Are we in the midst of a stock market bubble that is about to burst? Smead Capital Management thinks so. The privately held investment advisory and management firm recently sent out a letter to its shareholders warning that we are in a market akin to the “Tulip Mania” that gripped Amsterdam back in 1636 — a speculative bubble that ultimately burst in spectacular fashion.
According to Smead’s note to clients, the stock market is currently going through a period of “euphoria” that is likely to end badly for investors, large and small. In its note, Smead states: “Due to incredibly low interest rates for a long time, we think the history books will look back at this time period as a combination of the 1636 Tulip Mania in Amsterdam and the South Sea Bubble of 1720.”
And Smead isn’t the only one sounding the alarm on stocks right now. With war escalating in the Middle East, crude oil prices back above $90 a barrel, bond yields continuing to rise, China’s economy slowing rapidly, and the U.S. Federal Reserve threatening to raise interest rates further, many voices up and down Wall Street are raising concerns about equities, with more than a few predicting a coming crash.
Previous Predictions
Smead’s dire market outlook is attracting attention because the firm has a track record of making accurate market forecasts. In 2009, Smead correctly predicted the bull market that occurred over the next decade, citing 10 bullish factors that were then working in favor of stocks. Now, Smead is saying that the market is showing extremely bearish signs and that a bubble is likely to burst in the coming months.
“To say we are at or nearly at the opposite extreme would be an understatement,” Smead said, referring to its bullish 2009 call on equities. “We believe this euphoria episode will end badly, but some part of capital tied up in the episode will work its way into whatever investors gravitate toward in the future.”
Specifically, Smead cites the trajectory this year of tech stocks, some of which have seen their share prices triple due to the hype surrounding artificial intelligence (AI) and a return to riskier investments. Smead’s concerns come as the overall market, as measured by the benchmark S&P 500 index, is up nearly 15% year-to-date. However, Smead notes that riskier assets such as Bitcoin (BTC-USD) are up 70% on the year.
Other Naysayers
Smead Capital Management isn’t the only market naysayer right now. Geopolitical events and economic indicators are combining to create a lot of uncertainty for stocks. Michael Burry, who correctly predicted and profited from the 2008-09 financial crisis, currently has a huge short bet against the stock market.
The French bank Société Générale recently warned that current market indicators are flashing signals similar to the ones seen before the stock market crashed in 1987 during an event known as “Black Monday.” With so much uncertainty in the market, the price of gold is trading at its highest level in seven months and near an all-time high as investors run to assets that are seen as safe havens.
Additionally, Yale University’s U.S. Crash Confidence Index indicates that only 32% of retail investors currently think the chance of a 1987-style stock-market crash over the coming six months is less than 10%. Clearly, many people are growing more bearish on the market outlook as uncertainty and fear rises.
Stock Market Bubble: What’s Next
While no crash has happened yet, and stock indices remain mostly positive for the year; the market has not been the same since it peaked at the end of July. Over the last 10 weeks, the S&P 500 has declined 6%, while the blue-chip Dow Jones Industrial Average has given up most of its gains since January and is now up only 1% on the year. Going forward, investors should remain vigilant and prepare themselves for any signs that the market is collapsing.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
