Two years of uninterrupted gains in U.S. stocks are sowing anxiety among financial professionals, with three in five saying the market is on the verge of a bubble or already in one, the Bloomberg Global Poll found.
Forty-seven percent of those surveyed said the equity market is close to unsustainable levels while 14 percent already saw a bubble, according to a quarterly poll of 562 investors, analysts and traders who are Bloomberg subscribers. Almost a third of respondents called the market for lower-rated corporate debt overheated and most said stock swings will increase within six months, the July 15-16 poll showed.
With biotechnology stocks trading at more than 500 times earnings, mega-deals resurfacing and bond sales at a record, concern prices are too high is growing amid a rally that has pushed the Standard & Poor’s 500 Index almost 30 percent above its peak in 2007. The view isn’t shared by the Federal Reserve, which said this week that while valuations are stretched in smaller biotechnology and social media companies, asset prices in general are in line with historical levels.
“It’s like a storm coming,” Dane Fulmer, a poll respondent who has traded stocks and bonds for more than 40 years and runs Dane Fulmer Investments in Fort Smith, Arkansas, said in a phone interview yesterday. “You don’t have to be a weatherman to see clouds.”
More than $15 trillion has been added to U.S. equity values and the S&P 500 is up 193 percent since the bull market began in March 2009. The benchmark gauge trades for 18.1 times profit, the highest level since 2010, according to data compiled by Bloomberg.
How Soon, How Fast and How Far Will Prices Fall?
Equity valuations are not excessive compared to the dot-com bubble of the 1990s, according to Doug Ramsey, chief investment officer at Leuthold Group LLC. Using the average of six metrics such as price to earnings and sales, market valuations today correspond to levels in 1996, according to a study published by Ramsey last month.
That rally kept going until March 2000, when the S&P 500’s price-earnings ratio reached 30. The index lost almost half its value in two years during the subsequent bear market.
Bubble or not, respondents were divided on when the rally will end. About 40 percent said the U.S. still offers one of the world’s best opportunities in the next 12 months. The U.S. has topped other countries as the best destination in Bloomberg polls every quarter since January 2011.
The poll, conducted by Selzer & Co., a Des Moines, Iowa-based firm, has a margin of error of plus or minus 4.1 percentage points.
“Equities have been doing ridiculously well over the last two years,” Campbell Faulkner, a poll respondent and chief data analyst for OTC Global Holdings in Houston, said in a phone interview. “We’re not going to see a 25 percent decline, but a good eight to 10 percent correction would really clear out some of the valuations.”
Almost 70 percent of those surveyed said the rally in junk-rated bonds is in a bubble or close to one. Companies have sold $211 billion of speculative-grade bonds in the U.S. this year after a record $346 billion in 2013, according to data compiled by Bloomberg. Junk bonds are up 5.3 percent this year, extending a 7.4 percent advance in 2013, Bank of America Merrill Lynch index data show.
Stock and bond prices have been supported by Fed stimulus, five years of profit growth and an expanding economy. Record corporate cash levels led to a boom in takeovers, with more than $1 trillion worth of deals announced this year, exceeding the total of 2013, data compiled by Bloomberg show.
Signs of more deals came yesterday after people with knowledge of the matter said Twenty-First Century Fox Inc. is willing to pay more than $75 billion for Time Warner (TWX:US) Inc. The size and timing is reminiscent of when America Online Inc. bought Time Warner for $124 billion in 2001, said Michael Block, chief strategist at Rhino Trading Partners LLC.
“It shows a modicum of swagger and confidence,” said Block in an interview from New York yesterday. “Big deals are a symptom of a confident market.”
Acquisitions also fueled gains in biotechnology and Internet companies and increased valuations. The Dow Jones Internet Composite Index trades at 72 times reported profit and Facebook Inc., Amazon.com (AMZN:US) Inc. and Netflix Inc. have multiples above 90, according to data compiled by Bloomberg.
Concern that earnings at those companies don’t justify their share prices made them the biggest losers in a market retreat earlier this year. The Nasdaq Biotechnology Index and the Dow Jones Internet gauge fell more than 19 percent between February and May and have since rebounded.
About 80 percent of respondents in the Bloomberg poll said Internet and social media stocks are in a bubble or close to reaching unsustainable levels.
“The excessive valuations being afforded to the new age Internet stocks, which did ebb in the late spring, are indicative of a bubble,” Eric Beyrich, who responded to the poll and is a senior equity research analyst at Arbiter Partners Capital Management LLC in New York, said by email yesterday. “I don’t expect a collapse, though a five to 10 percent pullback, considering that we haven’t had one in over a year, seems increasingly probable.”
Sixty-seven percent of those surveyed expect the Chicago Board Options Exchange Volatility Index to rise in the next six months. The gauge, known as the VIX, dropped to a seven-year low earlier this month.
The S&P 500 has gone without a 10 percent loss for 33 months, the longest stretch since 2003. On average, corrections have occurred every 18 months since 1946, according to a study by Sam Stovall, chief equity strategist at S&P Capital IQ.
About half of the poll respondents said the Fed is too accommodative, while 41 percent consider monetary policy as appropriate. The central bank needs to press on with record monetary stimulus to combat persistent job market weakness, Fed Chair Janet Yellen said in remarks to the Senate this week.
The Fed’s policy of keeping interest rates near zero for so long is risky and baffling, said Stan Druckenmiller, a hedge-fund manager with one of the best track records in the industry. Druckenmiller, who spoke yesterday at the CNBC Institutional Investor Delivering Alpha Conference in New York, also questioned the Fed’s certainty over its forecasts given mistakes in the past.
Minutes of the Fed’s June meeting showed some Fed policy makers were concerned investors may be growing too complacent about the economic outlook. Fifty-one percent of people surveyed in the Bloomberg poll said macroprudential measures used by central bankers will prove ineffective at preventing systemic financial risk.
“We’re continuing to have very lax monetary policy,” Faulkner of OTC Global Holdings said. “That’s spilling over even though strong balance sheets and continuing positive economic news indicate we probably should be cutting back and raising interest rates.”
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