Will the End of the Bear Market Be the Start of the Bubble?

Will the End of the Bear Market Be the Start of the Bubble?

“If you went to sleep on Feb. 19 and woke up on Aug 14, you would think that nothing had happened.” This according to a recent article in Barron’s that describes the market’s rally after the March bottom as “the fastest recovery from a bear market on record.”

But was it really a bear market? According to the article, a typical “peak-to-peak” recovery takes an average of 1,542 trading days (according to Dow Jones Market data), so the speed of the recent rally may suggest that something else happened.

While a bear market typically marks a “clean break with what came before,” as it did during the financial crisis of 2007-2009, the article cites a comparison presented by Marketfield Asset Management CEO Michael Shaoul of the recent dip to two other historical declines, “one officially a bear market, the other not:” The first in 1987, when the S&P 500 dropped 35% (including the Black Monday fall of 20%); and the second in 1998, when the emerging market debt crisis (and the fall of Long Term Capital Management) led to a 19.9% drop in the index. “In both cases,” Shaoul notes, Fed intervention triggered swift rebounds that led to the creation of bubbles.

“Under current circumstances,” says Shaoul, “the odds of central banks being ‘third time lucky’ appear to be remote, and we increasingly believe that we are heading for some form of ‘bubble trouble’ along the road.”

Jason Brady, CEO of asset manager Thornburg, says the market is currently being led by companies that have strengthened during the pandemic and can offer growth as the Fed has pushed rates down below the level of inflation. While a good story now, he argues that things may be getting pushed too far and “a little bit silly.”

If a bubble is forming, says BTIG strategist Julian Emanuel, a few things could pop it:

  • A vaccine that leads investors to buy “economically sensitive stocks over those that benefit from everyone working from home.”
  • A rise in interest rates—and financial stocks—that causes bloated multiples to contract.
  • A furthering of tensions with China causing problems for “high-flying tech stocks.”

Photo: Copyright: 123rf.com / gopixa