Weekly Investment Update
Is A Stock Bubble Bursting?
Published Friday, September 4, 2020, 9:15 PM EST
(Friday, September 4, 2020, 9:15 PM EST) Is a stock bubble bursting?
No, the market plunge does not appear to be a bubble bursting. Here's why.
Consumer sentiment is still ailing. At 74.1, consumer sentiment is still in the dumps. It's way off the average rate shown in the dotted line. Its weak condition belies the notion that last week's market downward volatility was a bubble about to burst. To float a price bubble in stock prices, irrational exuberance must be widespread. The 74.1 reading in the consumer confidence poll, conducted monthly by the University of Michigan for decades, is nothing like the 112-plus sentiment readings that characterized the tech bubble of 2000.
Covid crushed consumer confidence starting in March and April. A recovery is in progress, but no widespread irrational exuberance has driven stock prices, causing this past week's decline.
The PEG ratio – price-earnings to growth ratio -- is a company's price-to-earnings (P/E) ratio divided by the growth rate of its earnings. It is a more thorough metric than a standard P/E ratio. The PEG ratios of the top 10 public companies, which drive the performance of the major stock market indexes, were not outlandish before the big plunge this week, and their lead in recovering from Covid was cut back. Since the FAANGM – Facebook, Amazon, Apple, Netflix, Google, and Microsoft – have lead the recovery from Covid and the major market indexes are heavily influenced by market capitalization, their outsized returns have blown away the broad market.
The Standard & Poor's 500 stock index closed Friday at 3,426.96. The index had fallen -3.5% on Thursday and plunged another -3.1% Friday before recovering to close at 3,455.06. That's -2.33% lower than last Friday's close, but +42% over the March 23rd bear market low.
This past week saw a new all-time high for the S&P 500, as well as the largest single-day drop since June 11th. Stock prices have swung wildly since the coronavirus crisis started in March and volatility is to be expected in the months ahead.
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