Tesla – “a positive earnings report would mark the first time that 17-year-old Tesla has reported four consecutive quarters of profit…” Wall Street Journal (article link). And yet, Tesla’s stock has grown by more than 5 times in the last 12 months. If a stock is company ownership, why would the value of a barely profitable company grow by 5X? Certainly, Tesla and Elon Musk have cool ideas and are building great stuff. They will be fun to watch, but still…
Asset bubbles happen when the price of a security or asset dramatically rise over a short time and are not supported by the value of the product. Think about the Tech Bubble of 2000. Dot Com companies were going public with little to no revenue or profit and their stocks would skyrocket. Think that doesn’t happen anymore? Hertz recently went bankrupt and the stock price rose 800% (June 4-9, 2020 Tradingview chart).
Bubbles aren’t new in history. There was Tulipmania in the 1630s, the South Sea Bubble of the 1720s, the Railroad Mania in the 1840s, the Wall Street bubbles of the 1920s, ’87, ’00/’02 and ‘08/’09. They all have the same persona, “it’s different this time.” So, are we in a new bubble? I wonder what we will name this one…
Honestly, we don’t know for sure, but much of the historical evidence points to the current stock market being a new bubble:
- High valuations; the stock market is historically the most overvalued its ever been (per the Buffett Indicator, see market cap to GDP chart) except for the market peak in February of this year.
- Increased use of credit to purchase assets – margin trading in increasing. (article link, link)
- Band-wagon jumping – studies show that a high number of individual traders have jumped into markets this year (think Robinhood, article link), which is historically a sign of Irrational Exuberance.
All of these point to signs that a new bubble has formed and unless the Federal Reserve suspends reality forever history should repeat itself (or at least rhyme) and this bubble burst.
So how should we manage money through this?
The same way that we have been; by staying with our rules-based models, moving more a bit more conservative but staying invested and diversified, avoiding an emotional attachment to stocks and the news cycle.
We appreciate the trust that you put into us and know that we are working hard for you.