Is it a Bubble or Not? When will It Burst?

Bloomberg Businessweek July 27, 2020. Pp23-24 Finance | “Investors Can’t Stop Dancing” “The bull is calling the tune, but prices are high and some pros are getting anxious about what will happen when the music stops”

Despite being in the greatest economic downturn on record “professional investors are worried the that the stock market may be rallying itself right into a bubble.” At this point “investors are crowding tightly into shares of tech-inflected companies believed to have the least at risk from economic disaster”. The top five stocks consist of the following percentage of the S&P 500 value at year end (Through July 20) with Microsoft at 6%, Apple 6%, Amazon 5%, Alphabet 3% and Facebook 2% for a total of 22% versus 12% in 2015. Investors in these equities believe their future earnings will be better but paired with that enthusiasm is doubt about the rest of the broader market. Many firms are so uncertain they are reluctant to provide forecasts regarding their future.

Some faith, in the market run-up, is based on the funding of the markets by the Federal Reserve and the concomitant restraining of interest rates which effectively reduces the usual competition for investment dollars into fix income investments. Given the mometum and support by the Federal Reserve, professional investors and private investors alike, now about 18% of the market, are reluctant to stand on the sidelines.

Many believe there is still upside in this market despite the high valuations but are we reaching the inevitable precipice? Historically there does seem to a pattern or cycle but there really are no realible signs of impending doom. Having said that, less commitment by Congress and the Federal Reserve could be a trigger but other seemingly small or random events could initiate a crash. According to Scott Minerd, Guggenheim Investments, “How will we know if it’s a bubble?...After the stock market crashes.”

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