Is the stock market in a bubble?
As the technology behemoth Nvidia experiences a surge due to the excitement surrounding artificial intelligence, and as global stock indexes reach unprecedented highs, there’s an increasing debate about whether the stock market is in a “bubble” phase.
This is typically defined as a period when asset prices rapidly inflate, potentially surpassing their intrinsic value, and are at risk of a swift crash.
Bob Parker, a senior advisor at the International Capital Markets Association, a trade organization, said to CNBC on Wednesday that he observed indications of a bubble based on two out of three primary characteristics. https://lnkd.in/dfjJzEDs
“The first characteristic is obviously the valuations. Nvidia’s valuation, for instance, is justifiably extremely high,” Parker stated, adding that the second indicator is the positioning of investors.
“In any market bubble, investors tend to be very clustered or concentrated, either in a single market or sector.”
“It doesn’t matter whether you’re looking at the U.S., Europe, or some Asian markets, we’re seeing a historic disparity in valuation between the tech sector, and more specifically AI as a sub-sector of tech, and the rest of the market. Investors are heavily concentrated in the tech sector,” Parker explained.
The subject has sparked a divide among market observers. JPMorgan Chase CEO Jamie Dimon told CNBC on Monday that he doesn’t view AI as a bubble, emphasizing, “The first internet bubble was all hype. This isn’t hype. It’s real.”
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However, Torsten Sløk, the chief economist at asset manager Apollo, published a chart this month that compared the valuations of the top 10 companies in the S&P 500 with their counterparts during the 1990s boom, labeling the “current AI bubble… larger than the 1990s tech bubble.”
“If you examine the bubbles in 1999-2000 and then in 2007, a key f eature was investor leverage. We saw a very high level of leverage, whether it was retail investors or institutional investors, and that was either through borrowings or derivatives,” Parker told CNBC.
A significant issue during the 2008 market crash, according to Parker, was the lack of transparency of derivative positions and the challenge of defining risk management around complex financial products like collateralized debt, bond, and loan obligations, which led to the subprime mortgage crisis.
“The crux of the matter was quite simple: it was just embedded leverage. So, I don’t anticipate a major market reversal like we witnessed in 2000 or 2008, primarily because investors currently don’t have much leverage.”
While he does not see a dramatic market crash, Parker does envision an investor rotation out of areas of concentration into the broader market.
Picture credit: Torsten Sløk, Apollo
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