September 2020 – Is a Bubble Building?

​How can we possibly be talking about a stock market bubble when we have:

A contentious election coming up…

An economy that is reeling from the Coronavirus…

Tens of millions of people unemployed in the United States…

Social unrest like we haven’t seen in 50 years…

Deficit spending beyond expectations (even before the Coronavirus)…

And the US debt growing at an enormous rate.

The Fed is wondering where inflation is. 

Well it appears a portion of it is in the US stock market.

Portions of the market have risen significantly in the past few months, and while profits for many of these companies are expected to rise, many of them are simply priced to take over the world.  

Brand loyalty, sure.  Ahead of their peers, yes definitely.  The last of their kind?  Probably not.

Think Chevron vs. Exxon.    Think General Motors versus Ford.    Think Avis vs. Hertz. 

With the news cycle not in sync with the 2020’s stock market performance let’s use a few charts to put things in context.

Despite having more deaths and the highest death per capita of a developed country, the US Stock Market (BLUE) is outperforming most other global stock markets and has outperformed international markets collectively (RED).

​When we examine the US Stock Market as a whole, we see that three areas of the market have done particularly well and three areas of the markets have done particularly poorly. 

Add this all up and you end up with a stock market that has performed well enough even as significant segments have been left behind.  What’s particularly unusual is that the most expensive sectors have outperformed segments that have a higher expected long term rate of return.   

There’s a few theories of why this has happened but evidence suggests that smaller retail traders are buying positions in a variety of companies, bidding prices up.  

Or maybe this is the “inflation” the fed keeps talking about, but can’t find.  

Worth noting that some casinos are not open.

But the stock market is.

In contrast to a rising, bullish stock market, high-quality bonds have done quite well since their initial fall in March due to the Coronavirus.   Contradictory because high quality bonds are where people put money when they are nervous, and the fact that bonds are up so significantly this year means that investors may be nervous. (Or need somewhere other than the stock market to put money!)

High yield bonds, lower quality bonds that pay higher interest, appear to be priced more reasonably given high yield bonds come with more risk….they haven’t recovered as much as high-quality bonds. This this confirms that there is some fear in the bond markets, and it’s important to note that bond investors are generally considered to be significantly more sophisticated than (no offense to the new Robinhood or Etrade investor starting out) small retail investors. Bonds are boring and often owned by financial advisor’s clients, institutions and other organizations that have a long time frame and a desire for stability.

So there’s both fear being recognized in the bond market but also extreme bullishness in other parts of the stock market.

Conflicting signals.  Just like the media.

Note: If you are a client, don’t worry, we’ve considered all of this as we evolve your portfolio allocations in the context of your overall plan.

Thanks to Jean-Paule Rodrigue for sharing his Stages of a Bubble Graphic with the world