Bank of America Incites Panic-Should You Worry?
Bubbles are a consistent concern when the market is doing well. “Are we in a bubble?” “Do I need to sell?” “Is this like 2000?” Etc… These fears are easily stoked, and companies like Bank of America or JP Morgan enjoy stoking every once in a while. Bank of America released a report last week warning about a “mega-bubble” that could destroy 40% of the value of the index. Every week, some guy or business, or uncle, claims that we are in a bubble. Obviously, it is very worrying whenever they claim this, and it takes a measure of bravery to go forward with your investments. So, is this report baseless, or should you start going more conservative?
BOFA (an always funny acronym) is comparing our current position to that of the dot-com bubble, shocker. Not to sound too, too biased already, but that is an example oft-trotted out when fearmongering. Not to say necessarily that fearmongering is what BOFA (still funny) is doing, but old guys who are somehow rich often say, while complaining during their 30 seconds on CNBC, that we are in the middle of a second dot-com bubble, and they’ve been saying that for a decade.
An example brought out to support this claim of the US markets being overvalued is the chart that has been passed around about the value of the US stock market compared to the global stock market, and how we are over three standard deviations away when comparing value. I think this is more of a case of places like Europe being undervalued, rather than America being overvalued. And even if it’s not, America is in a really good spot right now economically, and I think that is being spread to the companies. No other country is as well positioned, has as much money, and is rolling at our pace with so few obstructions in our way. This is not just rah-rah, guy from the South, patriotism. American Exceptionalism, when it comes to our companies, is undeniable. We might not be 3 standard deviations better, but we are not that far away. I give this section of their argument a D-.
Then, they mention concentration again, but this time within the US markets. The five largest companies control a quarter of the S&P’s market cap. I think this argument is also quite flawed. Yes, sometimes that means we are at the top of the market, but sometimes it doesn’t. And I do not think that this concentration is unearned. These companies are making an insane amount of money. This is not like the dot-com bubble when these internet companies were not making any money. In the long-term, this hyper-concentration could be problematic, but I think it is more likely that this is just an odd quirk of the market we are in right now, and I think a spreading back out is inevitable.
Then, they bring out a few more graphs that, I believe, are more about correlation than causation. Fund-manager cash levels are at a low, sentiment is at a high, and buybacks are at a high. These all indicate optimism. BOFA is asserting that because market optimism is so high, bad things must be on the horizon.
Is the market too overexcited? Yeah, probably. I think companies like MicroStrategy and Palantir (great name) are evidence of this general overexcitement, as is crypto excitement. But this is why you buy good companies. Good companies weather bad storms. Costco fell 20% in 2022, at pace with the S&P 500, but they increased 50% the year before and 45% the year after. So ultimately, while the 20% stung, we moved on. Sure, the market is a bit overexcited, but you will be fine if you stick with high-quality companies. I can assure you though, the market will not drop 40%. That is insane hyperbole. And if I’m wrong, you can have the $5 remaining in my portfolio.
