The stock market was enjoying its longest bull run in history until the coronavirus sent the stock market spiralling back in March 2020. The recovery since then has been breathtaking. The S&P 500 has climbed 75% since bottoming last March. Over the same time frame, the Nasdaq has more than doubled and the TSX is up 64% from its pandemic lows.
The huge gains, though, have many believing the stock market is in a bubble and that it’s not a question of “if” but “when” the bubble will burst.
Is the Stock Market in a Bubble?
As of this writing, the stock market is at record levels. That’s not just U.S. and Canadian stocks, but global stocks. World stocks were up for another consecutive day and trading at record highs. U.S. stocks are at record levels and the S&P/TSX Composite Index is enjoying a seven-day winning streak and trading at an all-time high of 18,527.88.
COVID-19 is still ravaging the world with variants of the virus popping up around the world. But the bulls point to the US $1.9 trillion economic stimulus package, US $1.400 checks, and various vaccines as reasons to remain optimistic that the stock market rally will continue.
There are signs that Wall Street and Bay Street are getting stronger. Fourth quarter financial results have been solid, and earnings forecast have been positive. As a result, investors are optimistic that stocks will be able to build on the recent earnings recovery as the economy reopens and returns to normal economic activity later this year.
But are investors getting ahead of themselves?
There are more than enough signs that point to the stock market bubble bursting. In 2020, U.S. gross domestic product (GDP) contracted 3.5% in 2020, the first decline since 2008 and the worst showing since 1946. In 2019, U.S. GDP advanced 2.2%.
The U.S. unemployment rate remains high at 6.3%. But that’s nothing compared to Canada’s unemployment rate, which stands at an eyewatering 9.4%, the highest levels since August 2020. In January, Canada lost 213,000 jobs, a whopping five times more than what analysts were expecting. At a time when most of our trading partners are seeing their unemployment rates fall, Canada’s unemployment rate stands 55% higher than the G7 average.
On top of that, U.S. and Canadian consumer confidence is in a funk. And the future doesn’t look particularly bright. One expert believes it will take at least a decade for Canada’s youth to recover economically from the coronavirus pandemic.
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Stocks are trading at record levels and investors are increasingly optimistic, but there are more than enough worrying signs to suggest we are in a stock market bubble. Because stock market bubbles always burst, investors need to be cautious. That doesn’t mean you should stand on the sidelines. The trading experts at Learn-to-Trade.com, can show you how to make money when stocks are going up, down, sideways, or crashing.
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