There is currently lots of speculation going on, saying that the stock market is experiencing a bubble. This has been noticed everywhere on Google and YouTube. Does this look like we’re setting up for another Dotcom crash? NASDAQ recently went up 12,000, being a record. To some people, this looks like the stock market going up every day is a guarantee for it to fall. Hi, I welcome you all to my blog. If you enjoy this blog, please encourage me by liking, commenting, and sharing this post. Subscribing to this channel will also mean a lot. If you wish to know more about the stock investment game, watch my video ‘The beginners guide to stock investment 2020‘.
A quick check on NASDAQ about six months ago shows that it almost doubled with 6,000, having a 52 weeks high of 12,000. When things like this are noticed, it poses a lot of questions in investors’ minds, curiously finding out if we’re in the bubble era. So today, I will be discussing the question: is the stock market experiencing a bubble phase? Please remember that everything I say here is my opinion and not law, so don’t be tied to it. Also, all figures noted here are accurate for the 3rd day of September.
S&P 600 SmallCap
I will begin by looking at the S&P 600’s recent history; it has never experienced growth this year. Yes, the stock is high, but it does not indicate that we’re already in a bubble even if it goes higher than this. When you talk about the bubble scenario, it shows there is a massive high in stock value. This rise in the value will be much more than the recent high we are experiencing. From my conclusion, we are not in a bubble yet.
S&P 400 MidCap
There’s also a high in the S&P 400 MidCap, though it is not too high. Yet this is not a qualification for saying that we’re in a bubble. When you take a look at the S&P 500, it seems to be scary as the forward PE ratio for the S&P 500 appears to be a Largecap. This shows it is massively higher than anything, not even in history. In my opinion, this can qualify for being in a bubble phase. If you go-ahead to the S&P 500 large-cap, it’s a territory of bubbles. With the incredibly high value for the LargeCap, there is a lot of worry for the coming year.
From the forward PE Russell 2000, its growth category was purely in a bubble. They had their growth at 60. There has been no time this growth stock was trading at anywhere close to these forward PE. This shows that anything in this growth category in growth stocks is overvalued. It’s not just only overvalued in the context of looking at recent growth but anytime in the past, say, 16, 17 years.
PE & PEG S&P 500
Taking a look back to 2001 territory from the chat, there’s no way you would look at this chart and not be scared. This may leave you guessing about what’s going on in the stock market. Regardless, there are lots of things that have been observed about this bubble in the chart.
In my opinion, several positions are interesting about this that makes the market scary:
- There’s a clear divergence between growth stocks, whether it is being valued in forward PE metrics or in the way they value stock. When you observe the growth category traded at 29.2, you will need to go back to 2000, 2001, where the stock is traded in good value. Checking out the value stock, it seems high but not too high. This is where there’s a major divergence in the market where value stock is high but not in bubbles. This is why it’s getting dangerous to say the entire stock market, including other stock, is in bubbles. It can be wrong to assume that every other stock is in bubbles, just because a single stock is in a bubble.
- Fed Funds Rate: From what we have, it’s a 0.25 compared to last year’s, which was at this exact time, 2.25. This implies that if you’re keeping your money in a savings account, you will be making a healthy decision. This is because you’re getting no interest. When you’re merging your savings and cash, as stock and real estate goes up, and you’re saving some cash, this makes your cash less valuable every day. It is likely that money will be devalued in the next few decades, and when this happens, people would be doubtful to invest in the stock market.
- The last thing that causes worries in the stock market is not just the fact that stocks are in bubble territory, but nobody knows what will happen with the pandemic. With many cases coming in every day and numbers going less well, this indicates very good news. There are rumors about what is going to happen; nobody knows what the shakeup will be. These above observations leave everyone to think about what they feel.
The following are the concluded facts:
- Big tech-stock is not a good deal at the moment: This doesn’t mean that you cannot make a purchase of any of them, or you cannot make any earnings from them in the next few years, but the fact remains they are not a good deal at the moment. The fact is, even if you take a look at the big tech-stock, you would observe that even though it remains good, there is a lot of worry about its future.
- You could be ripped-off if you are buying anything S&P 500 LargeCap. Although it doesn’t still imply that you shouldn’t make any purchase of it, you could be ripped off. At the moment, you could be getting poor pricing as well. This is because people are hiding under the big tech-stock as the valuation just went up despite these companies which haven’t done anything special in the most recent times. Apple had some key changing products, which might have caused its market cap to increase. Also, Amazon did the same thing, being a very great stock in the last ten years. They are launching a game-changing product and services at the company that has experienced an increase in market cap in the past 5 to 6 months. This is why you should realize that buying this stock at the moment might not be good pricing.
- Many value stock and dividend stocks are the play. This is because it doesn’t seem to be the right time for people to focus on dividend stocks and value stock. To be honest, everybody loves the growth stock. For instance, everybody has focused on the Zoom stock and is rushing it en masse in the past months due to its market cap of about $130 billion. With this, everyone is rushing the tech stock, which has left an opportunity for value stock and dividend stocks as people don’t care about the stock right now. However, People would care about it later as there would be a rotation in the market. When valuations go too high, they come back when there’s a drop of a certain percentage. This makes money to rotate in the value and dividends place as this would bring planning of opportunities in value and dividend stock. This doesn’t apply to companies with a huge dividend market cap, but the smaller companies.
This time seems the perfect time for stock pickers to shine. This isn’t the time to conserve money and be finding out which stock would make money. When you go to some top period, you will find some stock that would do better than the market doesn’t, in general. Some stock would outperform others if they go down less or go up when the market is down. 5 or 6 months ago, it was obvious you could buy or sell anything with a look from the NASDAQ chart with a PE of 2200. It doesn’t matter which stock you wanted to buy then.
In my final opinion, I think it’s going to be critical to know what to do in the next half a year to 18 months in the stock market. If you’re not ready to know what you want in these stocks, you may not make much money in the market.
The bubble era for the stock market could be an interesting period throughout its lasting period. However, nobody knows when the bubble era sets in as a specific stock might be in a bubble today but crashes the following day. So do not be worried as a long term investor and just concentrate on the future of the company you are investing in. If you were entertained by this post, do not forget to like, comment, and share with others. Also, do not forget to subscribe if you are a newbie.
Recommended books for further reading:
- How to Make Money in Stocks
- How to Day Trade for a Living
- A Beginner’s Guide to the Stock Market
- Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
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- Passive income
- Silver & Gold coins
- Interactive Brokers
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