Just about every hedge fund manager and market expert on the Street says that the equities market in the U.S. is in a bubble. With the S&P 500 now 75% higher than its low point last March, it's not hard to make that case. Add to the fact that the Nasdaq has more than doubled since its pandemic low, and you have more evidence to back up the theory.
"I do think we are in a bubble like we were in 2000," veteran hedge fund manager Mark Yusko told CNN Business. "That doesn't mean that tomorrow the market is going to crash."
Well, if not tomorrow, then when? There is no surefire way to tell, and experts have been wrong more than once, especially when it comes to timing. But the term "bubble" can be misleading. There is a far greater chance that some sectors and segments of the market will crash, while others won't. Overtraded and overvalued stocks like Telsa (Nasdaq: TSLA) will no doubt be the first ones to see their stock fall fast should a broader decline take place.
There are three factors to watch out for, three red flags that will signal a market downturn, according to strategist Andrew Garthwaite and a team at Credit Suisse as quoted on MarketWatch.com
1) Lack of growth in European markets.
Europe has been surprisingly inept when it comes to rolling out its vaccines. Also, bankruptcies are being suppressed through moratoria. “We see this as being a European, not global, equity problem, with European GDP [gross domestic product] being c.16% of global GDP — though a tactically stronger USD could be a consequence,” said the team to Marketwatch.
2) Less dovish Federal Reserve.
The team at Credit Suisse considers this to be a high risk in the latter half of this year. "If this happens at a time when inflation rises to 2.5%, wage growth is higher than expected and there are concerns about asset bubbles, the Fed could become less dovish,” said the team, according to Marketwatch. 10-Treasury yieldsd should also be monitored; a sharp rise above 1.7% or sharply rising TIPS (Treasury inflation-protected securities) yields is a bad sign.
3) A slowdown in Beijing.
The housing market in China is key here, which is starting to signal a imminent decline. Also, while recent policy tightenting in Beijing might not call for immediate worrry, it may help bring the Chinese bull to a halt.