Mid-February Market Update

By Ryan Gilmer, CFA, CMT Chief Investment Officer

February 16, 2021

We hope you are doing well. Here is a recap of market performance for the month of February so far:

Over the first half of February, stocks are strongly up. US small stocks continued to lead the way, while US large and international stocks also posted attractive returns. Bonds, however, have declined, as intermediate and long-term interest rates increased. For the year to date, it’s the same story.

In fact, this trend of positive returns is not new. Most stock funds bottomed last March, but after a terrifying crash, they have been rising ever since. Some have doubled in value (or more) from their low prices. This has many investors wondering, “Are we in a bubble?”

Financial bubbles happen when the price of an investment increases significantly or spectacularly, detaching from the economic reality of the asset. The price rises for a period of time, but isn’t sustainable, so it crashes almost as fast as it increased. If its true that we are in a bubble, it means that we are in an especially dangerous environment and should be taking less risk.

Overall, we don’t think the global stock market is in a bubble.

Investments should be evaluated on a case by case basis; each is unique and different. The current market has a range of investments – some look more like bubbles than others. Let’s take a look at some examples.

Example 1: In our last update, we discussed GameStop, which is a classic example of a bubble. Here is an updated chart – as you can see below, the bubble is popping. GameStop had increased by around 2,300%, and is now down around 90% from the peak.

Example 2: Groups of stocks can experience bubbles too. Perhaps the most famous, recent bubble happened in technology stocks, as shown by the NASDAQ 100 index. (While stocks in the index change over time, this currently includes Amazon, Apple, Facebook, Google, Microsoft, and Tesla, which are also in the S&P 500.) From October 1990 through March 2000, this index increased over 2,700%. Over the next few years it fell over 83%. From November 2008 to current day, the NASDAQ is up around 1,250%. While this is obviously an incredible return, the NASDAQ would still have to double from current levels to reach the bubble level returns of the 1990s. So, are tech stocks currently in a bubble? Maybe, but we’ve seen bigger.

Example 3: Now let’s look at the financial sector of the S&P 500, which includes banks, insurance companies, and stock brokerage companies. As you can see, these stocks have essentially gone nowhere since the beginning of the financial crisis in 2008. Stocks that are flat for 14 years are not bubbles.

As you can see from the similar chart below, it’s the same story in international developed markets including Japan, the UK, Canada, France, Switzerland, and Germany – no progress for 14 years.

What about emerging markets like China, Taiwan, India, or Brazil? Looks like the same story as the last two charts.

Finally, let’s look at Malaysian stocks, which are still almost 60% below their 2013 highs:

To summarize, when we look at all of the opportunities to invest, we see a wide range of options. For some stocks, their past returns have been fantastic, while others have been terrible. So are some stocks in a bubble right now? Possibly. Globally, is the whole market in a bubble? It doesn’t look like it.

There are always risks associated with investing -- stocks can decline whether they are in a bubble or not. The level of returns we’ve seen since March will certainly not continue forever because markets ebb and flow. Overall, our aim is to help you achieve long-term returns to fulfill your financial goals. We are optimistic that we can accomplish this in the current market environment. If you would like to discuss this further, please let us know.

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