8 reasons why fears of a stock-market bubble are overblown, according to Goldman Sachs

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Goldman Sachs said that fears of a bubble were overblown.

  • Goldman Sachs said that fears of a bubble in markets were overblown, despite a few concerning signs.
  • The analysts gave eight reasons, including lower levels of leverage and risk-taking.
  • They also said the boom in tech stocks had a firmer basis than in the dot-com bubble of the 1990s.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

With retail traders driving up stocks like GameStop, blank-check companies booming, and bitcoin soaring, many investors are worried about bubbles in financial markets.

But Goldman Sachs analysts said in a note on Monday that fears about bubbles were overblown. There are a few worrying signs, but markets now appear much safer than they were during the dot-com crash or the 2008 financial crisis, they said.

Here are the eight key reasons investors should not be overly concerned about the recent market frothiness, according to Goldman analysts including Peter Oppenheimer and Sharon Bell.

1. The stock-market rally is driven more by fundamental factors.

In bubbles such as the dot-com boom of the late 1990s, investors drove up asset prices with little rational basis, and the fear of missing out triggered buying frenzies.

The rise in stock prices over the past few years, particularly in tech, “has been impressive” but “is not nearly as extreme as the explosive rise that accrued during the late 1990s,” Goldman said.

The rally in tech firms can mostly be justified by “superior growth and fundamentals,” the note said, with earnings far outstripping the rest of the market.

2. The “equity risk premium” measure does not look worrying.

Goldman said that much of the market frothiness could be explained by record-low interest rates around the world.

The bank’s analysts pointed to a key measure of stock value, the equity risk premium, or the extra return investors get on stocks compared with holding risk-free bonds.

Goldman said that in the bubble of the late 1990s, investors were so confident about growth that they were prepared to buy stocks offering a dividend yield of 1% when they could make 6.5% holding bonds.

But record-low interest rates and better prospects today mean the equity risk premium is higher, suggesting investors are much more justified in bidding up stocks.

Read more: Cowen says buy these 10 retail stocks before a colossal wave of consumer spending sends them skyrocketing – including one expected to surge 71%

3. Market concentration has increased – but is not dangerous.

Goldman said Facebook, Apple, Amazon, Microsoft, and Google were increasingly dominant, with a market capitalization nearly three times the annual GDP of India.

But the bank’s analysts said that such a concentration “has reflected strong fundamental growth, rather than the hope, or promise, of returns far into the future.” This suggests it’s far more sustainable than in previous asset rallies.

4. A big jump in retail trading has followed years of outflows from equities.

The GameStop saga in January brought the power of retail investors to the attention of Wall Street.

Goldman said that the rise in amateur investing had been “breathtaking” and that one of its key measures of risk-taking had hit a level associated with a 10% drop in stock markets.

But the analysts said that “while flows have been significant of late, we have come from many years of outflows from risk assets like equities.”

5. Credit is cheap, but investors aren’t being overly risky.

Central-bank interest rates are at record lows, as were bond yields until recently, making borrowing very cheap.

But Goldman said that speculative bubbles are associated with banks and companies funding risky activities through debt and with a collapse in household savings, which “is not the case today.”

Banks are very strong thanks to reforms, the note said, adding that US households had accumulated about $1.5 trillion in savings during the COVID-19 pandemic.

6. Mergers and acquisitions are booming from a low base.

The excitement about special-purpose acquisition companies, or SPACs, has many investors worried about frothy markets.

“Booming M&A activity and equity issuance are reminiscent of activity rates in previous cycles,” Goldman said.

But it added that the activity did not appear excessive “when adjusted for the market capitalization of equity markets.”

7. The surge in certain sectors is driven by profitable companies.

Market bubbles are often driven by an enthusiasm for new technologies, such as the internet in the dot-com era.

Goldman said that while tech and green stocks had indeed boomed, a fall in these stocks should not lead to widespread company collapses, as most of them are profitable.

8. Stocks are rising as economies recover from a slump.

The Wall Street bank said the powerful rally in stocks from last March to September was typical of a “hope” phase of a bull-market run after an economic slump.

“This phase is generally followed by what we call the ‘growth’ phase,” when earnings pick up, it said, though there could be bumps along the way.

