Well it’s been an interesting start to the New Year to say the least. One month in and we have experienced:
- The volume of IPOs has reached a rapid pace, with $347 billion worth announced in 2020 despite the pandemic, more than double the $165 billion announced the prior year
- Bitcoin’s continues to sky rocket and is up 50%, yet it is not being used as a currency by the general global population
- GameStop had more-than-six fold increase that occurred in less than two weeks due to day-traders causing a major short squeeze
- Tesla is now the fifth-largest stock in the S&P 500 by market capitalization, with a market cap larger than that of the major U.S., European, and Japanese automakers combined
- Individuals, who are not investment professionals, are trading (gambling) based on stocks trending in conversations on Reddit, Stocktwits, Twitter, and Facebook
Does consistently rising prices rather than rationally assessing the value of an investment sound like a sustainable situation to you? Given this exuberance and excessive behaviours, it’s only fair to wonder if we’re seeing a bubble inflating close to a bursting point.
Such concerns are valid, in the view of RBC Wealth Management. However, we see the situation as a growing number of red flags rather than a definitive sign that we are in a bubble that is about to burst. We see less evidence of bubble territory when we look at stock market valuations.
On the surface, U.S. equities appear expensive at 22.3x the 2021 consensus earnings estimate for the S&P 500. After excluding the five largest technology-driven stocks (Apple, Amazon, Microsoft, Google, and Facebook), which constitute more than 20 percent of the S&P 500’s market capitalisation, the forward price-to-earnings (P/E) ratio drops to 17.5x, according to our national research correspondent. This compares to a 10-year average of 16.4x for the S&P 500 as a whole, suggesting to us that while valuations are expensive, they are not significantly overvalued.*
Still, a pullback or correction cannot be ruled out. The frothiest, most extended parts of the U.S. market would be most vulnerable, in our opinion. Difficulties with vaccine rollouts and delays in reopening economies that lead to disappointing earnings guidance could all trigger profit-taking.
We maintain an Overweight stance in global equities, while applying smart diversification. The markets will experience volatility, however our view is that equities will eventually move slowly higher over the course of the year. We expect the sector rotation into cyclicals that started in November 2020 to continue as the economy approaches a reopening.
The portfolio managers that I utilize for my clients’ investments cover vast geographies, sector, industries, factors and styles. They continue to look for exposure to more attractively valued cyclicals, without neglecting exposure to resilient defensive stocks.
*Source: RBC Wealth Management