5 Examples That Show Stock Markets Have Reached Peak Bubble
The late stages of stock market booms almost universally share the same characteristics:
- Valuations of stocks cease to bear any relationship to underlying business fundamentals;
- Widespread speculation causes values to explode out of control;
- Professional investors rush to the exits as amateurs get lured in by the feeding frenzy.
The current stock market bubble in the US shares many of those characteristics. It’s a bubble that was late in forming, was quick to set record highs, and is well overdue for a correction. It has seen ups and downs unlike any other bubble, with losses of nearly 30% followed by incredible rebounds. And like all other bubbles, its roots stem from the Federal Reserve’s loose monetary policy.
In fact, the only reason stocks continue to rebound is because the Fed continues to pump money into the financial system. That, and the hope that the Fed will one day buy stocks in order to forestall another financial crisis, is the only thing keeping stock markets afloat today. The euphoria has gotten so out of hand that investors are behaving as if they can’t lose money, another sure sign that the bubble is soon to burst.
If you haven’t been paying attention to what’s going on in stock markets, you may think that they’re rebounding because the economy is recovering. But looking under the hood demonstrates that isn’t really the case. Here are a few of the absolutely mind-boggling examples of how investors have thrown caution to the wind in order to chase returns, completely ignoring what will happen when the bubble finally bursts.
1. Hertz Stock Soars
The travel and hospitality industries were incredibly hard hit by the coronavirus lockdowns, with air travel falling over 95%. With far fewer people traveling, other linked industries were affected too, such as the rental car industry.
Things were so bad for rental car companies that Hertz actually declared bankruptcy. Not only that, the company is also trying to offload thousands of cars from its inventory by selling them online. The company’s bonds are basically worthless, and by selling its inventory the company will eventually become just a shell of its former self, assuming it even survives.
Given all of this, you would expect investors to drop the stock like a hot potato. Yet over 80,000 investors on Robinhood bought Hertz stock after the company declared bankruptcy. So many people are purchasing Hertz that the stock’s value rose from around 85 cents per share at the end of May to over $5 earlier this week. Its market capitalization was at one point nearly $1 billion, yet the company is almost doomed to fail. So why are so many young retail investors looking to invest in it?
2. Chesapeake Energy
Chesapeake Energy was one of the pioneers of fracking in the United States, and benefited greatly from the shale oil boom, especially when oil prices were high. But with oil prices having tanked, and with incredibly high debt loads, Chesapeake is at risk of both defaulting on its debt and declaring bankruptcy. And in the event of a bankruptcy filing, the company is rumored to be thinking of turning over control of the company to its creditors, thus wiping out shareholder equity.
With that risk in mind, you would think that the stock would be trading at next to nothing, right? Wrong.
Chesapeake’s stock nearly tripled from Friday’s close to Monday’s close, and reached even higher after the close. That was the result of significant interest from retail investors, who piled into Chesapeake and caused trading volume to quadruple. The stock has since fallen back closer to where it was at the beginning of the month, likely dealing heavy losses to those investors who thought they were buying a sure thing.
Everyone knows Tesla, and many think its stock is incredibly overvalued. But there’s another electric car company named after Nikola Tesla, truck maker Nikola. The company’s stock has shot up so much that its market capitalization is now greater than Ford. There’s just one problem. Ford produced over 5 million vehicles last year, while Nikola produced… zero.
Yes, that’s right, a company that hasn’t produced a single truck and that only has a concept is now larger than one of the major firms in US industry. Will the company ever bring its concept to market, or will it end up collapsing like Pets.com?
4. Day Trading
Remember day trading during the dotcom boom? Everyone thought they could sit around at home, trade stocks, and make millions. There was money to be made while the boom was still going, but once the bust occurred, day traders got taken to the cleaners.
The latest market rally has seen a return not just of day traders but also of their cockiness. Whether it’s the hundreds of thousands of millennials flocking to stocks through apps like Robinhood, or prominent “investors” like Dave Portnoy talking about how easy it is to make money in stock markets, this is a sure sign that a major stock market crash is just around the corner.
5. FANG Stocks
The FANG stocks (Facebook, Apple, Netflix, Google) and associated tech stocks such as Microsoft and Amazon have been major drivers in stock market growth over the past several years. Invest in any technology fund and it’s almost certain that the majority of the fund’s assets will be invested in those major stocks. And in fact, the five biggest stocks on the S&P 500 are among those FANG stocks – Microsoft, Apple, Amazon, Google, and Facebook. Combined, those stocks are up double digits on the year, while the rest of the S&P 500 is down. That’s not a great sign for the health of the economy, nor for the health of stock markets.
You could probably find at least half a dozen more examples of similar investor behavior right now, with young, inexperienced investors looking to make a quick buck. They’ll find out the hard way what previous generations have known for a while, that stock markets are not just one of the best ways to grow your assets, they’re also one of the best ways to lose them.
Of course, even investors who should know better sometimes fall victim to the urge to make money. With stock markets having recovered almost 50% from their lows earlier this year, there’s a tremendous temptation to start buying stocks again, hoping to eke out every last dollar from this rally. But those who succumb to the temptation could find themselves losing big when the crash comes.
Many professional investors are headed to the exits, and that’s probably not a bad idea for ordinary investors either. Those looking to lock in their gains and protect their wealth can look into investing in gold, as gold will likely continue to make great gains when stock markets fall. Just like in the aftermath of the 2008 financial crisis, when gold nearly tripled in value, gold should rise significantly once stock markets enter their decline.
For investors with retirement assets they want to protect, a gold IRA offers a ready-made solution to keep their assets safe and secure. With a gold IRA, investors can roll over funds from an existing tax-advantaged retirement account, such as a 401(k), TSP, or IRA, without tax consequences. That affords investors the opportunity to enjoy the benefits of gold while still maintaining the same tax advantages as their current retirement accounts. So if you have retirement savings that you want to protect, start thinking about a gold IRA today.