Looking back over 2020 with only three days remaining, what a stressful year it’s been. Stock markets rose steadily until February, when fears of the Covid-19 pandemic smashed share prices. By 23 March, the FTSE 100 index had collapsed below 5,000, down 2,550 points — around a third (33.8%) — in three months. In the US, the S&P 500 crashed almost 1,000 points (30.7%), also bottoming out on 23 March. However, the US market has since rebounded to all-time highs. To me, this suggests that we are in the fourth market bubble of my lifetime.
Bubbles cause crashes
Having been an investor during the 1987, 2000-03 and 2007-09 stock-market crashes, I’ve learnt painful lessons from these three meltdowns. As a result, I don’t buy assets at sky-high prices, because I know this will reduce my future returns. Likewise, I steer clear of frothy markets during their periodic bubbles. How do I identify a bubble? It’s hard to say, but I know one when I see one! Here are three market bubbles that I see as having inflated to dangerous levels in 2020.
My three bubble markets
The price of Bitcoin has soared this year, rising by $20,000 from around $7,200 to all-time highs over $28,200 yesterday. Why is Bitcoin up 280% in 2020? There is no way of knowing and no fundamentals to review. All that has driven the Bitcoin price higher since March has been buying pressure and momentum. For me, that’s good enough to declare Bitcoin as my first market bubble. In 2021, I expect Bitcoin to perform as it did in 2018 — by crashing hard when financial gravity finally overcomes speculative excess.
I call US tech stocks as my second market bubble. The NASDAQ Composite tech index has soared by three-sevenths (42.7%) this year, setting record highs in late 2020. For me, the NASDAQ in 2020 has echoes of its performance in 1999/2000. Twenty years ago, the tech index peaked above 5,000 points on 14 March 2000 (coincidentally, my 32nd birthday). By winter 2002, it had lost four-fifths (80%) of its peak value. Today, the tech index is dominated by the ‘Big Five’ mega-tech firms, all huge and profitable. But the NASDAQ trades on a price-to-earnings ratio of 39 and an earnings yield below 2.6%. For me, this indicates that US tech stocks are looking bubbly.
My third bubble is in market listings — IPOs (initial public offerings) and SPACs (special purpose acquisition vehicles). Again, the first-day performances of over-hyped IPO stocks and SPAC shares have scared me this year. Indeed, the opening ‘pops’ (price spikes) in companies such as cloud-software provider Snowflake and delivery firm DoorDash are only beaten by the 2000 vintage of IPOs. And we all know what happened to those bubble stocks over the next couple of years, don’t we?
The FTSE 100 is no bubble
While I see multiple bubbles in the US, partly driven by the ‘Robinhood herd’ of younger investors, I see great value in UK-listed stocks. The FTSE 100 currently hovers around 6,500 points. The Footsie first passed that level in 1999, and is also over 1,400 points — more than a sixth (17.7%) — below the record high reached in May 2018. What’s more, the price-to-earnings ratios, earnings yields and dividend yields of many individual FTSE 100 businesses are extremely attractive today. That why, in 2021, I will move some of my family wealth out of over-priced US stocks and into cheaper FTSE 100 value shares. I believe this will surely produce better returns over the next 10 years, helping me to retire rich!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Snowflake Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.