Wall Street’s meteoric rise has pros worrying about a bubble
NEW YORK — Now, even the pros on Wall Street are asking if the stock market has shot too high.
U.S. stocks have been on a nearly nonstop rip higher since March, up roughly 70% to record heights and causing outsiders to say the market had lost touch with the pandemic’s reality. But Wall Street kept justifying the gains by pointing to massive support from the Federal Reserve, lifesaving deliverance from COVID19 vaccines and efforts by Congress to pump more stimulus into the economy.
Recently, though, some of the market’s action has become tougher to explain, and not just the maniacal moves for GameStop. Some investors are so hungry for huge payoffs that they’re pouring into investments without knowing what their dollars will go toward. And by some measures, the broad stock market looks more expensive than it did before the 1929 crash.
All the fervor has Wall Street openly debating whether the market is in a dangerous bubble, after months of batting away the possibility.
A bubble is what happens when prices for something run much higher than they should rationally be: They’ve been a regular occurrence through history, going back to tulips in the 17th century and pets.com at the close of the 20th.
“It is a privilege as a market historian to experience a major stock bubble once again,” the famed value investor Jeremy Grantham, who has correctly called several major market turning points, wrote in a recent paper. “Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage crisis, and now the current bubble - these are the four most significant and gripping
investment events of my life.”
To be sure, most professional forecasters say the U.S. stock market is not headed for a crash, just slower returns than before. But those optimists are having to do more work convincing others.
“You might say a bubble occurs when people think that the market is going to go up but worry that it may drop,” said Robert Shiller, a Yale professor who won a Nobel prize for his work on explaining stock price movements. “That is where we are.”
He said the market looks vulnerable, but he cautioned that some hallmarks of a classic bubble aren’t present today, such as investors talking about a “new era” for the economy. He also said that it’s difficult to predict when the market will run out of momentum and turn lower.
“People often extrapolate trends, and they go on longer than you ever think,” he said. “And then they disappear.”
Yet for all the worries, much of Wall Street is still
optimistic, forecasting more gains ahead.
COVID-19 vaccines have raised expectations that daily life will get closer to normal this year and return the economy to health. If earnings rise a lot and stock prices make only modest moves, prices would look more reasonable, and that’s precisely what much of Wall Street expects to happen.
Then, there’s the Fed. Past bubbles have popped after the Federal Reserve started raising interest rates in hopes of cooling off an overheated economy or markets. For now, the Fed seems to be years away from doing that. It’s even said for the first time that it’s willing to keep rates low for a while after inflation tops its 2% target.
Margie Patel, senior portfolio manager at Wells Fargo Asset Management, said the Fed has pretty much signaled to Wall Street that it won’t allow for a big market downturn.
“As long as interest rates are this low,” she said, “it’s really hard for me to see how you could have much of a correction in stocks.”