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I see signs of a stock market bubble. Here’s what I’m doing now

Edward Sheldon, CFA
·3-min read
Photo of a floating bubble
Photo of a floating bubble

Right now, there’s quite a bit of concern that the stock market is in a bubble.

Personally, I don’t think the whole stock market is in a bubble. However, I do believe some areas of the market, such as parts of the US technology sector, are overstretched at the moment. Here’s a look at some bubble indicators that concern me.

Everyone’s a stock expert

Prominent US investor Joe Kennedy once said something along the lines of: “When even shoe shine boys are giving you stock tips, it’s time to get out of the market.” What he meant by this was that when everyone is talking about investing in shares, it’s often a sign that the market has run too far.I

I’ve seen an explosion in the number of YouTubers giving share tips over the last few months. All of a sudden, everyone on YouTube seems to be an expert in shares! Worryingly, a lot of these content makers have very little experience in the stock market. I see this as a bubble indicator.

Euphoria is high

There’s also an incredibly high level of ‘euphoria’ in the market right now. Excitement levels are off the charts.

We have very seldom seen levels of investor euphoria like this,” said legendary British investor Jeremy Grantham (who has predicted a number of stock market crashes in the past) recently.

High levels of euphoria can be dangerous for stocks. “Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria,” said Sir John Templeton.

IPO activity

Recent IPO activity in the US also concerns me. Investors are scrambling to buy new tech stocks with little thought about the actual valuations of these companies. Just look at the Airbnb IPO. Its IPO price was $68. However, the stock opened near $150.

Valuations are extreme

Speaking of valuations, some tech valuations just look way too high, in my view. Take Tesla, for example. Its market cap is currently about $800bn which equates to a valuation of around $1.6m per car sold. It may prove to be justified long term, but it makes no sense to me.

Bubble indicator

Finally, zooming in on the tech sector, I think it’s worth noting that one of the UK’s largest global technology funds, Polar Capital Global Technology, closed itself off to new investors last year due to the enormous demand for tech stocks. After assets under management surged from £2.9bn in March to £4.5bn in June, Polar Capital announced that the fund was ‘soft closed.’ I see this as a contrarian bubble indicator.

Stock market bubble: what I’m doing now

Given these bubble indicators, I think it’s worth focusing on risk management right now. Here’s what I’m doing to protect my portfolio.

Firstly, I’m keeping a close eye on my exposure to expensive growth stocks. I don’t want my portfolio to be overly exposed to these kinds of stocks.

Secondly, I’m making sure that my portfolio is nicely balanced. Recently, I’ve been boosting my exposure to more defensive names such as Unilever and Reckitt Benckiser. If the stock market falls, these shares should hopefully provide protection.

Finally, I’m stockpiling cash. This will give me firepower to buy great stocks at good prices if the market does pull back in the near future.

The post I see signs of a stock market bubble. Here’s what I’m doing now appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever and Reckitt Benckiser. The Motley Fool UK owns shares of and has recommended Tesla. The Motley Fool UK has recommended Airbnb, Inc. and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021