Read more: Hedge funds are ramping up bets against Chamath Palihapitiya’s SPACs and have already taken home $40 million this year. Here’s a detailed look at the wagers they’re making.

Read the original article on Business Insider

Goldman Sachs says fears of a stock-market bubble are overblown for these 8 reasons

GettyImages 1158933047
Goldman said fears of a bubble are overblown

  • Goldman Sachs said fears of a bubble in markets are overblown, despite a few concerning signs.
  • The Wall Street giant’s analysts gave 8 reasons why, including lower levels of leverage and risk-taking.
  • They also said the boom in tech stocks has a firmer basis than the dotcom bubble of the 1990s.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

With retail traders driving up stocks like GameStop, blank-check companies booming, and bitcoin soaring, many investors are worried about bubbles in financial markets.

But Goldman Sachs analysts said in a note on Monday fears about bubbles are overblown. There are a few worrying signs, but markets now appear much safer than during the dotcom crash, or 2008 financial crisis, they said.

Here are the 8 key reasons investors should not be overly concerned about the recent market frothiness, according to Goldman analysts including Peter Oppenheimer and Sharon Bell.

1. The stock-market rally is driven more by fundamental factors than investor craziness

Past bubbles such as the dotcom boom of the late 1990s saw investors drive up asset prices with little rational basis, with buying frenzies triggered by the fear of missing out.

Goldman said the rise in stock prices over the last few years, particularly in tech, “has been impressive… but it is not nearly as extreme as the explosive rise that accrued during the late 1990s.”

The rally in tech firms can mostly be justified by “superior growth and fundamentals,” the note said, with earnings far outstripping the rest of the market.

2. The key ‘equity risk premium’ measure does not look worrying

Goldman said much of the market frothiness is explained by record-low interest rates around the world.

The bank’s analysts pointed to a key measure of stock value, the equity-risk premium. This is the extra return investors get on stocks compared to holding risk-free bonds.

Goldman said in the bubble of the late 1990s, investors were so confident about growth they were prepared to buy stocks offering a dividend yield of 1% when they could make 6.5% holding bonds.

But record-low interest rates and better prospects today mean the equity-risk premium is higher, suggesting investors are much more justified in bidding up stocks.

3. Market concentration has increased – but is not dangerous

Goldman said Facebook, Apple, Amazon, Microsoft and Google are increasingly dominant, with a market capitalization nearly 3 times the annual GDP of India.

But the bank’s analysts said such a concentration “has reflected strong fundamental growth, rather than the hope, or promise, of returns far into the future.” This suggests it is far more sustainable than in previous asset rallies.

4. A big jump in retail trading has followed years of outflows from equities

The GameStop saga in January brought the power of retail investors to the attention of Wall Street.

Goldman said the rise in amateur investing has indeed “been breathtaking.” And it said one of its key measures of risk-taking has hit a level associated with a 10% drop in stock markets.

Yet the analysts said: “While flows have been significant of late, we have come from many years of outflows from risk assets like equities.”

5. Credit is cheap, but investors aren’t being overly risky

Central bank interest rates are at record lows, as were bond yields until recently, making borrowing very cheap.

But Goldman said speculative bubbles are associated with banks and companies funding risky activities through debt, and a collapse in household savings, which “is not the case today.”

Banks are very strong thanks to post-crisis reforms, the note said. US households have accumulated around $1.5 trillion in savings during COVID-19, the bank said.

6. Mergers and acquisitions are booming from a low base

The mania for special-purpose acquisition companies, or SPACs, has many investors worried about frothy markets.

Goldman said: “Booming M&A activity and equity issuance are reminiscent of activity rates in previous cycles.”

But it added activity does not appear excessive “when adjusted for the market capitalization of equity markets.”

7. The surge in certain sectors is driven by profitable companies

Market bubbles are often driven by a craze for new technologies, such as the internet in the dotcom era.

Goldman said tech and green stocks have indeed boomed. But the analysts said a fall in these stocks should not lead to widespread company collapses, as most of them are profitable.

8. Stocks are rising as economies recover from a slump

The Wall Street bank said the powerful rally in stocks from March to September last year was typical of a “hope” phase of a bull-market run after an economic slump.

