This
is Fine: Markets at the Peak of Speculation
By the Curmudgeon
Overview:
Wall Street’s relentless rally off the April 9th stock
market lows has driven U.S. equity valuations to record levels prompting
warnings that “euphoric” markets are entering bubble territory. What was a grave concern for the equity
markets after the “Liberation Day” (April 3rd -to April 9th)
waterfall decline is now a non-issue.
Trump’s trade war, spiraling U.S. budget deficits and public
debt, pervasive geopolitical risk, the radical dismantling of the postwar
international order, declining global growth prospects — all have failed to
hold back the magical rebound and sense of euphoria.
Despite U.S. import tariffs at their highest in decades, and
great economic uncertainty, signs of market froth have multiplied
exponentially. Here are several examples:
·
Stocks in the S&P 500 are now valued at more than
3.3 times their sales according to Bloomberg
data, an all-time high.
·
Warren Buffett’s best single measure of stock market
valuation —
U.S. market capitalization divided by GDP is now at 212.1% vs the
long-term average for this ratio is ~154.14%. That indicator suggests that U.S.
equities are at the highest valuations of all time.
Ratio of Total Market Cap to U.S. GDP:
·
Barclays “Equity Euphoria indicator,” a composite of derivatives flows, volatility and
sentiment, has surged to twice its normal level, into territory associated in
the past with asset bubbles. “[The indicator] is clearly showing that the
market is euphoric,” said Stefano Pascale, head of US equities derivatives
strategy at the bank.
·
Goldman Sachs
“Speculative Trading Indicator” has risen
sharply during the past few months. The gauge now sits at its highest level on
record, outside of the 1998-2001 dot-com bubble era and 2020-2021 during COVID.
·
Stocks with no earnings
have soared: Circle Internet (CRCL),
a stablecoin cryptocurrency player, has gained 132% since its June IPO. CoreWeave (CRWV), an AI cloud computing company, is up 165% since April 8. Rocket Lab (RKLB), which
sends light payloads into low orbit, has gained 188% since its early April
lows. Quantum Computing (QUBT) is up 278% since its March bottom.
·
Speculative trading has also
been accompanied by a sharp short
squeeze in “meme stocks,”
including Krispy Kreme (DNUT), Opendoor (OPEN), and
Kohls (KSS). See graph below.
·
Even more imaginative than
the manipulation of meme stocks are financings that exploit the speculative
fervor in the market. MicroStrategy,
now doing business as Strategy, was
back this past week with its fourth preferred stock offering, totaling $2.5
billion, in what Barron’s Andrew Barry described as “a Bitcoin-backed version of U.S. Treasury bills” yielding as much as
10%. Quantum BioPharma announced a “strategic investment” in GameStop, the OG
meme stock this past week. Indeed, excess liquidity in the system has spawned
frenetic crypto speculation and growing use of crypto as collateral for
lending.
·
The CBOE Volatility Index
(VIX) closed Friday at 14.93 - its
lowest close since February 14, 2025. This shows there is no fear among U.S. stock
market options participants.
·
Call option volumes by retail
traders have recently surged, especially zero-day-to-expiration (0DTE) options.
These contracts, with a lifespan of a single trading day, are attractive to day
traders because of their low cost.
·
Prices of Special-Purpose Acquisition Companies (SPACs) and IPOs have also shot higher. For example, Stablecoin issuer Circle
(CRCL) is up more than 500% since going public in early June. Crypto firm Bitmine Immersion Technologies (BMNR) is up roughly 400% from its public offering price last month.
·
Speculative exuberance has
spread to corporate credit, where
the additional interest rate on highly rated U.S. corporations over benchmark
U.S. government debt has shrunk to 0.8%, close to its lowest since 2005.
·
In last
weeks Curmudgeon post, we highlighted
astonishingly tight junk bond spreads
despite increased risk of default.
·
Bitcoin, the poster child of intense speculation, is approaching
$120,000, which is up some 25% this year and 80% in the past 12 months.
Bespoke on Epic Short Squeeze:
While all stocks are up
an average of 4.3% in July, the 20 most heavily shorted
stocks (based on short interest as a percentage of float) are up 25.2%. UBS keeps an index of 100 heavily shorted stocks, and the basket has soared since the April
8th post-"Liberation" Day closing low for the S&P. As shown below, the "heavily
shorted" basket is up +79% in a straight line over the last 3+ months.
Other Voices:
"The median U.S.
IPO in June rose by 37% in its first trading day, the best month since early
2024 and a top decile return relative to the past 3 decades," Goldman analysts wrote. "The
recent rise in speculative trading activity signals near-term upside risk for
the broad equity market but also increases the risk of an eventual
downturn," Goldman's Ben Snider and his team wrote on Thursday.
Across the S&P,
“price to sales, price to cash flow, price to book, price to dividends, they’re
all near record levels,” said Rob Arnott,
founder and chair of asset management group Research Affiliates, who likened investing in the small group of
tech stocks that dominate the index to picking up pennies in front of a
steamroller.
“The market is pricing
the current dominant AI players as if they will have no competition in
the future,” he said. “At the same time there’s caution about moving away from
the popular and frothy names because if you’re too early, you’re in trouble.”
