The other day I wrote about the idea that stocks can’t be in a bubble if everyone knows we’re in a bubble. I argued that it’s indeed possible for a variety of reasons, but now we have this poll of fund managers from Bank of America that shows only 15% actually think stocks are in a bubble:

However, 55% believe stocks are in the late stage of a bull market. And the number who think stocks are in a bubble did tick up slightly since last month’s poll.

So altogether, 70% of fund managers think stocks are in the late stage of a bull market or outright in a bubble.

But then this begs the question: what does “bubble” mean? I’m sure those polled have different definitions. For instance, some could take “bubble” to mean the final stage of a bull market. But some could also consider bubbles to be their own sort of market type with stages of their own (ie. Early, middle, late).

But given the way the question was posed with three options—early-stage, late-stage and bubble—I think it’s safe to assume they are sequential. As in one comes after another.

Interestingly, about 25% of fund managers polled think stocks are in an early-stage bull market.

How could this be given that stocks have been going up since March 2009, 12 years ago?

A lot of people think the Covid Crash was a full bear market cycle unto itself and that a whole new bull market began on March 23, 2020. There’s no other way to interpret the datapoint that 25% of fund managers believe we’re in the early stage of a bull market given that stocks have been in a long term up trend for 12 years. Otherwise it would imply that 25% of fund managers think we’re in a 30-year bull market, something that has never happened before.

I have said consistently on this site that I do not believe the Covid Crash was a true bear market, but was instead just a really bad correction within the context of the larger bull market up-trend since 2009.

People get too hung up on the technical definition of “bear market,” as in whenever stocks drop 20% or more. I think a lot of people are trying to convince themselves March 2020 was the bear market and now we’re good to go, free of worry, for another several years.

But I’m sorry to say that even though stocks went down as much as 35% in March 2020, it was not a real bear market. A real bear market entails a valuation reset, and we did not see that. A real bear market is a fundamental change in the direction of stocks over a multi-year period. In a bull market, stocks go up with brief, periodic drops of varying severities. In a bear market, stocks go down with brief, periodic rises of varying magnitudes.

By those definitions, the Covid Crash was just a really bad correction within the context of a larger bull market, like the 1987 crash, the late 2018 correction, and the 2011 correction. Valuations did not come down dramatically during the Covid crash. It was not a full-scale reset of the market.

But I can totally see why investors want to believe it was. During the late stages of a bull market, you constantly have to worry if the end is near. Every drop in price could be the start of a new bear market. It’s stressful. But if the bear market has already happened, then you don’t have much to worry about. It’s all good. You can hold stocks with confidence, knowing we’re still years away from the next bear market.

Sorry, but the Covid Crash was not a bear market. It just wasn’t.

Valuations just didn’t come down by anywhere near the amount that would be enough to consider it a true bear market.

In fact valuations are now, today, as high as they’ve ever been other than the final year or so of the Dot Com bubble.

The next bear market will be painful, and it’ll probably last 2-3 years. Altogether we’ll probably see prices go down 50-80%.

It’s going to happen at some point. People keep trying to delude themselves into believing it won’t, but it will.

I want to say it will be a fantastic long term buying opportunity, but who knows? It took stocks 25 years to finally regain their highs from 1929. As you can see from the chart above, following the crash of 1929-1932, valuations did not return to a long-term up trend until around 1949.

And we could be in a situation like Japan in the late 1980s, where they had a massive stock bubble that burst in 1989 and never really recovered.

And you can see that Japanese stocks only really started to recover from the GFC around late 2012, and that was because the central bank took the unprecedented measure of buying equities to artificially prop up the stock market.

A lot of people believe we’re in the process of “Japanification” and that their past is our future. I have no idea if that’s true. But it’s at least something to consider given that our central bank’s actions over the past 12 years (ZIRP, QE) have been rip-offs of what the BoJ did starting in the late 1990s. We also have an aging population like Japan, although they’re much worse off than we are. It’s possible America is on the same trajectory as Japan. I hope that’s not the case, but we’ll see.

Anyway, the broader point here is that no, “everyone” does not think stocks are in a bubble. At least according to the B of A survey. So the whole idea that we can’t be in a bubble if everyone knows we’re in a bubble is based on a faulty assumption.

Although it’s possible the fund managers polled were lying about their true feelings. If they all said we were in a bubble, it could spook the market and spark a massive sell-off that actually ends up popping the bubble.

For what it’s worth, I think I probably would’ve answered “late-stage bull market” myself. As I’ve written before, I don’t think we’ve actually seen the peak bubble phase of this thing yet. I think we still have to go through the blow-off top phase of it, where prices gets completely delusional and parabolic like in late 1999/early 2000.

Leave a Reply