Stock prices soared to record highs in the past year as the coronavirus devastated the world, people lost their jobs, economic growth nosedived, poverty increased, democracy fell apart and the bubble kept growing.
The disconnect between the stock markets and the real world has a lot to do with wealth and access, Farhad Manjoo wrote in an opinion piece for the New York Times. Although a little more than half of Americans own some stock — possibly in the form of a retirement fund — a huge share of the value in stocks is held by a tiny number of Americans.
Majoo wrote that he found the GameStop narrative irresistible for this reason. We all got to watch as “scrappy online traders were taking on greedy hedge funds and corrupt Silicon Valley tech bros while also saving a business (GameStop) that is a relic from a longed-for past,” he wrote. “Was this the beginning of a genuine revolt against billionaires — or were billionaires likely to win whatever happened, because they always do?
In just the past week, the price of the stock for GameStop, AMC theaters and silver soared to their highest level in as much as a decade, driven by small traders chatting on Reddit forums.
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The trading of the last week bears all the signs of market mania that historically ends in big losses for small traders, regulatory investigations, congressional hearings that drag on for years, and sharp pull-backs by big investors, Ben White wrote for Politico.
Politicians so far have mostly sided with the small investor and called for hearings on platforms such as Robinhood, which restricted investors from buying shares in GameStop. However, analysts fear that small investors are “blowing up bubbles that could burst and create market turmoil” that will hurt them, the broader market and economies still struggling with covid-19, White wrote.
“We are now living through the greatest disconnect between financial markets and the real economy that we have ever seen,” said Mohamed A. El-Erian, president of England’s Queens College Cambridge and chief economic adviser to German investment giant Allianz. “And we now have younger retail investors who have disposable cash, are savvy at social media and have cost-free platforms.”
The idea that the GameStop phenomenon is being fueled by a bored younger generation, flush with extra cash from stimulus payments, does not sit well with everyone.
“People are really blaming this on stimulus money like people have been sitting on the whopping $1200 over the course of several months just to become a day trader out of nowhere. That money was spent, puhhhhleze,” one Twitter user posted.
Another tweeted, “I’m old enough to remember naked credit default swaps on subprime mortgage tranches nobody ever even looked at, and Gamestop is the greatest disconnect?”
It’s relatively easy for brokers like Robinhood to keep raising money and for investors to keep pumping cash into questionable assets that could easily come crashing down, White wrote.
The Washington, D.C.-based International Monetary Fund, which works to secure international financial stability, sees a bubble and warned in a blog on Jan. 27 that as “the apparent disconnect between exuberant financial markets and the still-lagging economic recovery persists, it raises the specter of a possible market correction should investors reassess the economic outlook.”
Mellody Hobson, president and co-CEO of Ariel Investments, discussed her market outlook in an interview with CNBC without mentioning “bubble”. Hobosn predicts a rotation to value stocks over growth stocks.
“We’re in nosebleed territory, Hobson said. “We’ve started to see a crack in the fourth quarter and in the early days of 2021. And I think we will see that continue with value starting to take the lead. Value should do better in a recovering economy. We looked at 14 recessions since the Great Depression, value outperformed in every single one of them, every single one across all sectors.”
Value stocks are companies that are currently trading below what they are really worth and are expected to provide a superior return, according to Investopedia. Growth stocks are companies thought to have the potential to outperform the overall market because of their future potential.
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Dick Parsons, former Citigroup chairman, is growing more concerned about a bubble bursting, he told CNBC.
“We’re into a sort of risk-on, buy everything mode. Everything is going up and money is pouring into the market, driving … things even higher … there’s a kind of a disconnect that’s going between growth in the market, and the state of the real economy. And eventually, the state of the real economy is going to catch up.
“I am concerned that we could see … a bubble bursting and the markets falling precipitously. This has happened before after melt-ups, market always crashes. If it were to crash at a point in time where we have other issues like the pandemic that we’re dealing with or a seriously injured global economy, it could portend a lot of difficulties going forward.”