"In the steel cage
match since the market's lows in April, the bulls have been virtually
unbeatable — like Muhammad Ali and Hulk Hogan," wrote Doug Kass in a
post on TheStreet Pro. "But, as we all know, all the WWF matches were
fixed — a feeling that the bears have developed over the last three months as
retail, zero days to expiration option traders, and volatility-controlled funds
have aggressively bought every dip, contributing to the generation of animal
spirits and fear of missing out."
John Hussman’s July 20th
Market Commentary: “With our most reliable
stock market valuation measures at the highest extremes in U.S. history, record
negative readings on our most reliable “equity risk premium” gauge (estimated
S&P 500 total returns vs. Treasury yields), and the narrowest junk bond
risk premiums in history, it’s useful for investors to remember that a market
crash is nothing but risk-aversion meeting a market that is not priced to
tolerate risk.”
Back on Main Street:
“Wall Street has done
very well over the past few decades, and now it is Main Street’s turn to
shine,” Treasury Secretary Scott Bessent said last month. Really? Wall Street is glowing red hot
while Main Street is struggling mightily.
Small businesses find it
very difficult to borrow. Bank construction loans and housing starts have
declined. Surveys indicate that business owner confidence is at some of the
lowest recorded levels. This pessimism stems from a combination of rising costs,
decreased customer spending, and economic uncertainty.
Job growth has stalled
in recent months in most industries outside of health care and government. The
Labor Department’s latest JOLTS survey showed hiring declined this spring for
employers with fewer than 50 workers while modestly increasing for those with
more than 1,000. The mass deportation crackdown has also reduced the available
workforce for smaller employers.
Finally, increased
tariffs are squeezing margins at many small and medium-sized businesses, which
can’t absorb their costs or reconfigure supply chains as easily as large
corporations. Let’s take a closer look.
Impact of Tariffs
Underestimated by the Market:
Economists have
continued to insist that Trump’s high tariffs (see chart below) will
eventually start to weigh on the U.S. economy. Price increases have been slow
to materialize but started to become more apparent in appliances, toys,
furniture and other imported items last month. Economists anticipate that
higher prices will weigh on company sales and consumer activity, resulting in
slower growth for the U.S. economy.
Tariffs make imported
goods more expensive for consumers and businesses, leading to reduced demand
and potentially slowing down overall economic activity. Additionally, tariffs
can disrupt global supply chains, increase inflation, and reduce business investment,
further contributing to slower economic growth.
Macro
Economic Update:
l The Leading Economic Index (LEI) from the Conference
Board fell further than expected, dropping -0.3% in June. The Index tumbled
-2.8% in the first half of 2025, far more than the -1.3% it fell in the last
half of 2024, as this indicator continues to warn of economic headwinds to
come.
l New orders for manufactured durable goods declined -9.3% to $311.85 in June, the largest monthly
decline since 2020. They’ve been down for two of the last three months.
l Existing Home Sales fell –
2.7%, while New Home Sales ticked up +0.6%. New Home Sales are near
their lowest level in around 3 years, while sales for existing homes are
virtually at decade lows.
l New Home Inventory continued to
rise, pushing the months of supply at the current sales rate up to 9.8 – a
severely elevated level. That’s despite lots of home builder incentives for
home buyers. According to the National Association of Home Builders, 38% of
builders report cutting prices and 62% use sales incentives.
Stocks May
Underperformed Cash and Bonds:
It’s important for
investors (not speculators) to understand and appreciate that stocks are NOT a
bank account with no risk of loss.
The S&P 500 has
historically experienced extended time periods of underperformance. Here are a
few examples:
1. Under performing cash
from 1966 to 1982 during a very inflationary period. S&P 500 was basically
flat through August 1982, such that the index’s total return came almost
entirely from dividends.
2. From 1929 to 1949,
the average annual return on U.S. stocks was approximately -0.1%. This period
includes the Great Depression (1929-1932) and World War II, which significantly
impacted the stock market. The S&P 500 didn't exist in its current form
until 1957, but data from comparable indices show the volatile nature of this
era.
3. The period from
January 2000 to March 2009 is widely considered a lost decade for U.S stocks,
because the S&P 500 essentially delivered zero returns. This period
included the dot-com bubble burst and the 2008 financial crisis, which
contributed to stagnation.
4. The total return of
the S&P 500 lagged Treasury bonds from 1929-1950, 1968-1987, and the
22-year stretch from 1998 to 2020 (3/23/98-3/23/20 -5.27% vs 5.32% annually).
That’s 62 years of the 96-year period since 1929 – nearly two-thirds of market
history!
Conclusions:
The data points provided
in this post are symptoms of past stock market peaks. And they’re all too
familiar to those who have been through multiple market cycles (for which
they’ve been none to speak of since March 9, 2009).
Bear markets often start
with high valuations, intense speculation, fear of missing out (FOMO), and a
feeling of invincibility. All those warning signs are very apparent right now….
Caveat emptor!
End Quote:
“And
so the beat goes on, until it doesn’t,” Anonymous
.…………………………………………………………………………………………………………
Wishing you good health,
success and good luck. Till next time…
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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