One of the most heavily discussed topics in the financial media today is the observation that most of the gains in the stock market are being driven by just a handful of names, and this, as in past episodes of market melt-ups and melt-downs, may be a precursory signal for an impending crash. These mega-cap stocks have become both retail favorites and forced holdings for many professional investors who simply cannot afford to not own them. The phenomenon has resulted in descriptors that remind us of the parable of the blind men and the elephant (see here). The elephant is the massive bull market rally in the S&P 500, and the subjective experiences explaining them are labels such as “concentration”, “momentum”, “dispersion”, “low volatility”, “buybacks”, etc. Other explanatory metrics are “revenues”, “earnings”, “book value”, and many others that are used by analysts for judging value in the stock market. Depending on who you speak with, they will label and perhaps even identify the stock market today as exhibiting one or more of these causes and utilize one or more of the metrics to justify their point of view. This leads to an extremely complex discussion, and while some investors think that the stock market is in a bubble, others differ, and think that the current market euphoria is justified. For our own part, we simply don’t know, but we believe that the labels and metrics above are inter-related; more importantly, since similar episodes have occurred in the past, with a rigorous analysis they provide us with a blueprint for what we can act on, even without being able to forecast what happens next .
The full note on this important topic can be downloaded at this link: LTA Thinking – Is the Stock Market in a Bubble