This Market Bubble is Getting Dangerous

This Market Bubble is Getting Dangerous

Posted On December 16, 2020 12:08 pm

The stock market is always climbing a wall of worry, even in the roaring 90’s.

(Source: Michael Batnick)

Since 2009 and 1945 we’ve averaged a 5+% pullback or correction in the S&P 500 every six months.

  • this is the approximate frequency of market pullbacks that is likely to persist for the foreseeable future
  • the cost of owning the best performing asset class in history
  • smart long-term investors (DK members) harness this short-term volatility for their benefit

What makes up the Wall of worry today? Here’s a survey from Deutsche Bank.


(Source: Lance Roberts)

The current Wall of Worry consists mainly of vaccine/pandemic related potential bad things happening and insufficient fiscal and monetary stimulus.

  • these short-term risk factors are the potential catalysts for flipping Wall Street from “risk-on” to “risk-off”.

In the short-term no-one can predict the stock market, because just 8% of returns are a function of fundamentals, according to JPMorgan.

Moody’s, a blue-chip economist/analyst firm, has a base case forecast predicting a multi-year bear market beginning in early 2021

Goldman Sachs, another blue-chip economist/analyst firm, predicts stocks will rally to 4,600 on the S&P 500 (up 25%) by the end of 2022.

JPMorgan, another blue-chip economist, thinks stocks could hit 4,600 by the end of 2021.

Bank of America, another blue-chip economist, thinks stocks will post modest gains that disappoint many.

Bank of America expects global GDP to grow 5.4% in the next year, while the US economy grows 4.5%. The S&P 500 will rise roughly 5% to 3,800, and the 10-year Treasury yield will climb to 1.5%, according to the firm’s outlook note.” – Business Insider

All four of these economist/analyst firms are among the 16 most accurate out of 45 tracked by MarketWatch. How can they differ so greatly in their forecasts for the stock market?

Because forecasting the short-term future is nearly impossible.

According to JPMorgan, just 8% of 12-month stock returns are a function of fundamentals, meaning earnings growth and valuations. You can see that by how wide the 12-month return range is since 1995. By five years the range gets much narrow, with 44% of returns a function of fundamentals.

By 20 years 91% of returns are a function of fundamentals.

The fact that the “long-term” is far longer than most people realize is how market bubbles can form, and last for years.

  • Robert Schiller and Fed Chairman Alan Greenspan both called the tech bubble in 1996
  • the bubble continued until March 2000
  • along the way the Nasdaq fell 17% three times from 1997 to 2000 without suffering a bear market

That’s both good and bad news for investors who were traumatized by the fastest bear market back in March.

Speculative Manias Are All Around Us

(Source: Business Insider)

It’s a record year for IPOs, in terms of how much money has been raised by companies. That includes companies with questionable moats, no profits, and that some analysts think will never actually turn a profit.

Airbnb (ABNB) was valued at $154 billion at its peak. There was a 91% probability that paying such insane valuations for a non-profitable company that might never actually turn a profit was likely to end badly.

The average IPO this year has enjoyed a 41% first-day return, according to data compiled by University of Florida professor and IPO expert Jay Ritter — the highest mark since 2000, when IPOs jumped 56% on average amid the dotcom bubble.

The record high — a 71% average first-day bump — came in 1999.

The IPO market has notched other staggering figures this year as well, with nearly 430 deals, the most since 2000, and $160 billion in deal value, an all-time high, according to data from Dealogic.” – Business Insider 

What does this mean for investors? That you have to be more careful than ever with your money.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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