Stocktake: Bubbly stocks may continue ‘bubbling up further’

‘Many similarities’ between today’s US market and the late 1990s tech bubble

On the boil. Photograph: iStock

On the boil. Photograph: iStock

 

US markets are close to bubble territory but it’s not time to cut back on risk just yet. That’s according to a recent Allianz note that assessed US equities based on a 10-criteria bubble checklist inspired by market historian and bubble expert Charles Kindleberger.

Of the 10 criteria, the most worrisome are overvaluations of multiple asset classes (both bonds and US stocks are expensive), ultra-easy monetary policy (a factor in all historical bubbles and “clearly present” today), financial sector deregulation (regulations were scaled back under the Trump administration), and a boom in innovative financial instruments (cryptoassets and special purpose acquisition companies, or Spacs).

Other concerns include overtrading and exponential price moves (growth stocks have roared higher in this economic cycle while recent retail speculation has driven “weird” price action) as well as high hopes for a new era (soaring earnings expectations amid talk of another “roaring 20s” as well as technological breakthroughs in the field of artificial intelligence).

As for valuations, European, Japanese and Asian markets are trading at or below historical norms, but the US trades on a cyclically adjusted price-earnings (Cape) ratio of 37 – a reading last seen in late 1998, during the tech bubble. The Nasdaq’s Cape ratio of 55 is similar to early 1998 levels. Almost all sectors – not just tech – look expensive.

Overall, most indicators “are waving red flags” and there are “many similarities” between today’s US market and the late 1990s tech bubble.

However, bubbles don’t burst until central banks hike rates or rein in easy-money policies. Consequently, Allianz remains “nervously ‘risk on’ for now”, saying US stocks will likely “continue bubbling up further”.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.