I’ve just read that Google searches for the phrase ‘stock market bubble’ are at an all-time high. Investors are clearly getting nervous, fearing that share prices are overvalued (particularly in the US) and that the mother of all bubbles is about to burst.
Maybe I’m weird, but I like reading about potential stock market bubbles. There’s always somebody out there claiming a crash is upon us. Sometimes lots of people cry “crash!” at the same time, and you get the sense they know what they’re talking about.
The thing is, they don’t. While it’s easy to spot a stock market bubble, the tricky part is accurately saying when it will burst. Nobody ever does.
Ignore predictions, especially about the future
I believe we’ve been in a bubble since interest rates were slashed after the financial crisis, in March 2009. Stock market growth since then has been underpinned by cheap money, as well as the unspoken assumption that if asset prices crash, central banks will ride to the rescue again.
This has largely driven the 12-year US stock market bull run. Every investor who called a crash in that time, got it wrong. They were right about the bubble, wrong about the crash.
That bubble may be even bigger today. Especially in the US, where the S&P 500 trades at a P/E of 34.1, double its long-term mean of 16.78. Speculative mania over video games retailer GameStop looks like typical late-bubble euphoria. Mutant Covid could slow the recovery, as countries lock down.
I’ve just read a warning from stock market historian Jeremy Grantham, who reckons the post-2009 bull market has finally matured into a “fully-fledged epic bubble“. He says: “I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.” Eek!
So how do I react to that? The first thing to remember is that this is just one man’s view, and as he admits himself: “Nothing is certain.”
He’s right on one point. Nothing is certain when it comes to stock markets. Some may be tempted to sell up now, but I won’t. This bubble could blow a lot higher before it bursts.
This stock market bubble doesn’t scare me
So I’m doing what I always do. Investing a regular monthly sum in the stock market, to spread my risk. If we get the mother of all crashes, that will suit me, as my monthly payment will pick up more stock at the lower price (and so will my reinvested dividends).
If it doesn’t crash, that also suits me, as my money will continue to grow. Not everyone can take that approach, of course. But I can afford to take such a relaxed attitude because I don’t expect to touch my retirement pot for at least 15 years. Even if Grantham is right, history suggests that markets should have begun to recover by then.
The other thing I’m doing is keeping my ammunition dry, because if we do get a crash, I plan to start snapping up shares in my favourite companies at reduced prices.
The key, as ever, is to invest for the long term. Then I can ignore the short-term noise. There’s a lot of it about right now.
