Yahoo Finance 2 key bubble ingredients are missing from today's stock market
For all the talk of a bubble in the stock market, two key ingredients are missing.
TS Lombard said the lack of leverage held by retail investors suggests the stock market is not in a bubble.
An IPO frenzy is another telltale sign of a bubble, which occurred in 2021 and 1999 but not yet in 2024, according to UBS.
As US stocks trade near record highs, there's growing concern on Wall Street that the stock market is in a bubble.
While bubbles lead to dizzying gains on the upside, they are unsustainable and ultimately end in a swift and spectacular fashion, leading to massive losses for investors who get caught up in it.
But there are two key ingredients missing from today's stock market environment, suggesting that a bubble has yet to arrive.
Where are the IPOs?
In 1999 and 2000, at the peak of the dot-com bubble, a combined 1,313 companies went public, raising about $170 billion in capital. And from 2020 through 2021, more than 1,500 companies went public and raised more than $500 billion in capital, according to data from Bloomberg.
That pales in comparison to today's IPO market, which has been largely dormant since the 2022 bear market. So far in 2024, just 20 companies have gone or are about to go public.
"A hallmark of the late 1990s bubble was the IPO frenzy and elevated first-day returns, which are absent today. In 2020–21, the average first-day returns were the highest since the dotcom era, but that ended once rates started to rise, and the IPO market has yet to really come back," UBS's CIO for global wealth management in the Americas, Solita Marcelli, said in a recent note.
And for the companies that have gone public, one-day returns pale in comparison to the soaring one-day returns newly public companies saw in 2020 and 2021.
Instead, investors are more focused on quality and profits than they are on speculative growth, and that's ultimately not behavior that is indicative of a bubble.
The divergence in performance between mega-cap tech companies and speculative IPO companies "appears to reflect investors' willingness to pay up for high-quality companies with strong earnings potential, but not for those with more uncertain futures," Marcelli said.
Marcelli ultimately sees the stock market continuing to trend higher throughout 2024 thanks to a strong economic backdrop and tailwinds from AI, and recommends investors maintain a core allocation to US large-cap stocks.
Where's the leverage?
Another hallmark sign of a stock market bubble is investors taking on excess leverage to juice their returns and chase the rally higher.
But according to Global Data TS Lombard, FINRA margin debt has risen only modestly over the past few months and is still down about 25% from its record high reached in 2021.
"Margin debt and options open interest suggest that it's not speculation driving the rally," strategist Skylar Montgomery Koning said in a note on Wednesday.
Meanwhile, investors have been insulating themselves from potential losses in the stock market via put options, which is not typical of a stock market bubble.
"By the same token, the volume of US equity market call options has increased but remains well below the levels of froth seen in 2020. Moreover, the Nasdaq put volume has been relatively elevated, presumably because investors have been hedging outright long exposure," Koning said.
Read the original article on Business Insider
