◼ FINANCE Bloomberg Businessweek July 27, 202024
intheboom.TeslaInc.,notyetintheS&P500,is
tradingat10,000timesearnings.
Thesevaluationsareallbasedontheearningsthat
havealreadybeenreported.Investorsarewillingto
paythismuchbecausetheyassumefutureearnings
willbebetter.Butwhenit comestothemarketasa
whole,futureearningsareanybody’sguess,because
a recordnumberofcompanieshavedecidedtheout-
lookis toouncertainforthemtoprovideinvestors
withprofitforecasts.
“Itlookslikethebubblewelivedthroughinthe
late’90s,”ScottMinerd,chiefinvestmentofficer
atassetmanagerGuggenheimInvestments,told
BloombergTelevision.That’snotnecessarilya
reason to bail on the marketrightnow,headded.
Former Federal Reserve ChairmanAlanGreenspan
warned about “irrational exuberance”in1996—more
than three years before themarketpeaked.“The
nature of bubbles is theygolong,”Minerdsaid.
“It’s hard to predict whentheyend.Ultimately,
there’s probably more moneytobemadeinthe
stock market.”
For professional investors,it’shardtobeon
the sidelines even if pricesarehigh.Iftheysit
out today’s gains, they may lose clients before the
market turns.
There are plausible ways for bulls to justify swol-
len valuations. The Fed is likely to keep interest rates
exceptionally low for the foreseeable future, while
also buying assets to prevent economic contagion
from spreading to the corporate bond, mortgage,
and Treasury markets. Those measures remove a
lot of risk to share prices and reduce the competi-
tion from fixed-income investments.
That probably doesn’t explain it all, according
to Liz Ann Sonders, chief investment strategist
at Charles Schwab Corp. For her, the current
environment brings to mind a famous formula
from 20th century investment industry icon JohnTempleton:Bullmarketsarebornonpessimism.
Theygrowonskepticism.Theymatureonoptimism.
And they die on euphoria. “There is no fundamental
term in that set of four sentences,” she says. “There’s
nothing in there about valuations or earnings
growth or GDP or retail sales. And I think there’s
no better description of how market cycles work
than that. It is all about the psyche of investors.”
For now, that psyche is split. There’s no short-
age of skepticism, especially among the profes-
sionals.“IfyousaidinJanuarythisdisease,which
atthattimewascirculatinginChina,wasgoing
tocausea globalpandemicandterriblereces-
sion,wouldyouthinkstockpriceswouldstaythe
sameaswheretheyarenow?”asksEdKeon,chief
investmentstrategistatQMA,a unitofPGIMInc.
thatmanagessystematicquantitativeequityand
globalmulti-assetstrategies.
Butthisyear’smonetarystimulusfromtheFed
andU.S.Congresscan’tbeignored.“Wearecautious
abouttakingtoomuchequityrisk,”Keonsays.“But
withthetremendousamountofstimulusthat’sinthe
pipelineandstrongmomentum,we’rereluctantto
takea verybearishstance,either.”
Whenmarketspushhigherinthefaceofiffy
economicandearningsdata,theproximatecause
is oftenprofessionalmomentum-chasersandhedge
fundsfollowingquantitativesignals.Buttheyaren’t
theonlyplayershere.Inascendancyisa swollen
corpsofdaytraderstakingadvantageofa newworld
ofcommission-freebrokeragesandperhapsa dearth
ofwaystospendtheirtimeanddisposableincome,
withmanysportsandotherentertainmentoptions
stillonlockdown.
Retailtradingin 2020 accountsforabout18.5%of
marketvolumeintheU.S.,accordingtoBloomberg
IntelligenceanalystLarryTabb.That’supfromabout
10%a decadeagoandapproachingtheshareofvol-
umeproducedbyhedgefunds.Thisallmayleadto
furtherfrustrationforinvestorsclingingtothequaint
notionthatfundamentalsshouldbeallthatmatter
inthestockmarket.Atleasttemporarily.
ForWellsFargostrategistAnnaHanandcolleagues,
the current environment has the potential for what’s
known as a melt-up, or a ferocious lurch higher in
equities that leads to an inevitable crash back to
Earth. As she describes it: “It’s this exuberance, it’s
investor risk-seeking that sort of gets ahead of itself.”
The problem with melt-ups is they have a habit of
being followed by meltdowns. The catalyst for that
could be, for example, disappointment if Congress is
slower or stingier than expected with the next round
of economic stimulus. Or it could be nothing other
than a sudden shift of the market-sentiment winds,
defying explanation.The S&P 500’s Five Biggest Stocks
Share of the index’s value at yearend
24%120FacebookExxonMobilJohnson& JohnsonBerkshire HathawayGeneralElectric2015 2020*Amazon
AlphabetAppleMicrosoft*2020 AS OF JULY 20; DATA: BLOOMBERG● Retail trading’s share
of U.S. market volume18.5%