Having been through the 1990's bubble (last week's article), I can speak with experience about such conditions. Many have speculated recently the market is getting 'bubbly', so much so that valuations are getting quite stretched. I'm not so sure about that yet, but there seems to be trouble on the horizon if more speculation comes into stocks.
Why do we hear bubble talk today? Clearly most people who 'see' a bubble are the ones who missed out on the creation of it. Then there are the ones outside the bubble, the skeptics who don't believe prices can go ever higher. With plenty of Fed liquidity in the mix and rates as low as they can go, it makes sense to put money into stocks. The complaints over the rising stock market just never seem to end.
Yet, we have to be aware of valuations. As mentioned last week, the Fed is often the one blowing up the bubble, and they are the ones likely to prick it, too. If/when the current Fed raises some concern about valuation (and hence, inflation) is when we could expect a sharp and sudden downturn.
The current situation with coronavirus tugging at the reins of businesses is not likely to end soon. The Fed's rhetoric has been consistent, stating they will continue with ample liquidity and low interest rates for a long period of time. That signals one thing: equities are the place to be.
Central banks around the world have joined the Fed in keeping rates low and spreading liquidity. While the stock market does not always signal a strong economy, it surely lends a boost to psychological factors and confidence. After the markets crashed down hard in February/March that confidence to take on risk assets was obliterated. It did not take long for greed and excess to reappear. And here we are, near all time highs on all market indices.
I'm not sure we are in a bubble today, but it could be close. I do know one can be defensive, proactive, less aggressive with risk. Puts are rather cheap with the VIX at 21%, stocks have had a good run, and cash is always a good alternative. Some things to think about if you want to be spared from the the eventual bubble pop.