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February 24, 2021

24.02.2021 - "Opinion-is there a bubble in the stock market?"

24.02.2021 -
Recently, Ray Dalio, a billionaire and well-known manager of one of the world's largest hedge funds, Bridgewater Associates (with assets of about $150 billion), published an article with reflections on whether the current state of the stock market can be called a " bubble "(https://www.bridgewater.com/research-and-insights/ray-dalio-stock-market-bubble). He notes that he has observed many bubbles (he founded his hedge fund 46 years ago!), and has studied even more on historical evidence – this has allowed us to develop a number of "bubble indicators" ("bubble indicator"). By" bubble", Dalio means unsustainably high prices and offers to evaluate the current state of the market based on six indicators:

1.How high are prices relative to traditional metrics?
2. Do prices reflect volatile conditions? This indicator shows how highly stocks are generally valued relative to the returns they generate compared to bonds
3. How many new buyers (i.e. those who did not exist before) entered the market?
4. How widespread is bullish sentiment?
5. Are purchases financed by leverage?
6. To what extent do buyers make purchases for future demand growth? In the case of the stock market, this indicator reflects the capex of companies, which is still under pressure from the collapsed demand due to Covid-19. It is this indicator that gives the lowest value among all six metrics and reduces the overall aggregated indicator.

Below is a summary table of the values of all these indicators of the current market in general and new technology companies in particular in comparison with the last crisis of 2008-2009 and the two largest bubbles in the last 100 years.


In this context, "frothy" can be translated as "some signs of a future bubble".

According to Ray Dalio, now there is a very large discrepancy in the estimates of different companies – some companies are in a state of "extreme bubble» (in particular, recently launched technology companies), while others do not show any signs of a bubble at all. So Bridgewater Associates created their own basket of "bubble stocks" and track the dynamics of these stocks over the past year.


Of course, Dailo makes a lot of comments in his article about the need for careful handling of the indicator-unfortunately, it does not allow you to accurately determine the moment of the upper or lower point of the bubble. However, he notes that these metrics have proven successful in predicting the relative performance of stocks over the next 3-5 years.


Author: Igor Rotor Investment Director at Atrani Capital.

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