’re in “a fully fledged epic bubble”. Tesla itself – the pin-up stock for this bubble – has seen its share price surge more than tenfold since its low point in March last year. It became the world’s most valuable car maker in July. It makes the rise in bitcoin (see page 4), another speculative asset, seem tame by comparison. 

Examples abound. Eoin Treacy notes on fullertreacymoney.com that the number of big companies trading on a price/sales ratio of more than ten (meaning that the firm would have to pay out 100% of revenues for ten years running to pay investors back in a decade) is at levels last seen during the dotcom bubble. Comparing the market capitalisation of the S&P 500 with US GDP has been dismissed as outdated – about 40% of S&P earnings come from outside the US. But as John Authers notes on Bloomberg, according to Jason DeSena Trennert of Strategas Research Partners, the S&P 500 is now as costly as it was in 2000, even if you compare it to global GDP. Initial public offerings (IPOs) are surging despite the pandemic and a particularly speculative type of financial vehicle – the SPAC – listed in record numbers last year. Complacency abounds. 

So what can you do? Selling up and sheltering in cash is not the best option. “Calling the week, month or quarter of the top is all but impossible,” notes Grantham. But note that the US is very much the epicentre of this bubble. Asset manager Vanguard last month noted that US stocks have beaten international markets (as measured by MSCI indices) by a huge eight percentage points a year on average, over the past decade. The majority of that outperformance has been due to two things. First, investors have been increasingly willing to pay a premium for US stocks over their global peers, which has left US stocks looking expensive. Second, the dollar has gained against most other currencies. That is unlikely to be repeated in the coming decade – with the US starting from higher valuations, international stocks are more likely to win out this time. No one has a crystal ball. But if you are heavily invested in the US, now looks a good time to take some profit and invest in cheaper markets.

Recommended

What you should do if your energy provider goes bust
Personal finance

What you should do if your energy provider goes bust

At least four energy firms have gone under in recent days as the price of gas and electricity soars. Saloni Sardana looks at what to do if your energy…
20 Sep 2021
China’s property woes are coming to a head – so what happens now?
China stockmarkets

China’s property woes are coming to a head – so what happens now?

Chinese property giant Evergrande is in big trouble. And with no bailout plan yet, markets are getting nervy. John Stepek looks at how things might go…
20 Sep 2021
Three strong Asian stocks trading at bargain prices
Share tips

Three strong Asian stocks trading at bargain prices

Professional investor Nitin Bajaj of the Fidelity Asian Values investment trust picks three stocks that dominate their industries, earn good returns o…
20 Sep 2021
Iris Apfel: an inspiration to young fashionistas
People

Iris Apfel: an inspiration to young fashionistas

Iris Apfel made her name as a high-society interior designer before a show at the New York Met turned her into a fashion influencer. At 100 years old,…
19 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021