Is this stock market today a Bubble? If you ask Jeremy Grantham, one of the Deans of the Investment business and a founder of the Investment management firm GMO, it certainly is a Bubble. To him the market looks eerily like the housing market of 2008 and the technology market of 2000. Scary high.
But the conventional wisdom is that this market still has a way to go. GDP is going to expand rapidly this year, up anywhere from 5% to 8% as the Covid vaccine gains traction and the $1.9 trillion stimulus package kicks in with a big spending oomph.
Where do we stand on this? Sorry, but as is often the case with crystal ball gazing, we just don’t know. But we do know some things about market timing. Let’s say you are right, the market is a bubble, and you sell, and stocks fall. My bet is you get it wrong on the other side. You sit on the fence too long and watch the market go right back up.
How do we know? Because no matter when you handicap the market, there always seem to be four positives to the story and four negatives. A confusing outlook, so you end up sitting on the fence. When all the signals are finally flashing green, prices will invariably be up and through the roof.
Our best advice is still to work out an allocation you are comfortable with, between things that will grow (stocks) and things that will be more stable (bonds) and then, just stick with your strategy. Go sit quietly in your room. Let others worry about things there are no answers to – like will the market go up tomorrow or will it go down?
Even though we cannot time the market there are some things you should keep your eye on. The first is the Covid vaccine itself. What happens if it is not as effective as predicted, especially against all the new variants, and what happens if a significant number of people refuse to get the shot? Maybe 20%-30% of the population? This might seriously affect the economic recovery.
A second worry is inflation and the bond market. Bond investors are notoriously nervous on the trigger when it comes to expected inflation. Already this year the 10-year Treasury bond yield is up from 0.92% to 1.52%. A further big spike in inflation and bond yields could get stock investors feeling very nervous.
Finally, what about those out of the blue geopolitical unknowns? Taiwan Semiconductor (TSMC), along with Korea’s Samsung, dominate the global market for high-end chip making. Semiconductors are integral to almost every industry today. How would a bigger, possibly military clash between the U.S. and China over Taiwan affect TSMC and the world tech market? A scary thought. We advise staying the course in this market but keep your eye on the big issues which will affect the long-term outlook.