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Toppy’s stock markets spark more ‘bubbles’

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LONDON: A strong start for global equities in 2021 after the market’s fastest transition from bearish to bullish last year has prompted market scholars to signal concerns over expensive assets, with BofA calling it the ‘bubble of’ assets mother of all ”.

The torrent of liquidity flowing into global markets due to the unprecedented stimulus measures put in place to fuel economies emerging from the recession caused by the pandemic has fueled the euphoric rush for stocks, especially big tech.

The US Federal Reserve, for example, bought bonds at a record pace, doubling its balance sheet to nearly $ 8 trillion in less than a year. Over the same period, the top five tech stocks saw their market value double.

While financial assets worth US $ 1.1 billion are swallowed up by global central banks every hour, there is irrational exuberance on Wall Street, according to BofA.

Goldman Sachs CEO David Solomon and strategists at some major investment banks have since January warned of stock market volatility, especially in the immediate future.

Most of the traditional leading market signals were flashing amber, as they did before the dot-com bubble burst two decades ago. But what’s different this time around is that interest rates appear to be firmly at the bottom for years to come.

Ten-year bond yields for G7 countries are near record lows, lending credit to opponents of the “bubble” and caught in the hefty “equity risk premium” (ERP) relative to historical averages.

“You are practically ‘forced’ to switch to riskier assets,” said Jeroen Blokland, portfolio manager at Robeco, adding that outside the United States things look even less bubbly.

The US benchmark S&P 500 is now the most expensive developed market index based on the price-to-earnings ratio, trading at levels last seen during the dot-com bubble of the late 1990s.

Although Blokland sees the odds of global markets ending up in a bubble increasing, he said that future cash injections and tax expenditures could still support asset prices.

Some data points below signal higher chances of a bubble:

1 / PARTY LIKE IT IS 1999

Sitting at 22x 12-month futures earnings, the S&P 500 is trading well above its long-term average of just 16x. Other major indices are also trading above long-term averages, but are still far from S&P extreme levels.

(Chart: Global equity valuations are well above long-term averages: https://fingfx.thomsonreuters.com/gfx/buzz/yzdvxwaonpx/Pastedper cent20imageper cent201613736119174.png)

2 / SPARKLING CALLS, FALLS

The frenzy is also visible in the options markets. The CBOE put-to-call ratio has been pinned at nearly 20 years for eight months now, at levels last seen just before the dot-com bubble burst in 2000. Put options confer the right to sell at a price agreed in advance. allow holders to buy.

(Graph: put-to-call ratio pinned to lowest level in 20 years in months now: https://fingfx.thomsonreuters.com/gfx/buzz/jznpnojexvl/Pastedper cent20imageper cent201613736649173.png)

3 / LAST CHANCE TO BUY?

Extremely low bond yields leave equities attractive to investors who navigate the two asset classes, which is captured by the still heavy ERP relative to historical averages.

(Graph: Table on the risk premium on equities for the G7 and China: https://fingfx.thomsonreuters.com/gfx/mkt/jznvnojdxpl/Tableper cent20onper cent20Equityper cent20Riskper cent20Premiumper cent20forper cent20G7per cent20andper cent20China.percent20G7per cent20andper cent20China.p

4 / BUBBLY BIG TECH

While reflation trades drive gains in small-cap stocks, which fell sharply last year, interest in tech stocks has not waned. This creates concentration risk in the markets as the sector expands to represent one-fifth of all global stocks – the highest since the dot-com bubble of the late 1990s.

(Graph: Concentration risk in global equities? Technology dominates: https://fingfx.thomsonreuters.com/gfx/buzz/jbyvrdxjnve/Pastedper cent20imageper cent201613737694920.png)

5 / TAKE THE M2, ENJOY THE BUY RIDE

Another indicator is the extent of central bank liquidity support in the system. M2, a measure of money supply that takes cash and deposits into account, jumped sharply last year, creating bubbles in many corners of the markets, from bitcoin to high tech stocks.

(Chart: nasdaq and US money supply: https://fingfx.thomsonreuters.com/gfx/mkt/dgkplzjwmpb/nasdaqper cent20andper cent20USper cent20moneyper cent20supply.JPG)

(Reporting by Thyagaraju Adinarayan and Aaron Saldanha; Editing by Vidya Ranganathan and Susan Fenton)

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