Over the past weeks, several market and industry experts have been publishing an alarming number of convincing statistics and arguments that stock markets worldwide are in a dangerous ‘bubble’ territory. As stock prices are now trading at unsustainably high levels, particularly driven by investors’ unreasonably rosy expectations for a V-shaped economic recovery, but when those expectations start to be crushed by the real facts, prices will return to normal, violently collapsing in the process.
After a record rebound from a health-crisis-induced market crash last March, most stock benchmarks around the world have registered new record-highs in the early days of 2021. However, as stock prices continue to climb, numerous top banks are getting increasingly worried this unprecedented boom, which considerably resembles the dot-com bubble, will result in a similar bust. At this point, stock prices are truly at what experts define an “insanely high” level. Almost every research and analysis using price-based indicators are signaling that the bubble continues to grow, and the larger the bubble, the steepest the crash.
Traditionally, a stock market bubble is formed when investors get overly optimistic about a new development or possibility, which then prompts fast price surges as they pump money into these stocks. Oftentimes, caution is thrown to the wind and a speculative frenzy starts supported by future prospects for that asset that might never come true. Right now, the leading stocks in the market are Facebook, Apple, Tesla, Microsoft, Amazon, Google, and they account for 24% of the index, and the reality of it is they don’t really participate in the reopening of the economy per se. Those stocks are already trading at extremely high multiples. They’ve got regulation issues coming down the pipeline and the reality of it is they’ve benefited the most from us being locked inside.
One of the most alarming pieces of evidence pointing out to an excessive market speculation is the fact the Tesla shares are trading at unprecedented highs while there’s no guarantee the company’s future growth will match investors expectations. Even though some may defend that risk in the markets has vanished due to the latest bullish run, bubble markets often present bizarre behavior right before they collapse. The current rally is very similar to what was witnessed during the dot-com crash of the late 1990s, when stocks have sharply risen and then dramatically fell. In recent days, global stocks have been facing extra pressure as millions of online investors gathered up to send the share prices of the unprofitable U.S. video game store chain GameStop to sky highs.
One of the world’s top market experts, Mohamed El-Erian said that there will be “serious and widespread unintended consequences” if global output fails to return to pre-virus levels. He stressed that there is “no doubt” that company valuations have become “massively disconnected” from the economy, and if the crash doesn’t happen as a result of the investor frenzy, the current bubble will certainly pop if the economy fails to catch up with record-breaking valuations. Mr El-Erian added that the staggering amount of stimulus money unleashed by governments and central banks is inflating shares instead of boosting the economy.
Furthermore, the US Securities and Exchange Commission came reported that “extreme stock price volatility” has the potential to cause “rapid and severe losses” for investors and to undermine market confidence. On every front we look, there are several warnings that the markets are hanging by a thread and could collapse with the blink of an eye. As Richter outlines in his article, the stock market has been broken for a long time, but now it has finally blown into the open for all to see. The growing risks, speculation, manipulation, and frenzy are spiraling out of control and soon we will be witnessing an astronomical explosion that will reset the course of the financial markets for once and for all.