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Stocks Are In A Bubble, And Bubbles Burst

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Stocks Are In A Bubble, And Bubbles Burst

The number of movers and shakers on Wall Street that are using the “b” word to describe the stock market is growing by the day.

“I think we are certainly in bubble territory,” said Jonathan Bell, the chief investment officer at Stanhope Capital during an appearance on CNBC’s “Street Signs” yesterday.

Bell specifically mentions the “big five” tech stocks that have led the rally off the March lows. He mentioned these stocks as being in a bubble. Shares of Amazon are up 78% this year while Apple and Netflix have jumped 65% and 59%. On the other hand, Facebook and Alphabet have climbed 38% and 19%.

“It’s not that these businesses aren’t great businesses that are going to carry on going, it is just the exuberance related to them,” said Bell, adding “I would be saying to people that this is a bubble-type territory, but it doesn’t mean that it is going to deflate now. What we have seen in the last week or so is only an unwinding of the rise of the previous two weeks.”

The concentration into just a few stocks worries Bell. It does so as the market caps of this small group account for about 20% of the US market. Meanwhile, they account for 12% of the MSCI World Index.

“You’ve got exuberance on just a very small number of stocks. That’s certainly bubble territory,” Bell added.

Investors Must Pay Attention

He said investors need to pay particular attention to their portfolios to make sure they don’t own too much of these stocks.

“There’s still a lot of reasons to own these but be really careful, trim holdings … Look at the percentage weighting you’ve got. If you’ve got 15% or 20% and you’re overweight then be aware of that, but if you’ve got 30% or 40% of your portfolio in there, then that’s a really big risk you’re taking,” he concluded.

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Echoing Bell’s concerns about a bubble is Rob Arnott, the founder and chairman Research Affiliates, a global asset manager.

“It’s a bubble,” Arnott said. “Bubbles burst. The FANMAG (Facebook, Apple, Netflix, Microsoft, Amazon, Google) bubble will be no exception.”

Arnott says the recent pullback is a full-blown correction in high-flying stocks like the FANG+ index.

“We are clearly seeing a correction. The FANG+ index was down 11% in just one-and-a-half days.”

Apple is now in a correction, having slipped again on Friday and is now down more than 10% from recent highs.

Arnott says the recent valuation of Apple, when compared to some global indexes, is a bit absurd.

“At its recent highs, Apple was worth more than the entire FTSE index. In other words, the one stock was worth more than the entire publicly traded British economy,” said Arnott.

“It’s a fantastic company with great products and superb management. But, it will not produce more profits for its shareholders in the decades ahead than the entire London stock exchange,” he said.

He also warned that the results may cause pain for everyone involved. This may happen if stock markets do enter a correction and the economy suffers as well.

“It’s much worse than that,” said Arnott when asked if this downturn could be as bad as the Great Financial Crisis.

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