Is the US stockmarket a bubble? That’s the question everyone wants answered right now. It is the wrong question. Of course it’s a bubble. Choose any valuation metric you like in the US and it will tell you so. Yardeni Research puts the ratio of S&P 500 total market capitalisation to S&P 500 forward sales (an adapted version of the “Warren Buffett indicator”) at a record 2.54 times at the end of December, versus 1.88 at the beginning of 2000. A bubble. A full 53% of S&P stocks had forward price/earnings ratios of over 20 times in the first week of January – it was a little higher in June last year, but that aside is the highest since the series began in 2006. Bubble.
The percentage of stocks in the US trading above the 200-day moving average is at a ten-year high. Within almost all sectors, more than 90% of stocks are trading above their 200-day moving averages (notable exceptions, says Variant Perception, include biotech, junior gold miners, utilities and energy). Bubble. All technical indicators show what Variant describes as “extreme overbought market conditions” and 89% of respondents to a Goldman Sachs survey said they expect stocks to rise this year. Bubble.
But on top of all this number stuff, we are also getting a fabulous crop of delicious new market mania stories. There is a SPAC planning to launch with the ticker LMAO (if you don’t use social media, ask your kids). There is the poor man who technically owns $250m worth of bitcoin (worth $20,000-ish when he got them in 2011) but has only two password attempts left to get access to the hard drive they are on (see this week's magazine for more on bitcoin and listen to this week’s podcast for the full story). And of course there is the brilliantly extraordinary Elon Musk, a man who has accumulated wealth faster than anyone else ever in the history of the world. Bubble? Oh yes.
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
The more interesting question then is not: “Is this a bubble?” but: “Is it a rational bubble?” (If there is such a thing.) You can make a pretty good argument for the latter. It’s hard to see where else other than equities (and gold...) money goes when bond yields are still near record lows and global money creation keeps taking out record highs. In 2008, the UK put in place economic stimulus to the tune of 1.5% of GDP to ease us through the financial crisis. This time it’s 26%, according to Minerva Research. The numbers for the US are 4.9% and 18%. M2 (one measure of the supply of money) in the US is up 26% year on year. None of us have ever seen numbers like this before.
You can also argue that while the economy doesn’t look tip top right now, there is fabulous momentum behind recovery: earnings should explode next year, albeit from a very low base. So what do you do? Take a little money out of the most overvalued parts of the market? Sure. Note that some US tech stocks (to say nothing of bitcoin) are topping out and see this week's magazine for our worries about super-expensive Indian stocks. Shift your portfolio towards the bits of the market that are not overvalued – energy, smaller companies, financial and healthcare? Definitely. The US market might be experiencing a perfectly rational bubble – but that doesn’t make complacency safe.
-
How inheritance tax trick is helping families save ‘six-figure sums’Happy to skip a generation to save thousands on inheritance tax? A deed of variation could be the estate planning tool you need.
-
Nationwide: House prices unexpectedly dropped in AugustHouse prices fell by 0.1% in August in a surprise drop, according to Nationwide, as “affordability remains stretched”
-
Are wealthy whisky enthusiasts leaving Britain?Collectables Wealthy whisky enthusiasts are heading to tax-friendly countries such as Dubai, where there is more disposable income to spend on collectable luxuries like rare whisky.
-
'The rise and fall of Kodak is a lesson for the tech giants'Opinion The long decline of Kodak – a once-dominant company – shows why no business is safe from disruption, says Matthew Lynn
-
8 of the best properties for sale with kitchen gardensThe best properties for sale with kitchen gardens – from a 17th-century timber-framed hall house in Norfolk, to an Arts & Crafts house in West Sussex designed by Charles Voysey with a garden by Gertrude Jekyll
-
Why investors can no longer trust traditional statistical indicatorsOpinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Investors rediscover the virtue of value investing over growthGrowth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
8 of the best properties for sale with shooting estatesThe best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocksStocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
