Across Wall Street, signs of speculative excess are everywhere. Penny stocks surging. Cash pouring into trendy thematic bets. Risky debt paying less than ever. With unchecked animal spirits and historic valuations, what’s an investor to do?
Keep buying, apparently.
Exchange-traded U.S. equity funds took in $7 billion last week, led by strategies tracking the hottest themes from solar power to robotics. The S&P 500 rose 1.9% in its best week since November, while technology shares — dubbed the world’s second-most crowded trade — hit records again.
It’s all spurring the likes of Citigroup Inc. and JPMorgan Chase & Co. to warn of market excess in everything from blank-check companies to cryptocurrencies. Yet as fresh stimulus beckons, Wall Street firms are telling money managers to stay largely invested in rallying stock benchmarks.
“Surveys reveal what investors are saying, but market-based indicators reflect what investors are actually doing,” Ed Clissold and Thanh Nguyen of Ned Davis Research wrote in a note analyzing various measures of sentiment. “Market-based indicators show increasing speculation.”
Those indicators are easy to find. Retail traders are fueling the most speculative trading strategies, the market for new issues is booming, short interest in the SPDR S&P 500 ETF Trust is near decade lows.
Data show stock buying rose further after the last round of pandemic-relief checks, and it isn’t just the retail crowd. A record number of investors with $561 billion overall say they think they’re taking higher-than-normal levels of risk, according to Bank of America Corp.’s latest survey.
No wonder Clissold and Nguyen titled their research note “Are there any bears left?”
It’s All Relative
Goldman Sachs Group Inc. strategists say “unsustainable excess” is evident in very high-growth, high-multiple stocks and across special-purpose acquisition companies, or SPACs.
But they reckon overall market valuations are below the historical average when Treasury yields, corporate credit and cash are taken into account.
That’s a view echoed by Citigroup. The global strategy team led by Robert Buckland weighed global equity prices on both a relative and historic basis and concluded even expensive U.S. shares could have much more room to run.