Is the U.S. Stock Market in a Bubble?

January 8, 2021
Recently the stock market has shown such a strong upward bias that pundits are
questioning if we are in a bubble. For the sake of discussion, we will assume we are in
or approaching a bubble.
If we are in a bubble, we need a plan of action. The best action is to determine the
causes of the bubble and determine when those causes may fade.
What causes a bubble? Optimism and money chasing investments.
The market is being driven by the following: (1) people have money in their pockets
from stimulus checks and it is easy-come, easy-go money. Remember that two-thirds of
workers received more in stimulus money than the income they had been making from
employment. It is a maxim that money must go somewhere and some of it found its
way into the stock market. (2) the market is forward looking and is ahead of us mere
humans. As far as it is concerned, the vaccines have already been given. It is so over
Covid. (3) The Fed is keeping interest rates low, allowing a low cost of borrowing. The
Fed does not have much choice and we think they are correct in doing so. (4) People
have time on their hands, and they are carried along by investing websites that
encourage them to take risk.
How will we know when to step away? Here are possible signs (not exhaustive):
1. When the govt stops throwing money at people. This just got elongated with the
Georgia election as additional stimulus is coming. We will have to see how
much money is thrown at consumers and estimate how long it will take to spend
most of it. Fortunately, this data point is highly visible and easy to follow.
2. When the IPO market slows down and/or has hiccups.
3. When the SPACs lose steam. These are Special Purpose Acquisition Companies
in which investors put money without any operating history available because
there isn’t any.
4. When Tesla and bitcoin lose steam again.
Numbers 3 and 4 have drawn in younger investors. Younger investors are gung-ho to
invest until they lose money after which they shut their wallets.
Deciding when to reduce market exposure rests on watching for the money influx to
cease.
Right now, expected corporate earnings, the market level, and the economy are out of
synch. The market is ahead of the economy and earnings. Will corporate earnings be
good enough to close the gap? They just might but time will tell. We expect the
economy in the near term to gather a good head of steam as the vaccines allow freedom
to move about. The economy has the possibility to become over heated. If so, it sets
itself up to roll over to a lower growth rate.
We expect to have at least five months of stimulus driven happy days. We know we
will probably need to reduce equity exposure sometime this year.
We do this by selling 10% of equities, waiting a bit and then selling 10% more, and so
on until stability returns to the markets.
It is too early to start; there is still money to be made.

Leslie J. Lammers, CFA John A. Hanson, CFA

llammers@rivertoneadvisors.com jhanson@riverstoneadvisors.com

Riverstone Advisors, LLC

914 629-6739