2021 is not panning out as we planned. It’s delivered more lockdowns, new Covid-19 strains and a fresh assault on the global economy. Should stock market bubble be added to the list of concerns?
- In spite of the vaccine rollout, economic recovery doesn’t look assured
- Yet stock markets continue to power forward, apparently oblivious of the risks to growth
- Spotting the areas with inflated valuations isn’t difficult and value remains elsewhere
It is the grim reality that few have been willing to contemplate. What if vaccines aren’t the panacea and don’t get the global economy back on track? Worse, what if there isn’t going to be a recognisable ‘back to normal’ in 2021, or 2022 or even 2023?
The first few weeks of 2021 have given us plenty of reasons to feel this way: schools are out, seemingly for good (or does it just feel that way?); the government appears to be on the verge of announcing draconian curbs on international travel and ministers are making a virtue of wagging their fingers and telling us that no-one will be ‘released’ any time soon. This is in spite of a vaccine rollout that, to date, appears to be a success.
The result is that we are very far from out of the woods. The UK economy (along with many around the world) continues to lurch lower and there is the worrying prospect that vaccine-resistant strains will emerge to thwart all the good immunisation progress so far. Borders will have to remain closed to prevent as-yet-unidentified strains from coming into the country, a particular problem for an otherwise isolated country such as the UK.
Any concern has not yet spread to stock markets. They continue to power higher even in the face of these significant economic setbacks. While much of this appears to be stimulus-related, it has got some worried about a bubble. It has been pointed out that technology valuations are reaching dotcom boom levels. As during those giddy times, the increased involvement of amateur traders is helping pump up valuations.
That said, it is worth noting that the rest of the stock market is pretty unexciting. Valuations appear normal, or even low, for many parts of the market. ‘Value’ stocks have staged a small rally, but it does not make up for the past decade of underperformance. The risk is that tech stocks drag the wider market down with it.
However, investors should be wise to this by now and spot the inherent opportunity. There are few expectations built into much of the stock market and they can side-step the parts when expectations are vastly inflated. People have a lot on their plates in these worrying times, fretting about stock market valuations shouldn’t be adding to it.
