1 MARKET INSIGHT FIRSTQUADRANT.COM Are We There Yet? A Stock Market Bubble Checklist: checklist and you can decide whether you agree! market isovervalued. So,let’s gothrough the bubble, but we’re not quite there yet, even if the it appears that we are heading for an asset price to financialbubbles. Goingthrough theseitems, following checklist ofcharacteristics common overvaluation isanecessary condition, butnotadefiningone. bubbles. Onemajortake-away isthata“bubble” isacultural phenomenon, and tech bubble ofthelate 1990s/early 2000s,Ididastudy ofhistorical maniasand something we know whenwe see butcan’t describe?Maybe,butbackduringthe silver have increased talk ofbubbles. Butexactly whatisa“bubble?” Isabubble be overvalued bymanymeasures. Therecent volatility involving GameStop and Market punditshave beentalking bubbles lately. Thebroad market appears to Partner, Investments ED PETERS Past performance isnoguarantee of future results. Potential for profit isaccompanied bypossibility of loss. margin, a leveraged state Hyman Minsky called low interest rates can lead to excessive buyingon to stimulate investment in business and industry, people to borrow. While that’s goodifyou want have low interest rates. Low rates encourage when interest rates were low, and we definitely Every asset price bubble inthepast occurred 1) MARKET INSIGHT Based onthisresearch, Icame upwiththe Verdict: Check. Low interest rates and excessive leverage. investors to discard historical norms.Butthe has changedthewayworld works, leading usually driven bysomeform ofinnovation that even more overvalued. This unchecked trend is historically, yet they continue rising, becoming issues. In a bubble, securities are overvalued Innovation isgood,right?Itis,butthere can be 2) is notenoughfor a“bubble.” currently higher than average. But leverage alone Credit to GDPratios confirm thatleverage is calls, creating adownward de-leveraging cycle. large numberofinvestors to sellto meetmargin that even amodest decline in price can force a “Ponzi finance.” Investors become so leveraged productivity gains. Significant economic innovation and Verdict: No.

February 2021 2 MARKET INSIGHT FIRSTQUADRANT.COM Market Insight:AStock Market Bubble Checklist: Are We There Yet? scale oftheinnovation hasto dramatically improve before the stock market crash of1929.Inthe that began in 1921 and collapsed in 1926, long interest. There wasaFlorida real estate bubble that isnow beginningto draw institutional Instead, they’ve become anonlinebettingsystem for transactions, theiroriginalintended function. intrinsic value and can’t really be used practically behavior. Cryptocurrencies, for instance, have no to unrealistic heights baseduponpure crowd cryptocurrencies. These assets have mostly gone and continue to have speculationinIPOsand mentality. Before theRedditcrowd, we had Mini-bubbles are asymptom ofagrowing bubble 4) past attempts to bringtrading to themasses. systems are just themost recent incarnation of were cruisingtheAtlantic.Robinhoodandsimilar telegraphs allowed investors to trade even if they with Wall Street traders. In the 1920s, wireless thought withtherighttools they could compete available duringthetech bubble andmany innovations occurred. Online trading became speculation. In previous bubbles, similar successes withoneanotherandeggonfurther media hasallowed thesetraders to share their incentives for less experienced investors. Social share holdingshave alsobroadened outthe accessible. Zero commission trades andpartial have made onlinedaytrading easierand more is the obvious example. Various platforms The recent coordination amongretail investors 3) nervousness abouthighvaluations. hasn’t really developed yet, and there is ahealthy So the“thistimethingsare different” mentality seen a technological change ofthat magnitude. In the1920s,itwaselectricity. In2021,we haven’t this functioninthetech bubble ofthelate 1990s. to rationalize highvaluations. Theinternet served productivity andprofit margins enough for investors Mini-bubbles develop. Verdict: Check. Innovations insecuritiesmarkets. Verdict: Check.

