As of this writing, the stock market is at record levels with many Wall Street and Bay Street analysts saying stocks have surged into bubble territory. And we all know what happens to stock market bubbles. The big question is, are stocks as overvalued as they were during the Roaring Twenties, which begat the Great Depression, or the dot-com frenzy, which led to a stock market collapse in 2000?
Is the Stock Market Bubble Going to Burst?
The global economy came to a standstill in 2020 as the coronavirus pandemic circled the globe. Stay-at-home orders resulted in a huge raft of businesses closing, many of which will never return. And according to one study, more than 255 million full-time jobs evaporated in 2020. That’s four times more than the number of jobs lost during the 2009 Great Recession.
Despite going through the worst financial crisis since the 1930s, stocks have soared with various indexes in or near record levels. The Nasdaq is in record territory, as is the S&P 500 and Dow Jones Industrial Average. The TSX, meanwhile, is less than two percent below its February 2000 record levels.
Why the euphoric rally? You can thank unprecedented monetary policies, ultra-low or even zero interest rates, and the roll-out of a number of COVID-19 vaccines. Investors afraid to miss out are chasing stocks higher. Amateur online traders, who jumped into the stock market during the quarantine to make so-called easy money, and share their insights, tips, and even emojis on various message boards, have sent stocks even higher.
Today, stock market valuations have soared to levels not seen since the dot-com era. But investors do not seem all that fazed. Especially since every major central bank around the world, including the Federal Reserve and Bank of Canada, have said they will not raise interest rates from their record lows until an economic recovery is firmly established.
Can You Predict when a Stock Market Bubble Will Burst?
No. It’s impossible to predict what the stock market will do. But you can look at different technical indicators that suggest a stock market crash or stock market correction is looming. For example, based on 2021 forecasts, less than one third of companies trading on the S&P 500 have a price-to-earnings ratio of 15, a number that is the long-term average trailing multiple. The stocks on that list are mostly tried and true value stocks, like banks and insurers.
For all of the previously mentioned reasons though (easy monetary policies, low interest rates, COVID-10 vaccine), stocks are likely to climb higher. For how high and for how long remains the big unknown. What we do know though, is that the longer stocks climb higher, the more overvalued they become. And the further they will fall when the next stock market crash or correction comes.
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According to some of the most trusted technical indicators, the stock market is seriously overvalued and in bubble territory. Unfortunately, you can’t predict when a stock market bubble will burst. But you know it will happen. And history shows that when it does happen (Great Depression, dot-com, Great Recession, COVID-19), it’s ugly. The trading experts at Learn-to-Trade.com understand that broad-based or sector-wide crashes and even corrections provide investors with incredible buying opportunities.
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