The bull market turned a year old on Tuesday, a testament to the unbridled enthusiasm that let investors shrug off the economic carnage of the pandemic and buy stocks — and pretty much anything else.
Since the S&P 500 scraped bottom on March 23 last year, the blue-chip index has posted a rally of nearly 75 percent, even with a 0.8 percent fall on Tuesday. Tesla’s stock is up more than 650 percent, while true believers have pushed up shares of GameStop by over 4,500 percent. Bitcoin is booming, and so are even more esoteric assets like NFTs.
It’s enough to pose a question that would have seemed unfathomable a year ago.
“Is this a bubble?” said Garry Evans, chief strategist for global asset allocation at BCA Research. “I would say there are certainly pockets of the market that look bubbly.”
Mr. Evans said he didn’t see “a generalized bubble” but believed that individual stocks — like GameStop, which was driven up in January by retail traders gathering on sites like Reddit — and cryptocurrencies were overvalued.
“Those are definitely individual bubbles,” he said.
Few on Wall Street will ever predict a broad-based bubble, the overenthusiastic rise of prices that can be ruinous to investors when they burst. So it’s remarkable that the b-word is on anyone’s lips when you consider the outlook a year ago. The stock market had plunged nearly 34 percent and finally bottomed out on March 23, 2020.
The sell-off stopped only after the Federal Reserve took steps to cut interest rates almost to zero and restarted bond-buying programs that bought trillions of dollars in government-backed debt to get money flowing through financial markets. Stocks began climbing again, and accelerated as the government provided aid including expanded unemployment benefits and three rounds of direct stimulus payments worth as much as $3,200 a person.
That spending gave investors a psychological lift. While the economy still looks weak, the flood of money — along with the rising number of vaccinations — has raised expectations for 2021 economic growth from 2 percent a year ago to 5.7 percent Tuesday, according to Bloomberg data. That suggests a rush of corporate profits — key drivers for stock prices — will follow.
All that governmental support “gave the market confidence,” said Quincy Krosby, chief markets strategist at Prudential Financial. “They were quick. They were forceful. In every nook and cranny in the markets, they instilled confidence.”
It also minted millions of new traders as stimulus checks helped touch off an increase in stock-buying by average investors. From the most recent round of stimulus alone, Deutsche Bank recently estimated, some $170 billion could flow into the stock market.
“When you have this much free money sloshing around, it’s not surprising that it’s going to get into some very speculative places,” said Jason DeSena Trennert, chief executive of the institutional brokerage and research firm Strategas Securities.
With commission-free stock trading and easy-to-use trading apps, individual traders have emerged as one of the key drivers of the stock market. Earlier this year, Goldman Sachs analysts estimated that these investors accounted for roughly 25 percent of trading activity, up from around 10 percent in 2019.
The stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more.
Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read more
This credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.
There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.
The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.
Nikolaos Panigirtzoglou, a market strategist with J.P. Morgan in London, said the wave of investment activity sweeping the country was a glaring reason to worry that the rally could falter.
U.S. households are now more heavily invested in stock than ever before, even during the peak of the dot-com bubble, he said. “If that goes away or reverses, then the equity market will have a problem,” he said.
And on Monday, even a Goldman Sachs research note titled “Bubble Puzzle: A Guide to Bubbles and Why We Are Not in One” acknowledged that some indicators of retail trading activity were “worrying.” It mentioned the surging levels of daily trading in stocks and increased buying of tiny amounts of stock options by individuals.
The conditions for a bubble are clearly present, said John D. Turner, a professor of financial history at Queen’s University Belfast. Mr. Turner recently co-wrote — along with his colleague William Quinn — a book titled “Boom and Bust: A Global History of Financial Bubbles.”
To make them, he said, you need three key ingredients, plus a spark. The ingredients are ease of trading, access to credit, and mass speculation — all of which are in ready supply right now.
The spark, he said, is the unknown factor. It could be a change in government policy, like the push to supercharge homeownership in the 1990s and 2000s. Or a major technological development, the way electrification contributed to a boom in the 1920s.
So the conditions, Mr. Turner said, are all here.
“It smells like a bubble,” he said. “If I had to put money on it, it looks like a bubble.”