As I have started to have more social interactions as many friends and family have started to visit each other or engage more, I have started to get the sense that we are back to the times of a market bubble that I have seen a couple of times in the past. While it could really be me only and due to the fact that most of my contacts know my background and profession, I cannot recall another time since the dotcom bubble in 2000 where one of the first discussions I have with people is about the stock market.
Most of these conversations are about how they have taken advantage of being home to invest in the Stock Market and always seem to be buying at lows and making plenty of money with the rebound we have seen as of late. I am even feeling embarrassed as it seems that everyone is outperforming my portfolio even as I have even gotten involved in investing some more in the market. However, most of my trades have been with the long term in mind and in more defensive sectors. Everyone continues to talk about those that have declined the most like Airlines, Retail, and Real Estate.
We have seen this type of behavior in a number of bubbles in the past as well. I can personally recall something similar happening back in 2007 when people were buying Real Estate to flip in weeks; some even being in new construction! The most recent one we can all probably relate to is the Cryptocurrency bubble when Blogs and Content creators were all of sudden Crypto investing experts. However, we can all think of what may come next; a severe downturn.
While I have been somewhat surprised with the pace of reopening and even some of the signs of economic recovery related to it, the reality is that economic metrics still seem dire in nature. The latest job report was celebrated as the markets reached new short term highs despite still seeing an unemployment rate higher than the peak of the last financial crisis! In the end, valuations of companies are the expected cash flows of future earnings which are still very uncertain. Therefore, I believe we are clearly overvalued.
Despite me having this point of view has not meant that I have been betting against the market completely. Instead, I have been hedging my positions and being more defensive in nature as I believe that markets can become irrational very quickly. I have learned multiple times in the past that the market can run longer than I can be solvent with short positions so it really is not worth the risk although longer term, opportunities will prevail if we can actually bet against the losers that will surely emerge from this economic downturn; no matter how short or long it lasts.
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