Following a disastrous year in 2022, the US stock market experienced a significant surge in 2023. The S&P 500 has witnessed a 15.36% increase thus far, and the tech-oriented Nasdaq Composite has reported an astounding gain of 31.69% since the beginning of January.
Various factors have contributed to the sudden increase, with one being the irony that massive layoffs have oddly boosted shareholders’ belief in higher profitability. Additionally, the excitement surrounding artificial intelligence has also played a part in elevating the value of technology stocks.
However, it cannot be denied that underneath it all, there is an economy providing contradictory information, to say the least. Although the job market has continued to thrive, the cost of living has risen significantly. Interest rates have been raised considerably to address this issue, resulting in a stagnant housing market. Meanwhile, wage growth is still not keeping up with inflation.
Can this rally continue for a long time, or is the current bull market built on empty promises? Now, let’s examine the specifics.
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The argument for a stock market bubble
Numerous situations can give rise to a bubble. Recently, we have witnessed a well-known type of bubble known as crypto, which has experienced significant surges in value primarily due to activity on social media platforms like Twitter and TikTok, as well as celebrity endorsements.
The rapid rise of the bubble resulted in the sudden wealth of numerous individuals, but its burst had devastating consequences for the entire sector. Numerous companies have faced bankruptcy, a substantial amount of fraud has been exposed, and several prominent figures in the industry have been apprehended. Indeed, these events have unfolded in a highly dramatic manner.
The rapid price increase does not necessarily indicate the existence of a bubble. Still, the current excitement surrounding AI shows striking similarities to the hype surrounding cryptocurrencies a few years back.
There has been a slight decrease in noise in recent months; however, between the launch of ChatGPT and approximately May 2023, there has been a significant increase in AI-related news, startup activity, and individuals claiming to be AI experts. As a company with extensive experience in AI, it is evident that many of these ventures and individuals will not have a lasting presence.
Therefore, the argument for a bubble is that the excessive excitement surrounding AI has resulted in overinflated values. Although this phenomenon is primarily observed in the technology sector, its extensive size often has a significant impact on financial markets.
Jeremy Grantham, a well-known investor who accurately foresaw both the dot com crash in 2000 and the financial crisis in 2008, believes that these events are merely components of a broader “super bubble” encompassing not only the stock market but also real estate and commodities.
In an interview with the Wall Street Journal, he mentioned that our superbubble appeared intricate but had a somewhat familiar appearance. It was releasing air in the usual manner, until this recent surge.
The opposing view to the existence of a stock market bubble
AI differs from crypto because it already has practical applications and has gained significant acceptance. AI and machine learning have been utilized in various industries for many years. Instead of being a completely novel technology, ChatGPT has innovatively repackaged existing AI capabilities.
Some startups and AI features will likely fail, but according to Amazon CEO Andy Jassy, the current phase of generative AI will transition from a period of exaggerated excitement to a more meaningful and substantial phase.
In other words, the market may lose some of its air. Still, only the superior and most valuable technology applications will remain, leading to sustained growth in shareholder value.
Looking at the bigger picture, there is significant evidence indicating that our current economic situation is quite robust. Despite the Federal Reserve implementing its most assertive interest rate policy since the 1980s, the employment market continues to be exceptionally strong.
The recently published ADP jobs report reveals that the number of jobs in June is nearly twice as high as the projected figure and the previous month. This significant outcome indicates that employers continue to recruit new employees substantially.
How investors need to navigate volatile markets
Just like any market cycle, it is impossible to predict when or if a bubble bursts, and it may not even be clear if we are in a bubble at all. If we are indeed in a bubble, it can take several years for it to collapse, and those who choose to stay out of the market during this time may miss out on significant profits.
Bottom line
Additionally, a market downturn does not necessarily have negative implications for individuals with a long-term perspective. Ben Inker, who serves as the co-head of asset allocation at a renowned global asset management firm called GMO, recently expressed in an interview with the Wall Street Journal that a market crash at this time would present a lucrative and rare chance to profit, referring to it as a “fantastic opportunity with long-lasting benefits.”
Therefore, the strategy for individual investors in the retail market is straightforward. They should maintain a perspective focused on the long term, take advantage of any speculative market trends, accumulate profits along the way, and, whenever feasible, seek to benefit from a market downturn.
Asset bubbles are a common occurrence in life, constantly forming and disappearing. Despite their ephemeral nature, these bubbles have the potential to generate substantial wealth, even without any solid foundation. One example of this is the cryptocurrency industry.
The important thing is to maintain a diversified strategy in various markets so that you are protected when the unavoidable market decline occurs.
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