The economic markets are coming to grips with the Federal Reserve’s policy shift as geopolitical factors confuse the outlook for the global market.
The decline of the stock market has already been distressing for many investors. However, the worst is yet to come, and the downturn in the first quarter of 2022 was just a flirtation with a bear market— like an affair that wasn’t completely consummated. Regardless, the stock market still saw its worst start to the year since 1939.
Ray Dalio, a renowned investor, left some valuable insights regarding the stock market, claiming that the market was at 70% towards the highest bubble. According to the Dalio, we are still at the edge of a rapid escalation of market value that has a similar magnitude to the Dot-Com crash back in the 1920s during the Great Depression.
Bubbles like what we are seeing right now in the market right now can be split into six categories that only repeat themselves throughout history. The market performance hit an all-time low, and studies reveal that investors are more passionate about investing today compared to when we were at the initial period of the covid shutdown.
In this article, we are going to dive into the previous bubbles that occurred all throughout history and their similarities and differences to what we have right now. We’ll also tackle Ray Dalio’s opinion about the market and go into detail on some of his insights.
Who is Ray Dalio?
This seems to be a bit off the topic but let me introduce Ray Dalio to you— in case you didn’t know him— to understand how outstanding his performance is in the economic market.
Currently, Dalio is running the world’s biggest hedge fund firm Bridgewater Associates, which was launched back in 1975. Since then, the company has grown to be a giant in the industry, making one hundred fifty-four billion dollars ($154B) under Dalio’s management. The firm also has a history of outperforming the S&P 500.
Along the process of building his own financial market empire, Dalio also gained four decades and a half of experience in macro investing, among the biggest booms and busts in the market.
Stock Market in the Midst of a Bubble
Dalio believes that we are in the midst of a big bubble, and he’s broken this down into six various categories, including high prices relative to traditional value, unsustainable market conditions (e.g., extrapolating past earnings and revenue that are unsustainable), buyers attracted to enter because of increasing value, expansive bullish sentiment, market financed by debt, and speculative buys that are solely based on trends.
We have undeniably seen the highest valuation records on tech companies in the past years. The number of investors reached new heights after the post-pandemic boom, and the bullish sentiment hit an all-time high at the end of 2021. Not to mention that the margin debt hit a new record and many neophyte investors are in euphoria, thinking that stocks will continue appreciating in value.
Quite a lot of information backs Dalio’s claim that we are in a bubble that might pop anytime you finally decide to invest your hard-earned money.
Last January, Dalio called out excess valuations of some companies, which later was found to be accurate. He mentioned that some stocks are severely overvalued and are positioned to crash under particular conditions.
Fewer investors are entering the market while their sentiments are rationally optimistic, and initial public offerings (IPOs) were the highest they had been two decades ago. After his statement went public, the stock market popped, and he was right to point them out.
On the other hand, he also mentioned that bubbles would require quite some time to recuperate. Moreover, he also highlighted that not because stocks aren’t at an extreme bubble doesn’t suggest they are safe and that it’s the perfect time to ride on a great investing boat. In fact, he and his financial team believe that US stocks still seem to be overvalued through their measures.
A bubble would only continue going back once it pops, having the tendency to settle around 20%, which increases the potential of stock fall.
Tech stocks like Netflix are performing in a downward trend, which is almost the same exact trajectory as the 1929 and 2001 market decline. Now, how do we compare the rest of the markets, given the fact that prices are down from 15% to 70%?
Similar to the previous bubbles, the market we have now is high but is dipping in price, and the earnings growth is also a bit elevated. However, as fewer investors enter the market, the valuations have had a chance to come back down.
Some experts say that there might be more to the market drop, but the shocker from all of this is that bullish sentiment is at an all-time low. Based on studies, the more investors believe that they’re in to be in an upcoming market crash, the more likely the market is to do the exact opposite.
If you could come to think of it, crashes usually take place after reaching the peak of euphoria and not after the peak of fear. Hence, the moment the consumer sentiment declines, and the bullish sentiment reach an all-time low, it may indicate that it’s quite a good opportunity to enter the market.
Looking at the data in the past six decades, we can see that massive declines in consumer sentiments lead to 23% gains in the S&P 500 in the next 12 months.
There’s also an index that gauge’s consumers’ sentiment and how likely they think that a crash is about to happen— the United States Confidence Index. According to the data this presents, average investors are almost always wrong with the most critical points. This means that if an average investor thinks that stock prices are going to spike, it’s actually a sign that things could actually go south.
Moreover, if an investor’s sentiments are negative, the more likely the market gets bottom out. Seeing that we’re thinking that the market is going downward, we could expect the opposite of the sentiment to happen.
Warren Buffett’s Fear and Greed Index also says that the current market is driven by fear, especially because the stock market is trading below the 125-day moving average.
It’s relatively important to consider that if things go wrong and stock prices get worst, you shouldn’t stand in fear about the market. Instead, you should take it as a golden opportunity to keep buying in. The housing market brackets in an entirely different story, though.
Real Estate Market in a Glance
A recent poll suggests that only 30% of Americans believe that this time around is the best time to purchase a house. This number is the lowest that we’ve seen since 1978.
In fact, it’s the very first time that below 50% of the population supposed that it isn’t a good time to buy— which may be one of the factors why many people stay away from the real estate market. The housing market isn’t affordable at the time being, having the Fed has risen an extra 50-point basis in the largest rate growth since 2000.
However, investing in real estate could be a really profitable venture since there are quite a lot of options on how you can make money out of it. On top of that, house rental rates remain consistent regardless of the fluctuations that are taking place in the market, providing a steady cash flow.
