Monday, September 26, 2022

End of US Stockmarket Superbubble | money week


Jeremy Grantham, founder of asset manager GMO, has a long history of leaning towards the bearish side of things. But he also has a long history of being right about bubbles. And today, according to his latest research note released just before this week’s market turmoil, he thinks the US stock market is not just in a bubble, but a “superbubble.”

GMOs have done a lot of research into financial market bubbles and settled on the definition that an investment bubble is a market that has shifted more than two standard deviations from its trend mean (for more, see below. see box). Now, however, we have moved beyond the “normal” bubble as well. Instead, Grantham says, the US market is typically in a “superbubble” that has shifted three standard deviations from the trend.

This is the kind of thing that should only happen once in 100 years. It’s not that rare, but Grantham believes it has only been seen on five other occasions: US stocks in 1929 and 2000 (the tech bubble); US housing in 2006; Plus Japanese stocks, and late 1980s Japanese assets. “All these five biggest bubbles came all the way back into trend.” Grantham noted that if the S&P 500 does the same from here, it could drop to 2,500. Grantham says the bubble started leaking air last February, when the most speculative stocks in the market peaked. For example, Cathy Wood’s ARK Innovations EFT, which invests heavily in such stocks, has since halved.

Inflation not yet decided

It’s hard to disagree with Grantham’s view that US markets are overvalued. They have been that way on almost any measure you want to mention for many years. The GMO also notes that by 1925, rising inflation had “always hurt manifolds”—in other words, investors become less willing to pay for shares. So far (or at least, until the past week) it seems that investors have assumed that inflation will indeed be transitory, but if this changes, the price/earnings ratio in US markets is a long way off. is to be decided.

So what does this mean for your money? The approach to GMOs at Moneyweek isn’t much different from our own. While US markets are very expensive, other developed markets – particularly Japan and the UK – are in a better position, especially if you choose “value” instead of “growth” stocks. A proper crash in the US would inevitably drag most equity markets down, but the cheaper they are, the sooner they will recover (you’d expect). The list of GMOs also includes emerging market prices. Finally, says Grantham: “I’d like some cash for flexibility, some resources for inflation protection, as well as a little gold and silver.” It’s hard to disagree with any of this.

I wish I knew what the standard deviation is, but I’m too ashamed to ask

The standard deviation (SD) is the most widely used measure of “spread” or “risk” in the financial markets. It may sound technical but it is actually quite simple to understand. It is based on the idea that any population is “normally distributed” (it follows a “bell curve” pattern) – in other words, whether it contains the height of every adult male in the UK, or from the FTSE 100 If the annual return exceeds 100 years, most members of the normally distributed group will be grouped around the arithmetic mean (“mean”) for the whole.

For the height example, this would be the sum of each person’s height divided by the number of men in the UK. So a randomly chosen man in the UK would, on average, be closer to 5’10” – with only a few people being above or below “average” height (these are the so-called “outliers”).

The SD measures the average spread of a given measure (in this case, height or equity return), above or below the average figure. In other words, it is a measure of how widely the data varies from the mean.

Given a normal distribution, approximately two-thirds of all data points in a set should be within one SD of the mean, and approximately 100% should be within three SDs. The higher the SD, the greater the spread of the data – or the risk of a randomly selected individual from your data set being nowhere near the average of 5’10”, or that the return from equity next year is very high or below the average of the last 100 years.

SD can also be applied to other aspects of the financial markets. For example, as mentioned above, in the GMO definition, a market that has moved more than two SDs away from the mean is in bubble territory. According to GMOs, this is something that should happen once every 44 years, but actually happens once every 35, reflecting the fact that markets do not follow a “normal” random distribution, but rather human ones. Behavior motivated.

Nation World News Desk
Nation World News Desk
Nation World News is the fastest emerging news website covering all the latest news, world’s top stories, science news entertainment sports cricket’s latest discoveries, new technology gadgets, politics news, and more.

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