A recent Goldman Sachs report into the US financial markets found parts of the market “appear frothy,” with “signs of unsustainable excess.”
The peaks we’re seeing today, particularly among high-growth stocks and stocks with negative earnings appear to point to some kind of economic unreality.
“We’re a long way up the gang plank in terms of valuation,” said Julian McCormack.
“It’s a very elevated point in the history of the market”
When people start using words like “froth” and “bubble,” there’s a secondary assumption that at some point, the thin membrane surrounding it will soon break, releasing everything beneath in a cloud of water droplets and hot air.
To Julian, parts of the markets of today, particularly with the evangelism around tech stocks, evokes memories of the bubble in the 1920’s.
People back then started out their adult lives hopping on a horse to get to work and sending a carrier pigeon home to remind their kid to turn the open fire off. Within a relatively short period they were zooming around town in cars and calling their mates on the telephone — imagine how euphoric and unstoppable people felt during this time. We all know what happened next as the Great Depression hit and people were brought back to reality, fast.
Today everything is changing again. Innovation is causing constant change to the operation of our daily lives, and naturally this builds euphoria — a hype which seeps into share markets and ultimately supercharges sentiment.
But is it really a bubble, or are we operating in a new kind of system, governed by rules not yet written?
Interest rates are almost guaranteed not to rise, we’ve busted through any previous points of resistance in terms of all time highs in almost every sector – perhaps the punchbowl of quantitative easing has been replaced with a glass table, a rolled up twenty, and a little white bag.
The state of many parts of the current market is punctuated by a massive “if.” And as much as some commentators will try to tell you they have a perfect model for what is going on, there is no clear guard rails for these unprecedented times.
As Julian says, we must be wary of “the absolute impossibility of predicting outcomes in a chaotic system.”
So what do we do – what’s a rational response to an irrational situation? Cash out and stuff it in the mattress? Wait it out – call for the end of the world so that hopefully the market hears you? Or diligently keep building, knowing that in the long term, you should be okay?
While there’s no perfect answer, Julian reminds investors of the importance of keeping the investment fundamentals in mind.
“We all must be reminding ourselves to exercise general cautionary principles, even if markets might push higher,” says Julian.
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