Bloomberg Businessweek January 11, 2021 pp18-19|Finance| “Is It Time To Worry?” “There are signs that the market is getting ahead of itself, but price gains have been crazier in the past”. “THE BOTTOM LINE The tech-heavy Nasdaq 100 has doubled in price in two years, but the Fed’s promise to keep interest rates low helps explain a broader rise in stock valuations”
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Summary of Article
Highest valuations since the “dot-com era” and high volatility have some “experts warning about a bubble.” So, what indicators support theses concerns? According to Peter Cecchini (AlphaOmega Advisors) “many of those are obviously speculative technology companies.” At Harvard researchers identified parameters in surges that meet “with disaster” including “increased share issuance, heightened volatility, and a sector or index that both doubles in price and beats the broader market by more than 100 percentage points over two years. Check, check and almost check.”
According to Robin Greenwood (Harvard Business School) “’The probability of a market correction is much greater today than in the historical average.’” Something called SPAC short for Special-Purpose Acquisition Companies have “gained about 100% on average for the year.” A SPAC is a subclass of IPOs that use “proceeds from a stock sale” to buy another business and a record $80 billion were raised last year.
Further about the bubble parameters, even a causal market follower knows that volatility is up and “The CBOE Volatility Index…is still elevated.” Besides Tech the broader markets is less worrying and as for tech “the Harvard researchers say it’s still not as exorbitantly elevated relative to the S&P 500…as in past bubbles.” Yet there are plenty of naysayers and “companies will have to deliver profits that justify stretched valuations.”
Another wildcard since 2020 has been the rise in trading by retail investors that have “inflated previously little-known companies.” According to Jon Burckett-St. Laurent (Exencial Wealth Advisors) “’…there are pockets of the market that don’t make a ton of sense to me.”
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