Are We Heading Towards a Market Bubble?

From the desk of Hayden Kibbey, BCP Intern

Jeremy Grantham, famed investor and chief investment strategist of asset management firm GMO, has called the current market a “Real McCoy” bubble. This has caused the financial media to pause and reflect, noting that Grantham predicted three of the last major market bubbles. While it is no doubt that the stock market is pricing in an optimistic recovery, there are strong signals to not heed Grantham’s warning just yet. In past bubbles, two forewarning signals could be counted on. First, bullish sentiment skyrockets, which is not currently the case. Bullish sentiment (percent) according to the AAII Investor Sentiment survey was recently 24.37; this topped out in the equity bubble of 1999 at 60 (historically the simple moving average is around 40). Second, cash floods the market during market bubbles, when certain astronomical growth is promised. In reality, Barron’s reports that investors are still sitting on record amounts of cash – close to $5 trillion – in money market funds. With interest rates around the world at record lows and the Fed promising to keep them low through 2022, it is disingenuous to push the claim that stocks are in a bubble without considering broader market conditions.