The Federal Reserve may be fretting over the speculative euphoria in crypto, SPACs and meme stocks, but plenty on Wall Street see bubble risks growing across all the systemically important assets.
Everything from European bonds and U.S. Treasuries to high-yield credit and tech stocks is trading near the highest valuations in decades—even as the inflation bogeyman risks breaking out at long last.
Market participants from Goldman Sachs Group Inc. to BlackRock Inc. are divided on whether all this constitutes an unsustainable frenzy. To Dan Fuss, the legendary 87-year-old vice chairman at Loomis Sayles & Co. LP, it certainly looks that way thanks to unprecedented liquidity that is now set to tighten on good economic news.
Meanwhile, Kathy Jones of Charles Schwab & Co. is telling clients to beware the “nuttiness” in junk debt. And JPMorgan Asset Management’s Bob Michele is calling on Fed officials to discuss tapering asset purchases soon enough, before market bubbles form.
Others are more sanguine—betting that the economic reopening and the re-leveraging cycle will pave the way for more cross-asset gains.
Interviews have been edited for clarity.
Dan Fuss, vice chairman, Loomis Sayles
“We are in ‘bubble’ territory. It is primarily a liquidity bubble, combined with the resulting valuation distortion. Stocks with high P/Es, marginal credit bonds, and pooled vehicles are the most vulnerable. In the 1960s and 1970s, I was lucky enough to spot the small stock valuation bubble and the growth stock bubble. The similarity between then and now was valuation. This one is a liquidity bubble that is unique in my experience.
The markets are awash in liquidity caused by the central bank supporting the Treasury’s needs in fighting the Covid war. It is slightly analogous to the formal accord of the late 1930s to mid 1950s between the Fed and the Treasury. It is different in that it caused layers of increased liquidity as various market participants can borrow shorter term money cheaply.
When prices decline somewhat, there can be, as there was last March, a magnified drop in the liquidity, causing more sales. This can destabilize the broader market.”
Kathy Jones, chief fixed-income strategist, Charles Schwab
“We are warning people about not overdoing it. We are saying it’s OK to hold high yield but to try not to hold a concentrated position at the low end and realize this can change pretty fast. This is when diversification really helps you, when things are a little nutty like this, and you don’t know when the nuttiness will end.
When I look at CCC’s rallying so hard—even if the default rates are at the low end of historical average—your chances of making money over the long run aren’t great. You’d be lucky to break even.”