For several years, many stock watchers have pointed to signs of bubbles in the market.
Ray Dalio, founder of Bridgewater, the world’s largest hedge fund firm, has formulated a bubble indicator made up of six factors, including broad bullish sentiment and high prices relative to traditional measures.
“In January the bubble indicator showed that the U.S. equity market as a whole was at the edge of a bubble but not in an extreme bubble,” he wrote in a commentary on LinkedIn.
The market was 70% of the way toward the biggest bubbles, which occurred in 1920s and 1990s, Dalio said.
His indicator also showed that “emerging tech companies (e.g., Tesla (TSLA) and Roku (ROKU)) were clearly in an extreme bubble.”
In January, Dalio also cited problems with SPACs [special purpose acquisition companies], the IPO [initial public offerings] boom and the big pickup in options activity.
Bubbles Blow, Pop
“I noted that other bubbly behavior … financed by the unprecedented flood of liquidity post-Covid, had found its way into the asset markets,” Dalio said.
Now his bubble stocks have popped.
“They declined by about a third over the last year, while the S&P 500 is about flat,” Dalio said
In addition, there has been a “meaningful decline in frothy retail activity and a meaningful deterioration in sentiment,” he said.
“Emerging tech stocks no longer appear to be in a bubble, but neither do they appear to have substantially swung to the opposite extreme, so it’s not necessarily true that now is a good time to buy them.”
Bubbles can be slow to unwind and go to the opposite extreme, Dalio said.
“U.S. stocks in aggregate still look overvalued by our measures," he wrote. "History shows that once the popping begins, bubbles more often over-correct to the downside versus settling at more ‘normal’ prices.”
Dividend Stocks
If you disagree with Dalio and want to buy equities, dividend stocks can often provide stability in times of market volatility, like the present.
Goldman Sachs put together a list of high-dividend-growth stocks, including:
· Whirlpool (WHR), a home appliance company;
· Molson Coors Beverage (TAP.A), a beer company;
· Merck (MRK), a drug company;
· United Parcel Service (UPS), a delivery company; and
· NRG Energy (NRG), a utility.