“This phase is generally followed by what we call the ‘growth’ phase,” they said, when earnings pick up, although there could be bumps along the way.

Read the original article on Business Insider

Billionaire ‘Bond King’ Jeff Gundlach said stocks will crash, predicted a weaker dollar, and questioned bitcoin in a recent interview. Here are the 10 best quotes.

gundlach
2011 Jeffrey Gundlach co-founder and Chief Executive Officer and Chief Investment Officer of DoubleLine speaks at the 16th annual Sohn Investment Conference in New York May 25, 2011.

  • Jeff Gundlach, the billionaire investor known as the “Bond King,” predicted in a RealVision interview in October that stocks would crash in less than 18 months.
  • The DoubleLine Capital CEO also said the US dollar would dive in the long run, argued that tech stocks like Apple and Amazon were the only US equities worth owning, and questioned bitcoin, welfare, and Chipotle’s valuation.
  • Here are Gundlach’s 10 best quotes from the discussion.
  • Visit Business Insider’s homepage for more stories.

In a RealVision interview filmed and released in early October, the billionaire “Bond King” Jeff Gundlach said stocks would crash within 18 months, predicted that the US dollar would tumble in the long run, and voiced his doubts about bitcoin.

Gundlach, the founder and CEO of DoubleLine Capital, also called out Chipotle’s valuation, criticized welfare, and argued that the only US equities that made sense to own right now were the largest technology stocks.

Here are Gundlach’s 10 best quotes from the conversation, condensed and lightly edited for clarity:

1. “Valuation makes absolutely zero difference when you’re in a true, brutal bear market. You just go to prices that you just can’t believe.” – on the tricky 1994 bond market and how it prepared him for the financial crisis.

2. “I’m actually long the dollar now, even though I don’t believe in it at all. It’s a good investment for the next five years.” Gundlach added that he was “very, very negative long term on the US dollar” because of the ballooning budget deficit and the prospect of higher inflation, and that he sees betting against it as “the big trade for the years ahead.”

3. “If I want it to invest for my great-great-great-great-grandchildren, I’m positive that certain real-estate investments and certain resource investments would be obvious winners. Who cares about your great-great-great-grandchildren?” – on the need for fund managers to balance the lower risks of a longer investment time frame with investors’ impatience.

Read more: GOLDMAN SACHS: Buy these 15 stocks set to deliver the strongest possible profit growth and subsequent returns through year-end

4. “If you want to own US stocks, you should own those six knowing that you’re going to take a bloodbath if you overstay your welcome … You’ve just got to have your finger on the exit button or pretty close by, but I think that’s your only chance of making money.” – advising people that they should own Apple, Amazon, and the other “big tech” stocks that have driven the market in recent years.

5. “The one that just blows my mind is Chipotle. I just can’t understand why the stock has tripled over the last six months. It just baffles me. Isn’t the price-to-earnings ratio like 150 or something? That’s a lot of tacos.”

6. “I do think that within 18 months it’s going to crack pretty hard. When the next big meltdown happens, I think the US is going to be the worst-performing market.” – predicting a stock-market crash that would be exacerbated by a weakening dollar.

Read more: ‘The largest financial crisis in history’: A 47-year market vet says the COVID-19 crash was merely a ‘fake-out sell-off’ – and warns of an 80% stock plunge fraught with bank failures and bankruptcies

7. “It’s comical how people talk about modern monetary theory or universal basic income as some wacky idea. We’ve been doing it since the 1960s. What do you think welfare is? It’s universal basic income, just for a certain subset of the population. It hasn’t exactly solved the problems. In fact, in my view, it’s made it much worse.”

8. “I don’t believe in bitcoin. I think that it’s a lie. I think that it’s very tracked, traceable. I don’t think it’s anonymous.” Gundlach later added that he was “not at all a bitcoin hater.”

9. “I prefer things that I can put in the trunk of my car. I prefer my Mondrian on the wall to a digital entry that has the same value.” – on his preference for physical investments

10. “It will be quite a pleasant experience to not be in the car on the first wheel of the roller coaster that’s coming.” – on his cautious approach to investing in anticipation of a crash

Read more: Bank of America lays out its scenario for how the next big top in stocks will form – and pinpoints the trigger that could cause a meltdown shortly after

Read the original article on Business Insider