Wall Street’s speculative frenzy is even crazier than it seems
Bitcoin’s more than 200% surge in 2020 is just the latest sign of irrational exuberance
Animal spirits are famously running wild across Wall Street, but crunch the numbers and this bull market is even crazier than it seems.
Global stocks are now worth about $100-trillion. American companies have raised a record $175bn in public listings. About $3-trillion of corporate bonds are trading with negative yields.
All the while the virus spreads, the economic cycle stays on life-support and businesses get thrashed by fresh lockdowns.
Spurred by endless monetary stimulus and bets on a post-pandemic world, day traders and institutional pros alike are enjoying the easiest financial conditions in history.
“Sentiment indicators are moving to euphoria,” said Cedric Ozazman, chief investment officer at Reyl & Cie in Geneva. “People are now jumping to invest amid fears they will miss the Santa Claus rally.”
Here are the signs of market froth in this year of death, disease and economic calamity:
Nothing evokes a stock peak like a rush to the public markets. Debuts from Snowflake to Airbnb took 2020’s initial public offerings (IPOs) volume to a record $175bn in the US, data compiled by Bloomberg show.
Special-purpose acquisition vehicles (SPACs) that raise money for a “blank cheque” company to buy whatever it wants have raised more than $60bn in 2020. That’s more than the previous decade combined.
Investors still can’t get enough. The first-day return for IPOs averaged 40% in 2020, the highest ever other than 1999 and 2000, according to one estimate.
All that has drawn unprecedented interest in the Renaissance IPO exchange-traded fund tracking new listings, up more than 100% in 2020. Even SPACs that haven’t announced an acquisition target are up almost 20% in 2020, Bespoke Investment Group noted.
“If that isn’t a sign of exuberance, we don’t know what is!” Bespoke analysts wrote in a note.
Robinhood traders have become the talk of Wall Street this year by speculating on everything from tech options to airline shares. With these retail investors chasing the equity rally along with institutional pros, the S&P 500 is trading with a sales multiple about 16% above the 2000 peak.
Everything is going up. A Goldman Sachs basket of the most-shorted stocks in the Russell 3000 has surged about 40% this quarter, triple the broader index. High-beta shares are near their highest vs low-volatility ones since 2011.
Every time the Russell 2000 has surged more than 95% off its trough, it has gone on to lose money over the next three months, according to SentimenTrader. It is now up roughly 100% from its March low.
Bullish retail investors have plunged into the complex world of derivatives like never before this year. Over the past 20 days, a record average of roughly 22-million call contracts have traded each day across US exchanges.
Cboe’s equity put-call ratio has dropped near a decade low — a sign traders have rarely ever been so hell-bent on chasing upside in single stocks.
Animal spirits in corporate boardrooms are another infamous sign of a market top. This quarter is shaping up to be the strongest for deal-making activity since 2016 after a record third quarter. S&P Global buying IHS Markit and Advanced Micro Devices taking over Xilinx are among the blockbusters.
With corporate cash balances rising in recent years and deal volume as a percentage of market value still below a long-time average, it is possible the recent activity is just the start.
Europe joins in
Even Europe’s IPO market, which is much smaller in size than the one in the US and less accustomed to big first-day pops, is going bananas.
Among the 44 firms that have listed on European exchanges since November 9 — the day news of a coronavirus vaccine set off a bull run in equities — the average gain has been 16%, according to data compiled by Bloomberg. About 70% of them are trading above their IPO price.
“Given heightened equity valuations, IPOs are again a viable exit route for sponsors,” said Darrell Uden, global co-head of ECM at RBC Capital Markets.
In a world of almost $18-trillion negative-yielding debt, investors have been forced to gorge on risky corporate bonds at record valuations.
In the US, yields on junk bonds have tumbled far below levels at which high-grade borrowers could issue earlier this year.
Even Carnival Corporation, the fallen-angel cruise ship operator, has progressively cut funding premiums this year. The stockpile of negative-yielding corporate debt now stands at more than $3-trillion.
Naturally it’s boom times for emerging-market nations selling more than $730bn in dollar and euro bonds in 2020, more than in any previous year.
Even with political turmoil, Peru sold the lowest-yielding century bonds ever from a developing-economy government. Ivory Coast priced euro-denominated debt with a lower yield than 2019, despite its participation in a G-20 debt relief initiative and an ongoing International Monetary Fund programme.
To diehards, Bitcoin’s more than 200% surge in 2020 on a wave of new money shows crypto’s time has come. To many on Wall Street, it’s just the latest sign of irrational exuberance.
“We view it and other cryptocurrencies as ‘digital tulips.’ We have no way to value them,” Yardeni Research analysts including Ed Yardeni wrote in a note. “We do watch Bitcoin’s price action as a gauge of speculative excesses.”
Its volatility is a hard pill to swallow for most but the likes of JPMorgan and Nomura have noted plenty of interest, from family offices to trend-following quants.
The virtual currency is surfing a wave of speculation for long-duration assets, from solar energy to Tesla shares, as investors seek a stake in a technology of tomorrow — valuations be damned.
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