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Panic, Euphoria, and Grandma’s Stock Picks

March 15, 2021

There is good news on the pandemic. Vaccinations are up. Cases are down, as are deaths. This brings hope for everyone.

But for the stock market, it’s as if the pandemic never happened, save for a few weeks of plunging prices last spring. And now markets are approaching bubble territory.

We all know stocks gained a lot last year, and even more so towards the end of the year. But this situation is historically wild.

Citi Research has a panic/euphoria model that combines several market mood indicators. Since 1987, the market has typically topped out when this model approached the euphoria line. The two exceptions were the tech boom at the turn of the century, when it spent three years in the euphoric zone, and right now.

This current giddiness could last for a while. However, what’s happening now is well beyond the hysteria of around 20 years ago, and it developed a lot faster.

Legendary investment manager Jeremy Grantham said the current bubble is one of the most significant investment events of his multidecade career. He said the single most dependent feature of the biggest bubbles in history is crazy investor behavior. Well, the current speculation fits the bill. When we see tweets about grandmas plunging into GameStop, we’re seeing the signs of late-stage bubbles.

This current bubble is a bit different though. It’s proving resilient. There may be a double dip recession. Unemployment could get worse. Prices could climb higher. But as long as there’s cheap money available and low rates, the stock bubble could go on.

However, nothing lasts forever.

Last year the S&P 500 was up 18.4 percent. An equally weighted portfolio of FAAM (Facebook, Alphabet, Apple, Microsoft) and Netflix was up 55 percent. The contribution of that group to 2020’s S&P 500 growth was 14.35 percent. That means the other 494 stocks in the index gained 4.05 percent.

What is the chance those handful of stocks rise another 55 percent this year? Seems unlikely.

Unsurprisingly, Grantham sees many parallels between the past and today. Well, we know how those bubbles ended. Time will tell how many investors heed his warnings this time around.

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