Bubble Talk: Is all this talk of a bubble in shares and property prices justified?

 A bubble is brewing. At least according to some financial experts. And with the ASX at record highs and residential property going gangbusters there is good reason to believe we might be in bubble territory. We know it’s hard to believe after the year we had in 2020. Not to mention ongoing problems in 2021.

But record stimulus across the globe has lit a flame under asset prices, making shares and property look expensive.

A quick recovery

The bounce back from last year’s 30% fall in share prices was astounding. And rising property prices on the back of record stimulus was just as dizzying.

Other indicators like consumer confidence and the number of job ads are at record highs on the back of this rise in asset prices. All combined, it can be interpreted as a warning signal for doomsayers who believe the market is over-cooked.  

But digging further suggests now probably isn’t the time to panic. Not that there ever really is a time to panic.

Last year was case in point. The market fell more than 33% before roaring back to life. Those who pulled the trigger and got out, missed one of the great bull runs not seen since the recovery from the Global Financial Crisis in 2008 (another time in history when it paid to have a steady hand).

Sure, prices do look a bit heady right now. But looking at figures from the past, the chances of a major market correction happening two years in a row are slim.

According to Richard Coppleson from Bell Potter Securities, of all the selloffs of 10% or more in the S&P 500 since 1950 there are a few things to note:

  • There have only been 36 drops of -10% or more (so about one every two years).
  • There are “many -5% to -7% drops” that occur frequently every year.
  • There have been “just” nine occasions where the market fell -20% before the last year’s rout (March 2020 -33.9%).
  • In 70 years, we have seen nine (now 10) major crashes of -20% or more.
  • After every crash it has taken many years before the next crash has occurred.

In fact, Richard found, “on a simple average over the last 70 years, the US market after a major selloff of 20% or more, has gone 5.5 years on average before the next peak.

But wait…

Some investors will argue there has never been so much debt, so much money printing, so much leverage, so many inexperienced retail investors entering the market, so many IPO’s or so many_______ fill in the blank.

Yes, this may prove to be the case.

All we can say is having managed client portfolios for more than three decades and hearing the same fears about the market in every single one of those years—had you taken them all seriously (as many like to)—then you would never have invested in the share market. Or any other asset class for that matter. But in the long run, shares have outperformed pretty much all other asset classes, including property.

Cash Flow

With all the stimulus measures from Government and the RBA, we believe the share market is likely to continue its upward trend. There will be setbacks on the way, but the long-term trend is still up.

All this speculation about ‘where the market might go’ is beside the point in any case.

The goal is building a portfolio that can weather any storm and give you peace of mind in retirement. The odd pullback is inevitable, but a sharp sell-off is rarely a good reason to panic.

Let the bubble speculators do their thing.

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