With U.S. stocks reaching new highs, investors and experts alike are starting to wonder if market conditions are getting frothy.
A clear example of frothiness played out in late 2017, when many investors were fully invested in stocks and behaving as though volatility was only going lower. Fear of missing out overtook the fear of losing money and many took on more risk than they probably would have wanted in a more normal environment. Those are classic symptoms of a frothy market.
Measures of risk appetite, meanwhile, are not extreme; the various risk barometers periodically make a run at exuberance, but there’s still enough to worry about — from a possible Fed policy change to the growing spread of the Delta variant — to put investor emotion back in check before things get out of hand.
At times like this, it can be tempting to chase performance and buy even more of what’s working because “it’s going up.” But like the Hotel California, getting in is not a problem, but getting out may prove difficult as everyone heads for the exit at once. For those who manage to maintain a reasonable time horizon, start looking for opportunities; remember they’re unlikely to reside within the market’s current darlings, so you’ll want to cast a broad net.
So you’re saying the 200% market cap to GDP ratio is justified? That wasn’t just the fed and low rates contributing to liquidity and higher valuations while GDP is low? That’s great news! Where should I put all of my money?
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