Time to pause? Wall St. grows wary of some reserve bubbles

LONDON (Reuters) – Wall Street is in turmoil over stock market bubbles as rising share prices of some losing companies, hot public markets, and amateur investors chasing foamy-valued stocks spark fears of a pullback.

A wave of money supply, very low or no interest rates, and the launch of the COVID-19 vaccine triggered a “ buy it all ” rally, helping global equities add a whopping $ 33 trillion worth from the lows of last March.

The euphoria is evident in the small-cap Russell 2000 Index, where component companies with negative operating income outperformed the broader index by nearly 50 percentage points over the past year, a Reuters analysis of the index showed. Refinitiv data.

“The pockets of the market have recently demonstrated investor behavior consistent with bubble sentiment,” Goldman Sachs analysts led by David Kostin wrote in a statement.

Goldman noted that the outperformance of negative earnings is still a long way off from the 140 percentage points recorded during the dotcom boom of 1999-2000 and more in line with the one immediately following the financial crisis of 2008.

While this may be of some comfort to investors, JPMorgan equity strategist Mislav Matejka predicts that the “hot” areas of financial markets could be subject to profit taking that could extend to equity indices.

However, he said, those drops could be buying opportunities.

Stock valuations have risen to levels not seen since the early 2000s, but this has not caused investors great concern as interest rates are at historic lows, backed by commitments to hold them until a firm is established. solid recovery.

For examples of these selective bubbles, look at electric vehicle stocks: Tesla grew 8x and electric vehicle charging equipment maker Blink Charging by 2000% in the past 52 weeks, while an IPO index rose 200. % since last March compared to a mere 57% for the benchmark S&P 500 index.

High retail participation contributed to the price surge. Retail broker eToro told Reuters it had registered more than 380,000 new users in the first 11 days of 2021.

US video game retailer GameStop’s 50% jump on Monday, more than 250% year-to-date, was attributed by traders to short sellers quickly repurchasing shares to cover potential losses, defined as short-squeeze, and to investors al detail piling to advantage from the wave.

Ninety percent of respondents in a recent Deutsche Bank poll said they saw price bubbles in parts of the markets, with the majority expecting Tesla to halve by the end of 2021.

BUBBLES DO NOT BURN EASILY

However, not all major banks see bubbles.

“Everyone is asking us about bubbles … even the foamy equity indices are still far behind their performance during previous bubbles,” said Robert Buckland, Citi’s equity strategist.

For example, the S&P is trading 22x 12-month forward earnings, below the 25x peak seen before the dotcom crisis.

Citing the premiums on minimum bond yields, Citi believes equity markets still have a long way to go.

At just over 1%, the yield of the Bloomberg Barclays Multiverse index of 10-year government and corporate bonds worldwide is the lowest in the index’s 22-year history – less than half the rate of just two years ago and compared to 6.2% at the height of the dotcom bubble.

A rollback of the US Federal Reserve easing is seen as a threat to markets, but there is still no sign of that from the central bank.

“Equity bubbles are not delicate,” Buckland added.

“They don’t burst at the first hint of stiffening from central banks. They are runaway trains that misallocate capital, reshape the investment industry and end careers. It takes a little rest. “

Also, for all signs of speculative excess from Surveys on hedge funds and investor sentiment: The accumulated liquidity in money market funds or in household or corporate savings is still much higher than before the outbreak of the pandemic.

“The picture is blurred – intense activity in some stocks and options, but less extreme overall investment flows,” Andrew Sheets, Morgan Stanley’s cross-asset strategist, told clients.

“Hedge funds look optimistic, but many companies and individuals continue to keep liquidity on the sidelines given the uncertainty.”

Thyagaraju Adinarayan reporting; Editing by Kirsten Donovan