Trading Craze Stirs Bubble Debate

By Joe Wallace

Is the retail-trading frenzy a sign the market is near its top?

Edward Smith, head of asset allocation research at U.K. investment firm Rathbones, is skeptical.

"Often, in some corners [of the market] things get carried away," he said. "In the most-shorted names, clearly that's going on today."

Historically, bubbles in the broad market have been preceded by a rally of 300% or more in the three years before they pop, far exceeding the advance in U.S. stocks in recent years, Mr. Smith said.

To be sure, valuations of U.S. stocks are high by historical standards. "But those investors who apply a mean reversion approach to valuations are misguided," Mr. Smith said. "We're living in a world of structurally low interest rates that have been exacerbated, but not caused, by Covid."

"Structurally lower interest rates mean structurally higher valuations," he added, saying future profits are worth more in present-value terms when the rate at which they are discounted declines.

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(END) Dow Jones Newswires

February 03, 2021 09:33 ET (14:33 GMT)

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