How to Survive A Bubble

No one can be sure if markets are too high—but your emotions probably are

Suzanne Woolley

Signs of bubbly markets are everywhere. Commission-free apps have encouraged home-bound speculators to try their hand at trading tech stocks and options. Bitcoin soars—and plunges—on a daily basis. Gen Z and millennial investors have turned to the viral video app TikTok, where the hashtag #stocktok has 351 million views and everybody seems to be on the verge of becoming a “Teslanaire.”

Initial public offerings set a record last year. On Dec. 10, Airbnb Inc. rallied 113% above its offering price in one of the biggest one-day pops on record for a U.S. IPO. Just two days earlier, DoorDash Inc. went public and saw its stock rise 86%. Wall Street is offering customers ever more creative ways to amp up their exposure to hot investments: JPMorgan Chase & Co. is pitching to investment advisers structured notes that provide a leveraged bet on three popular exchange-traded funds from Ark Investment Management. Two of those ETFs are in turn heavily invested in Tesla Inc., whose stock rose more than 743% in 2020 and trades at 1,309 times it’s trailing 12-month earnings.

Jeremy Grantham, co-founder of asset management firm GMO, is warning of not just a bubble, but a “fully fledged epic bubble” fueled by “hysterically speculative” investor behavior. Byron Wien, vice chairman of Blackstone Group Inc.’s private wealth solutions business, recently predicted that the S&P 500 will fall almost 20% in 2021’s first half—but then advance to 4,500, up 19% from the start of the year. Against the backdrop of a pandemic-ravaged world, with millions out of work and living under lockdown, it all seems a bit out of sync. Dan Egan, managing director of behavioral finance and investing for robo-adviser Betterment LLC, sees a belief among some retail traders that “the Federal Reserve is not going to let the market, is not going to let companies, go bust.”

Now, it’s one thing to say prices look frothy and quite another to know when the market will turn. Grantham was famously prescient about the dot-com bubble, but his firm’s flagship fund had a tough 2020 because it was positioned so defensively. Whether or not 2021 turns out to be the year the market corrects, it’s clear that the question, “Is this a bubble?” is going to loom large on investors’ minds. With so much fear and greed swirling in the markets—and so much uncertainty looming over many people’s personal and professional lives—maintaining perspective requires concerted effort.