The new year has seen the market continue to climb to record highs as the S&P 500 (^GSPC) stays above 3,800.
With the markets this strong, warnings of irrational exuberance are beginning to sound off as observers wonder if this has the makings of a bubble. Last week, GMO co-founder Jeremy Grantham joined that crowd, saying the stock market is in a “fully-fledged epic bubble.”
“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history,” Grantham wrote.
Grantham sees the bubble perhaps lasting into early summer when the widespread vaccine rollout happens.
Amid the growing voices taking the bearish side, some see the warnings as a contrarian signal: to buy.
As BMO’s Brian Belski put it in an investment note: “Time to get even more cyclical.”
“Widespread speculation of an imminent stock market bubble, not to mention calls for a potential sharp correction in the first half of 2021, only to be followed up by strength during the second half, represents excessively consensus thought by most clients we speak with,” wrote Belski in the note sent Monday.
This, he added, “only makes us want to go the other way.”
With the Democrats taking the Senate, Belski sees a larger-than-anticipated stimulus package, among other things.
“We believe the first part of 2021 will be much stronger than most investors are imagining,” he wrote.
At the same time, that package might allow for more aggressive strategies to fight the pandemic as vaccines roll out, perhaps more stay-at-home orders as necessary. In the short term, Belski points out that this would boost the stay-at-home trade, but that in the long-term getting the pandemic under control provides a strong foundation for cyclical growth.
An “epic stimulus package,” Belski wrote, “also sets the stage for classic cyclical areas to gain steam later in the year as economic activity and earnings growth broaden out.”
With earnings season beginning for Q4, a better picture of how companies are doing will emerge, and many expect beats given low expectations. “We need them,” wrote Datatrek cofounder Nicholas Colas in his newsletter, because of how hot the market is, with “the S&P is trading for 23x 2021 estimates.”
