With US stocks at levels that appear to challenge the economic realities companies face as a result of the global pandemic, market experts have focused on whether or not everything is a bubble. Now Bridgewater founder Ray Dalio has given his opinion on whether the market should be of concern to investors.
In an article posted on LinkedIn Monday, Bridgewater’s co-chairman and co-chief investment officer said he had “systematized” his knowledge of the market foam into a bubble gauge.
Dalio measures a bubble, defined as an unsustainably high price, in six ways, including comparing values to past history, determining how many new buyers are in the market, and observing whether buyers are using leverage to finance the purchase. of actions. He said Bridgewater builds indicators based on these six factors for each stock and then builds broader indices from them.
The hedge fund firm’s assessment of the current market is mixed. None of the six bubble measures for the total market, for example, are in bubble territory, although Bridgewater gave a rating of “sparkling” to “the number of new buyers” in the market, as well as to “widespread bullish sentiment. “.
However, when the hedge fund firm looked at emerging technology companies, three of the six measures showed an intermittent “bubble,” including many new buyers to the market, widespread bullish sentiment and credit-financed purchases.
“In summary, the aggregate bubble gauge is around the 77th percentile today for the US stock market in general,” Dalio wrote in the post. “In the bubble of 2000 and the bubble of 1929, this aggregate indicator had a reading of the 100th percentile.”[II Deep Dive: Jeremy Grantham Warns Fed Can’t Keep ‘Epic Bubble’ From Bursting]
Ratings on individual stocks vary widely.
Only about 5 percent of the top 1,000 US companies are in a bubble, according to Bridgewater. “That’s about half of what we saw at the top of the tech bubble,” he wrote. “The number is lower for the S&P 500 as several of the more bubbly companies are not part of that index.”
When Bridgewater compared the performance of its bubble stocks to the top 500 companies overall, the alternate manager found that the price gap between the two groups had increased rapidly during the recovery from the market downturn in early 2020.
“This market action is reminiscent of the ‘Nifty Fifty’ in the early 1970s and the dotcom bubble stocks of the late 1990s, which I remember well,” he wrote. “It has a similar score to bubble stocks from the late 1920s, which I can’t recall because it wasn’t alive at the time.”