The risks are rising, and global markets are struck by black Tuesday. U.S. stocks plunged again on Tuesday, September 8th, falling for three days in a straight day. The Dow closed down more than 630 points, the Nasdaq was down more than 4 per cent and the Standard and Poor’s 500 index was down nearly 3 per cent.
Black Tuesday: Tesla’s 20% U.S. stock bubble is bursting?
Technology stocks drag U.S. stocks lower //
Technology stocks fell sharply, with Apple down 6.73 percent, Amazon down 4.39 percent, Netflix down 1.75 percent, Google down 3.64 percent, Facebook down 4.09 percent and Microsoft down 5.41 percent.
Tesla recorded its biggest one-day drop in history. The index’s trademark, S. and P Global, also said last week that it would not include Tesla in the S.P. 500, which is tracked by billions of dollars in investments.
Technology stocks continued to plunge. Market participants believe the weakness in technology stocks stems from concerns that valuations of big technology companies have risen to unsustainable levels. Even with a correction last week, the Nasdaq is up more than 70 percent from its March bottom.
International oil prices tumbled on Tuesday, with U.S. oil down 7.6 percent and Brent crude below $40.
European stocks closed lower on Tuesday, with Germany’s DAX down 1.01 per cent at 12,968.33, France’s CAC 40 down 1.59 per cent at 4,973.52 and Britain’s FTSE 100 down 0.12 per cent at 5,930.3.
Asia-Pacific stocks closed higher on Tuesday, with the Nikkei 225 index up 0.8 per cent at 23,274.13, South Korea’s Kosp index up 0.64 per cent at 2,399.39, Australia’s S.P. 200 up 1.06 per cent at 6,007.8 and New Zealand’s S.P. 50 up 0.31 per cent at 11,895.63.
U.S. stocks are brewing the biggest bubble in history //
U.S. stocks have been rising since March, defying economic data, led by a strong rebound from popular technology companies such as FAAMG. At one point, Apple’s market capitalisation exceeded $2 trillion, while Tesla’s soared to $400 billion from $80 billion in March.
Andrew Parling, chief investment officer at Washington Peak, an investment consultancy, argues that just as Japan’s soaring price-to-profit ratio in the late 1980s foreshadowed huge speculative risks, america’s outrageously high market share now highlights the departure of popular growth stocks from economic fundamentals.
Under normal circumstances, the market rate tends to be fairly stable, as revenues are not susceptible to large fluctuations in profits and are not as easily distorted by accounting as book value. Few stocks trade at a market rate of more than 10 times, and if a stock with a market rate of 10 times has a net profit margin of 20 per cent, its price-to-earnings ratio is as high as 50 times.
Of the 8,513 common shares listed in the US today, 530 trade at a price-to-earnings ratio of more than 10 times, Mr Parling said. That’s 6.2 per cent of common stock, up from 3.8 per cent at the market’s low in March. Only in March 2000, when the dotcom bubble was at its worst, could we see that the proportion of stocks with a market-to-market ratio of more than 10 times was higher than the current level, at 6.6 per cent.
In addition, three of the 10 largest U.S. stocks in 2000 had a market-to-market ratio of more than 10 times: Cisco, Intel and Oracle. Today, four of America’s top 10 stocks trade at more than 10 times earnings: Microsoft, Facebook, Tesla and Visa.
Alan Greenspan, the former chairman of the Federal Reserve, wrote in his 2007 memoir that “the United States is becoming a nation of shareholders”. He points out that the ratio of the total value of US equities to gross domestic product has risen from 60 per cent in 1990 to 120 per cent in 1996, “second only to the levels of Japan at the height of the bubble in the 1980s”.
Today, america’s market capitalisation-to-GDP ratio is just under 200 per cent. The market capitalisation of the S.P. 500 companies alone is about $30 trillion, or 150 percent of GDP.
It’s hard to tell when and how this will end, says Palin. But as the Fed buys assets and becomes more moderate on its 2 per cent inflation target, US stocks may be brewing one of the biggest bubbles in history.
U.S. stock bubble may not burst soon //
Notably, while many analysts have expressed concern about the US stock bubble, some strategists say the bursting period will not come soon. Jonathan Bell, chief investment officer at Stanhope Capital, compared the current market bubble to comments made by former Federal Reserve Chairman Alan Greenspan in 1996.
