The stock market is not in a bubble for these 2 reasons, DataTrek says

Stock Market Bubble
A trader blows bubble gum during the opening bell at the New York Stock Exchange (NYSE) on August 1, 2019, in New York City.

  • The stock market is not yet in a bubble, DataTrek co-founder Nicholas Colas said in a note on Wednesday.
  • Two conditions that define stock market bubbles are fast rising valuations and retail investor fervor, according to the note.
  • “We don’t have the first, and the second is just starting,” Colas said.
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The stock market is not yet in a bubble, but a “baby bubble” might be forming, DataTrek co-founder Nicholas Colas said in a note on Wednesday.

In order for a bubble to even form in the stock market, two conditions are necessary: fast rising valuations and retail investor fervor, according to the note.

“We don’t have the first, and the second is just starting,” Colas said.

Based on the Shiller PE ratio, the bubbles of 1929 and 2000 were evident when a sharp move higher in valuations occurred. It’s about the rate of change in valuations, not the absolute valuation levels that indicate a bubble is present, according to the note.

So far, the current reading of the Shiller PE ratio does not indicate that a bubble is forming in stocks, the note said.

Read more: Tesla just invested $1.5 billion in bitcoin. Here are the bull and bear cases for the crypto, according to legendary macro trader Mike Novogratz and Goldman’s wealth management CIO.

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“To our eyes the current-day red dot above lacks the antecedent spike of either 1929 or 2000, so by this measure we can’t call the current US equity market in a bubble,” Colas said.

While the stock market is not in a bubble yet, it is possible that one could be forming, according to DataTrek.

Heightened Google search trends for terms like “buy stocks,” “stock bubble”, and “stock market bubble”, have increased recently. The search trend data represents preconditions to create a stock market bubble “in terms of social attention on equities,” Colas said.

Retail investors have piled into the stock market since the COVID-19 pandemic, with $0 commission trading apps like Robinhood making it easier than ever to begin buying and selling stocks. The heightened retail activity was apparent last month after a Reddit forum helped spark a gravity-defying short-squeeze in shares of GameStop.

But while more retail investors are participating in the stock market, that doesn’t mean it’s time to sell stocks, the note said.

“We have not yet had the sort of valuation run up that says it’s time to sell,” Colas said, adding that investors should remain invested in US large cap and emerging market stocks. 

And while trying to call the top of a bubble remains appealing for investment professionals, it’s ill-advised.

“Even if you’re more bearish than us, remember that the end of the world only happens once so timing is everything for that trade. And early is the same as wrong,” Colas concluded. 

Read more: Credit Suisse says to buy these 16 ‘highest-conviction’ stock picks that are set to outperform despite the market’s contrarian view

Read the original article on Business Insider