Financial analysts have started speculating that we are in a stock market bubble. Based on my experience with the dotcom market bubble, I’m not so sure we’re in one … yet.
Are we in a stock market bubble?
It’s important to know that most people who “see” a bubble are not in it. They are the skeptics who don’t believe prices can continue to go higher. As we all know, you can’t tell the market what to do. Right now, we have plenty of Fed liquidity in the mix and rock bottom interest rates. It makes sense to put money into stocks.
However, valuations are getting stretched thin, and if more speculation comes into stocks, then we could be in trouble.
As I mentioned in last week’s blog, the Fed often lets all the air out of a bubble. If or when the current Fed becomes concerned about valuation (and hence, inflation), you can expect a sharp and sudden market downturn.
Don’t expect a pop anytime soon
I don’t believe this will happen anytime soon. The coronavirus pandemic will continue to tug at the reins of businesses for the foreseeable future. This means the Fed will continue to support the economy with ample liquidity and low interest rates. (Central banks around the world are following suit.)
While the stock market does not always signal a strong economy, it does boost psychological factors, like confidence. After the markets crashed down hard in February and March, confidence was obliterated. It did not take long for greed and excess to re-appear. And here we are, near all-time highs for all market indices.
No matter where we are with regards to a stock market bubble today, it’s a good time to be defensive and proactive to spare yourself losses. Index puts are rather cheap and a great way to protect your portfolio against sudden market drops. Stocks have had a good run, so sell some positions and bank the money. Cash is always good have on hand.