prices baseduponawidely accepted story. with little history andnoprofits selling for high narrative whichwe’re seeingagain:Companies sold for highvalues duringIPOs.It’s afamiliar bubble, any company with dot-com after its name to produce lightbulbs.And,ofcourse, inthetech was arunonanycompany thatsaiditwasgoing but no-oneto know whatitis.”Inthe1920s,there carrying-on an undertaking of great advantage values for anycorporation, even acompany “For South SeaIslandbubble of1720,people paidhigh that retailed for $5. people were willing to payupto $5,000for atoy animals called BeanieBabies.Duringitsheight, including oneonsmalllimited editionstuffed 1990s, there were several unusualbubbles, to asense ofinvulnerability. The late 1980s when themarket survives ahorrificdrop, leading wide-spread basis.Atleast notyet. similar, we’re notseeingthiskindofmania ona TVs rather thansports.While theIPO market is consistently showing CNBContheirwidescreen in 1999when I noticed thatsportsbars were a stock tip.Ihadmyown shoeshineboy moment market in1928whenashoeshineboy asked for Joseph Kennedy(JFK’s father) pulled outofthe a cultural phenomenon which we call a “bubble.” This iswhenanovervalued market transitions to in thelong term, you shouldalways buythedip. out. There is also belief that since markets go up if you’re notplayingthemarket you’re missing rich.” Soawidespread sentimentdevelops that judgment more than seeing your neighbor get JP Morgan said,“Nothingundermines financial culmination of the first four items in the check list. the market can only go up. This view is a natural During abubble, there iswidespread beliefthat it hasnotyet achieved levels thatdefinemanias. While there are signs of moral hazard developing, 5) IPOs have asimilarhistory. Goingbackto the The buy-on-the-dip(BOTD) mentality develops On themaniaside,there’s theoldstory that limited. Moral Hazard: Investing iseasy, downside is Verdict: Not yet. 3 MARKET INSIGHT FIRSTQUADRANT.COM Market Insight:AStock Market Bubble Checklist: Are We There Yet? Copyright ©byFirst Quadrant, LP,2021,allrightsreserved. MARKETING SERVICES FIRST QUADRANT,L.P. |800E.COLORADO BLVD. SUITE900, PASADENA, CALIFORNIA 91101 obtained from sources believed to bereliable, butitsaccuracy isnot guaranteed. through thisperiodandare subject to changebasedonmarket andother conditions. Allmaterial hasbeen This material isfor your private information. Theviews expressed are theviews ofFirst Quadrant, L.P.only Japanese bubble wasfostered bythemore modest there’s still awayto go. could foster anincreasing BOTD mentality, but come backfrom thehorrificdrop inQ12020.This in theearly days.Thestock market haslargely similar situationdeveloping, thoughifso,we’re finished withthelargest losses. We mayhave a so thosewhosoldwhenthemarket went down of 2008.Ineachcase, themarket bounced back, months –well before theglobal financialcrisis melt-down,” butthemarket recovered withintwo In thesummerof2007,there wasthe“quant Crisis) priorto thetech bubble bursting in2000. currency crisis)and1998(theRussian Financial significant drops in1997(theemerging market than the rest of the world. In the 1990s, there were a beliefthattheJapanesemarket wasdifferent market duringtheCrash of1987.Thissupported pull-back and quick rebound of the Japanese [email protected] | OFFICE 6266834223| opinion. Let’s hopeitstays thatway. phenomenon, and2021doesnotyet qualifyinmy likely is overvalued, but a bubble is a cultural that isthefinal stage ofabubble. Themarket another leg down maycreate themoral hazard this point.Infact, aquickmarket recovery from markets can’t have ameaningfulcorrection at we’re notquite there yet. Thatdoesn’tmeanthe “bubble.” While we have checked three of them, other items onthechecklist andnecessary for a Moral hazard isreally theculminationof yet fully inflated. Conclusion: Bubble developing, butnot WEB FIRSTQUADRANT.COM 