I’ve got two theories that explain why the share market is so high, but neither are good.
Such interesting times hey?
A month ago we were wondering if we were looking at total economic collapse – a global economic meltdown.
Now we’re wondering if we’re in the middle of a share market bubble.
How are we wondering if we’re in the middle of a bubble when it’s still not clear that capitalism itself is going to survive?
But it’s a data point that everyone is struggling to make sense of: the worst economic data ever, share markets at all time highs.
How do you even start making sense of that?
Now, you know me, I’ve got a few people I follow and like to listen to. And if I can’t tell you anything else, I can tell you that no one has any idea.
There are as many theories as there are analysts right now. Over the next few months, some of them are going to be proved right. But it’s impossible to say which ones.
But there is definitely no agreement or consensus about what’s happening right now.
Anyway, there’s a couple of theories that I find interesting that I wanted to share with you.
The first is that shares are booming because this is a ‘momentum market’.
Now when you hear the phrase momentum market, what you should probably take that to mean is “a herd of sheep running around in a paddock” market.
Prices go up because prices went up. Nothing matters but which way the herd is moving.
And there’s evidence for that.
Remember that, right now, equity managers think that this is the biggest bubble ever. They don’t think stocks have ever been as overvalued relative to performance as they are now:
And yet, they’re piling into the market. They’ve pivoted from cash back into shares:
… and hedge funds have gone almost “fully long” – they’re buying up big:
Why? Because the music is playing.
Remember what the Citigroup CEO Chuck Prince said just before all hell broke loose in the GFC?
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Fund managers care about relative performance. If other managers are in the market making money, then you have to be too. You can’t sit it out.
And this is why even sophisticated fund managers tend to move in herds.
… sorry. Move with ‘momentum’.
And then there is the unsophisticated retail investors. Your mum and dad investors. Your millennial with an app investors.
And right now, they’re piling in too. Take a look at the boom in trading accounts that have opened since the crisis started:
There’s been a huge boom in newbie traders flooding on to the market.
Now, how many of them do you think have any idea about evaluating a firm’s future profitability? How many of them even know that a firm’s share prices should reflect the firm’s profitability outlook, in theory?
And how many are just running with the herd?
This has all the makings of a momentum market. But the herd is fickle. It can turn on a dime.
So if you’re looing for something that gives current valuations a firm foundation, this isn’t it.
It could all come undone in a second.
That’s not to say it will.
But if this was the only thing driving the market, you’d be nervous.
But it’s not.
There’s also robots.
More on them tomorrow.