Back in January 2020 when the US markets were touching all-time high, there were no signs of bubble, although they were grossly overvalued. But now in June 2020, there are classic signs of bubble in Nasdaq and S&P 500.
What has changed over last 5 months is the extent of emotional involvement of the retail investors. Sudden sharp fall in markets in March 2020 due to COVID19 panic gave rise to a new set of Mom & Pop investors. These investors have time on their hand since they are working from home. They have some surplus left in their pocket as their monthly expenses have contracted substantially (….no more clubbing, partying or picnicking or any indulging expense). These investors are continuously propped by CNBC to invest when there is blood on the street…..which they have taken seriously….and no doubt have made money so far.
But their confidence has now gone overboard. In the delirious state of mind, they are venturing into stocks like Hertz (…practically bankrupt car rental company) and several penny stocks that were out of radar before Covid19. By 10th June 20, the penny stocks were up by 80% already in just 2 months. Mom & Pop are enjoying it.
That’s “Entertainment Investing” for you….as per Dan Egan (a Behavioral Finance pro).
It’s not that all retail investors are making hay while the sun is shining. A young 20 years old investor committed suicide last week when he saw his complicated derivative investments has delivered a loss of USD730,000….while the principal investment was mere USD 16000. That’s the dark side of get rich quick strategies deployed by retail investors.
There is mania out there right now that was not there in January 2020. Every bubble peak with peak in mania. No one can foretell where the peak lies. But it is time for investors in US to start loving their capital more than the expected profits on the horizon.
We look at some graphs to gauge why this mania is not justified when compared to fundamentals:
Chart 1: Abnormal rise from ashes
(NASDAQ is now trading at 4% higher than Feb 2020 peak. The rise of the index makes COVID19 panic looks like a sham. Please note that before Feb 2020, the rise of index was due to corporate buybacks, and 401K pension flows. Individual investors were largely absent. However, the recent rise has been due to individual investors buying massively into passively funds. The velocity is not normal.)
Chart 2 : Bankruptcies in the offing
(Whatever may be the pattern of economic recovery….V, U, W or swoosh, the extent of bankruptcies expected over next 12 months is mind boggling. Investors right now are not looking beyond their nose)
Chart 3: Detachment from the fundamentals
(Stocks prices at present are divorced of all fundamentals. People are buying overpriced stocks with horrific growth outlook)
Chart 4: Dot Com revisited
(Valuations were high in February 20…they are even higher now……reaching almost Dot Com era)