Stock Valuations Could Set Stage for Potential Bubble Burst

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(NEW YORK)–The stock market could be heading for a bubble burst after it rallied on the same day the monthly jobs report showed worst job loss since the Great Depression with unemployment soaring to 14.7%.

WHAT IS MAKING THIS MARKET RALLY?

If you dig through the index you will find that roughly 75% of the stocks in the index are down in 2020 . But the Nasdaq, like the S&P 500, is weighted by market capitalization, and larger companies such as Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) account for about 44% of all the value in the NASDAQ index.

DOTCOM BUBBLE VALUATIONS

Right now the market is 50% more overvalued than it was at the peak of the dot com crisis. The 10-largest stocks in the index aren’t cheap for they trade for about 47 times estimated 2020 earnings on average.

Add in all the new money and investors chasing stocks in what they call Fear of Missing Out (FOMO) we are setting the stage for possible sharp pullback in this stunning bear market rally.

FALSE HOPES FOR REOPEN AND RECOVERY

What is sending this market running is the positive trends in some data showing virus levels stabilizing in hardest hit areas, like New York and New Jersey. But if you take NY and NJ data out the overall trend in rest of the country still shows dramatic case growths, especially in states where they are rushing to reopen.

In coming days if data starts to show dramatic spikes in new cases this could send fear gauge in stocks back higher as the outlook for summer changes.

Just because there are only a few raptor dinosaurs roaming in the forest doesn’t mean it may be a good time to reopen Jurassic Park.

NOT ALL JOBS WILL RETURN RIGHT AWAY

Based on the rally the market may be baking in a total return to work and summer where things go quickly back to normal, and that may be far from the case.

The consensus view out there is that when we turn the lights back on, we’re probably going to see somewhere between 30% and 40% of those jobs not coming back online immediately.

This lower need for workers as businesses hash out demand will have a negative effect on unemployment rates and earnings outlook for Q2 and Q3.

EVENTS THAT COULD BURST THE BUBBLE

Once these main leaders (MSFT, AAPL, AMZN) roll-over we could see a rotation out of stocks and into cash in a crowded rush to the exit door. Here are some issues that could be a trigger to suddenly turn sentiment and possible burst stock valuations.

– Spike in new COVID-19 cases in states
– Renewed trade war fears between US and China
– Lower consumer traffic after reopen
– Credit crisis in emerging market bonds
– Potential infections within White House
– Signs of inflation and rise is US bond yields

Given the $2.3 trillion liquidity injection by the Federal Reserve we could see this bubble continue to exceed Dotcom levels without any catalyst to change sentiment.

For longer-term investors with time frames of 5 to 15 years these ups and downs should be little to no concern as long as one is diversified, and in stable quality funds.

But for short-term traders who were lucky enough to get in near the bottom now may be time to take some profits off the table, or at least begin to develop a protection plan in case of sudden downturn in market trajectory.

There is old saying on Wall Street, “Bulls make money, bears make money, but pigs get slaughtered

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