Prepare for the end of the epic bubble in US stocks

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 Comparing the market capitalisation of the S&P 500 with US GDP has been dismissed as outdated – about 40% of S&P earnings come from outside the US.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.