At the time, Mr Greenspan warned in a now-iconic observation that financial markets were showed signs of “irrational prosperity”. Stocks continued to rise for some time after Mr Greenspan’s speech, but the phrase was often seen as a warning of the bursting of the millennial dotcom bubble.
“I would say to people that US stocks are already in the bubble, but that doesn’t mean it’s going to shrink now, ” Mr Bell said. All we’ve seen in the last week or so is a retreat from the previous two weeks’ gains. “
The strategist added: “There are still many reasons to hold these shares, but be very careful that investors consider the percentage weights they hold.” If investors have 15 or 20 per cent of their positions and are inclined to increase their positions, they need to be aware of the potential risks to US stocks, but if they allocate 30 or 40 per cent of their money to the stock market, that is a lot of risk. “
Joe Zicherman, a senior trader at Stadium Capital, expects both the Fed and the US government to start sending out inflammatory signals if the sell-off continues: “If this continues for more than a few days, expect more talk of aggressive action by the Fed, and you will hear a sudden increase in the chances of stimulating trading.” “
Blackstone: There is a significant correction risk //
Byron Wien of Blackstone, a legendary Wall Street investor, believes there is a risk of a sharp correction in the US stock market. He warned of rising speculation in the stock market, a fragile U.S. economy and possible unrest during the presidential election.
U.S. stocks ended a five-week rally last week after a tumultuous two sessions. Apple, Microsoft, Tesla and other popular big technology stocks fell.
“A lot of speculation is going on,” Wien said in a recent interview with The Market/NZZ. This may be unhealthy. The market is fragile. “He worries that the U.S. economy is recovering more slowly than most investors think. He also argues that a lack of discipline, social unrest, record debt and political wrangling in Washington have all had a negative impact on the U.S. world’s standing, as reflected in the weaker dollar.
Asked if last week’s setback in U.S. stocks bodes well for more trouble or just a respite from the stock market, Wien said: “Most investors are confused because the economy doesn’t seem to be doing as well as financial markets.” But there is really no dissodiation: retail investors push the market to new highs, and they do so by pushing up the price of Internet-related stocks, which benefit people working from home. “
There is a heated debate in the market about the extent to which retail investors have supported the rise in US stocks. Of the phenomenon, Wien says: “There’s a lot of gambling in it. Individual investors who usually bet on sporting events are betting on stocks. This is reflected in stocks such as FAANG and Tesla. But I don’t think that tells the truth. If you look at the options market, there are a lot of retail options that are buying, especially options that expire in two weeks or less. This is speculation in the market and may not be a healthy performance. “
In Wien’s view, market valuations, while overvalued, are not as outrageous as they were during the dotcom bubble of the late 1990s. “So the market is fragile, but I don’t think there’s going to be a bear market.”
Referring to the U.S. economic recovery, Wien said that while the housing recovery is strong and manufacturing is rebounding, a large part of the economy is in serious trouble. Services, including hotels, restaurants, resorts and cruise lines, will take a long time to recover, he said, and the airline industry could suffer from long-term changes.
As for inflation, Wien says he’s not worried. “Too many people are looking for work, which means there is a low probability of wage inflation, ” he said. Despite some food inflation, oil prices are still at the low end of the $40 range, and oil is the most important commodity. In short, inflation will not be a problem and interest rates will remain low, which is a favourable backdrop for the market. “
Wien also expressed his views on gold. “I can’t say I’m a gold fan, but I think it makes sense to hold some gold now, ” he says. I recommend it to individual clients, not institutions. Individual clients should hold a 5% gold position. For institutions, there are still enough other things to buy. “
Wien points out that while stocks such as Apple, Amazon or Facebook reflect a lot of speculation in the market, a large part of the market is undervalued and the hotel and energy sectors are attractive because eventually people will return to normal.
On international markets, Wien said he was on the sidelines. “They are attractive in terms of valuation,” he said. But on the other hand, they suffer more than developed markets. Europe is very attractive, there are a lot of cheap and beautiful things. My feeling is that financial stocks and bank stocks are attractive. “