US stocks are obviously in a bubble. But is it a rational bubble?
Everyone wants to know if the US stockmarket is in a bubble. But that is the wrong question, says Merryn Somerset Webb. Of course it’s a bubble. The real question is: is it a rational one?
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.
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
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.
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.
-
What’s changing with employers’ National Insurance – and how will it impact you?
You might think the upcoming changes to employers’ National Insurance won’t impact you unless you’re a business owner, but experts have warned it could limit pay rises, cause redundancies, and push inflation higher.
By Katie Williams Published
-
Will Donald Trump invade Greenland?
Trump has announced renewed interest in taking over Greenland, an autonomous territory of Denmark. Why does he want it and what are the implications?
By Simon Wilson Published
-
What’s the outlook for the shipping industry in 2025?
All we know for certain about the year ahead is that it will be volatile. But the container shipping sector thrives on choppy waters
By Rupert Hargreaves Published
-
Is the US economy set for success?
Ignore the pessimists: US stocks will keep charging ahead, says Max King
By Max King Published
-
What investors can expect from stocks and the economy in 2025
There are reasons for investors to be hopeful about 2025, with slowing interest rates and moderating oil prices. But trouble may be brewing in bond markets
By Alex Rankine Published
-
Why Wise could be worth a lot more than its share price implies
Foreign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
By Jamie Ward Published
-
Can The Gym Group pump up your portfolio?
Gym Group was one of the best UK small-cap stocks in 2024 and will beef up your profits this New Year
By Rupert Hargreaves Published
-
MoneyWeek's five predictions for investors in 2025
MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
By Matthew Lynn Published
-
How buy-and-build stocks deliver strong returns
Bunzl, DCC and Diploma became successful through buy-and-build – rolling up dozens of unglamorous businesses. How does it work and what makes it successful?
By Jamie Ward Published
-
Singapore Technologies Engineering shows strong growth
Singapore Technologies Engineering offers diversification, improving profitability and income
By Dr Mike Tubbs Published