It’s seemed recently that a full recovery is on the horizon, with vaccines now being rolled out and lockdown restrictions mainly being lifted around the world (other than the occasional circuit breaker lockdown).
So as you’d expect, markets have been rebounding. But do the actions of US stock investors reflect reality or are they becoming overconfident?
You’d expect that there would be an increase in demand in risk assets, with the recent positive signs about the potential end of the pandemic. But actually, the rise in stocks started way before any encouraging vaccine news.
Perhaps the best place to see this is with IPOs. There has been a record $149 billion raised in the US in IPOs this year. But there are now concerns that the market is becoming 'frothy', which basically means that investors ignore fundamentals and keep buying assets anyway.
If we take a look at the recent IPOs from Airbnb and DoorDash, that seems especially true.
Airbnb more than doubled on its first day of trading. Only 3 companies raising more than $1 billion have risen more on their first day. The top one was Palm Inc, which created the PalmPilot.
That company doesn’t exist anymore, but the name might throw you back to the early 2000s. And that’s the concern at the moment; the euphoric demand for IPOs is reminiscent of the dotcom bubble.
It’s been reported that money managers investing in IPOs, have had to start factoring in the euphoria of retail investors since they outline their normal models in anticipation for the IPO but as soon as it takes place, the demand surges which makes the model redundant.
This may be a sign that there’s too much confidence from investors. After all, although a recovery is expected, it’s not likely to be a quick one and there’s going to be a struggle with many uncertainties for a while yet.
As the chief technical equity strategist for the Bank of America Securities said:
“The only thing we have to fear is the lack of fear itself.”
Surveys from Absolute Strategy Research showed global investors are more bullish about the next year than any other time since their surveys began. They have warned that markets are heading towards ‘groupthink’ as there’s a big gulf between the macro outlook and investor expectations. This means, there could be high levels of volatility if the consensus view gets challenged by actual events.
It seems for now this all might not be a problem as there’s been such a surge in liquidity. But later next year there may be issues.
It’s argued at the moment that investors are borrowing returns from the future and there’s an expectation that earnings will be improving next year. However, it’s also likely that improved earnings will lead to even more demand that could cause more rises.
Unfortunately though, it’s quite likely that the economic recovery won’t match the expectations that the stock market is showing.
As an article in the FT put it, "as welcomed as this recovery will be, it is unlikely to be sufficient to fully offset the impact of corporate bankruptcies or the detrimental effects of higher inequality. Investors might rue the day they ventured into asset classes far from their natural habitat that lack sufficient liquidity in a correction".