13 charts highlighting the speculative frenzy
Is this a return to 2022?
Here are some indicators of the recent exuberant risk-seeking behavior in markets:
Trading in expensive and penny US stocks is near record highs
Leveraged bets on markets going up have soared
Recent IPOs have generated strong first-day returns
US stocks with elevated short interest have surged
Special purpose acquisitive vehicles (SPACs) are back in vogue
These vehicles raise capital to acquire existing operating companies. Investors essentially give black cheques to SPACs to make acquisitions.
SPACs have raised US$12 billion this year. That’s nowhere near the heady days of 2021, though it’s still a lot of money.
Cryptocurrency prices are flying
Prices of Ethereum and bitcoin have catapulted higher, helped by the Trump administration’s pro-crypto policies and growing acceptance by mainstream financial institutions
Meme stocks are again a thing
You might remember that in 2021, retail day traders drove US mall retailer GameStop and other so-called meme stocks to ridiculous prices.
Well, meme stocks are back. This time it’s in companies such as Kohl’s and Opendoor. The latter is an online house flipper and its stock is up 377% in the past month.
Retail investors have been big buyers of the rally, while institutions have been sellers
There was a similar rise in US retail investor money in 2021.
The equity risk premium for the S&P 500 is near zero, the lowest since 2001
The equity risk premium measures the S&P 500’s earnings yield (earnings divided by price) versus the US 10-year bond yield. It’s an indicator of valuations of stocks compared to risk-free bonds.
It’s not just stocks – credit has also found favour
Spreads on US investment-grade corporate bonds are near the tightest levels since the late 1990s.
“The theoretical minimum spread is lower today. High-quality corporate credit can now trade closer to, or in some cases even through, US Treasuries in a way that was not previously conceivable”, says Citigroup.
There’s been some speculation in ASX stocks too
It hasn’t been to the same degree as in the US, but the likes of CBA and Pro Medicus saw extraordinary gains in the first half of the year.
Valuations on the ASX 200 are now punchier than 2021
The equity risk premium for the ASX 200 also implies expensive valuations for stocks
Are we headed for a fall?
Are we careering towards another 2022 market reality check?
Extrapolation from recent history is a dangerous business because no two periods are ever the same. For instance, back then, the world and Australia had a serious inflation problem. Our inflation rate went from -0.3% in June 2020 to peak at 7.8% in the December quarter of 2022. That led interest rates to rise from 0.1% in April 2022 to 4.35% in November 2023.
Now it’s different because inflation is falling here and in the US. And interest rates are on the way down, not up.
We also have a US President that is committed to getting rates lower and keeping them there.
There are other differences between today and 2021-2022 too. Back then, China was still locked down. Now, China’s economy remains in the doldrums though there are at least some tentative signs that the worst of its property-led slowdown may be behind it.
And Europe has dramatically changed since Trump came into power earlier this year. Germany has reversed decades-long government debt restrictions with plans to spend tens of billions on infrastructure and defence. If EU members increase their defence budgets by 1.5% of GDP as suggested, Joachim Klement estimates that those measures in aggregate could raise the EU’s annual trend growth rate over the next 10 years from 1.6%, the current OECD estimate, to levels like the 2.1% projected for the U.S.
We also have this new thing called AI that is already leading to massive spending from US tech giants and could spur economic productivity gains in the US and elsewhere.
All of this suggests that the current rally could run further. The risk is that Trump overheats the US economy, resulting in a rebound in inflation and rates heading back up.
Markets aren’t looking that far ahead, and for now, it’s risk-on.
