LONDON – A strong start for world equities in 2021 after the fastest bear-to-bull market switch last year has prompted market mavens to flag worries about pricey assets, with BofA calling it the “mother-of-all asset bubbles”.
The torrent of cash sloshing around world markets due to the unprecedented stimulus measures in place to fuel economies coming out of the pandemic-led recession has fed into the euphoric rush to equities, particularly Big Tech.
The US Federal Reserve for instance has been purchasing bonds at a record pace, doubling its balance sheet to nearly $8 trillion in less than a year. During the same period, the five biggest tech stocks have seen their market value double.
As financial assets worth $1.1 billion are gobbled up by global central banks every hour, there is irrational exuberance on Wall Street, according to BofA.
Goldman Sachs’ Chief Executive David Solomon and strategists at some major investment banks have since January been warning about stock market volatility, particularly in the immediate future.
Most traditional market-top signals have been flashing amber – just as they did before the bursting of the dotcom bubble two decades ago. But what’s different this time is that interest rates look firmly stapled to the floor for years to come.
Ten-year yields on bonds of G7 countries are hovering near record lows, lending credence to “bubble” naysayers and captured in the hefty ‘equity risk premium’ (ERP) relative to historical averages.
“You’re practically ‘forced’ to move into riskier assets,” said Jeroen Blokland, a portfolio manager at Robeco, adding that outside the United States, things look even less bubbly.
The benchmark U.S. 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 dotcom bubble of the late 1990s.
Though Blokland sees rising odds that markets globally end up in a bubble, he said the upcoming cash injections and fiscal spending could further support asset prices.
Sitting at 22-times 12-month forward earnings, the S&P 500 is trading well above its long-term average of just 16x. Other major indexes are also trading above long-term averages, but are still far from S&P’s extreme levels.
The frenzy is also visible in options markets. The CBOE put-to-call ratio has been pinned at near 20-year lows for eight months now, at levels last seen just before the dotcom bubble burst in 2000. Put options confer the right to sell at a pre-agreed price and calls allow holders to buy.
