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If the Stock Market is in a Bubble, What Will Trigger A Crash?
Due to the lack of spending as a result of the global Pandemic and being flush with cash from the Fiscal Stimulus, some Americans are saving now more than ever before.¹ However, as interest rates are at historic lows, some of those founds have been invested into various asset classes, leading to unusual market behavior. Whether it’s purportedly Robinhood traders² or Wall Street Bets on Reddit³ or general investor euphoria⁴, various asset classes are breaking record highs.
The typical indicators of a bubble⁵ are as follows:
- Low interest rates
- Stock valuations that are divorced from earnings
- Retail investor mania
It’s seeming more and more likely that there are minor bubbles across multiple asset classes such as:
1. Stocks: The CAPE Ratio⁶ and Buffett Indicator⁷ are at record highs not seen since other major financial crises such as the Great Recession, the Dot Com Bubble, or even the Great Depression. For example, the S&P500 is valued at 22x predicted earnings (the historical average being 16).⁸
2. Real Estate: Although much less speculative than the stock market, housing prices are beginning to exceed income⁹.
