Annual Percentage Change in US Equity Margin Debt (White, Right Price Scale) and Dynamics S&P 500 (blue, left scale). Source: FINRA, Bank of America, Bloomberg
The US stock market has become a “very, very dangerous” place: some parts of it are in a bubble, but betting too early on its decline is sure death for an investor, said the investment director of Bridgewater Associates ($ 140 billion under management – approx. ProFinance.ru) Greg Jensen in an interview with Bloomberg.
Below are some of the expert’s arguments.
Bridgewater Associates uses six criteria to “fairly” value any asset from stocks and bonds to cryptocurrencies. One is the realism of priced perspectives.
For example, current prices suggest that 10% of US public companies will see revenue and earnings growth of 20% per annum. However, history suggests that in the absence of strong inflation, only 2% of companies achieve such indicators.
Another worrying factor is the influx of new investors into the market who are financing the purchase of shares with margin loans (see chart above). Corporations, which increase their debt burden to finance their activities, are doing roughly the same thing.
The high activity in the IPO market is also worrying.
All of this suggests that part of the US stock market (but not the entire market) is in a bubble. However, a premature bet on its decline is certain death for an investor whom Greg Jensen advises to be cautious and conservative.