Over the weekend read two distinct pieces which made me (re)think about the Bubbles in the current asset markets. While, neither are predictive in nature on what might happen – but it is important to understand history as it is said:
History doesn’t repeat itself, but it often rhymes
On Bubble Watch
The first one “On Bubble Watch” by the legendary Howard Marks of Oaktree Capital. The link to the actual memo is available in the reference section below, however, here’s my brief summary of his memo:
The memo discusses the concept of financial bubbles – it defines it as a state of mind characterized by irrational exuberance. It involves adoration of certain assets and fear of missing out (FOMO). There is also an associated belief that there is no price too high for these assets.
In the memo the author draws parallels in the past bubbles such as the tech-media-telecom (TMT) bubble of the late ’90s and the housing bubble of the mid-2000s.
The memo emphasizes the psychological aspect of bubbles, noting that widespread participation in speculative investments often signals a bubble.
As per the memo – today, the “Magnificent Seven” stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla) dominate the S&P 500. They represent 32-33% of the index’s total capitalization at the end of October 2024. This percentage is roughly double the leaders’ share five years ago. It is higher than the previous peak of 22% during the TMT bubble in 2000.
Also, at the end of November, U.S. stocks represented over 70% of the MSCI World Index, the highest percentage since 1970.
The memo highlights the importance of newness in bubbles. Investors often believe that “this time is different” due to new developments. The memo also discusses the risks of overestimating the potential of new technologies.
The memo concludes with cautionary signs for the current market. These include high valuations and enthusiasm for AI.
Market Valuations to Trump 2.0
Closer home – The second read was an interview with Prashant Jain CIO and Fund Manager at 3P Investment Managers and one of the longest serving MF managers – who essentially said:
“Future market returns should be lower compared to last 5 years due to dearth of meaningful pockets of undervaluation”
What this means for you?
The usual – stay true to your asset allocation. 🙂
If you are worried, talk to a professional.
References:
Memos from Howard Marks
Market Valuations to Trump 2.0:
My Money Box 