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Bird’s Eye View: Popping the market bubble theoryVideo

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Description: We don’t think the stock market is in a bubble, even though some investors do, but you’d have to have been living in a bubble to not notice stocks at records and volatility elevated. So how do you embrace optimism while still being mindful of how much risk you’re taking? Join host Jake Manoukian as we tackle this month’s hottest market headlines.

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Length (seconds): 160

Transcript: <h2>Note:</h2> <p>Legal disclosures appear.</p> <h2>On Screen:</h2> <p>Investment and Insurance Products:</p> <ul> <li>Not a Deposit;</li> <li>Not FDIC Insured;</li> <li>No Bank Guarantee;</li> <li>May Lose Value;</li> <li>Not Insured by Any Federal Government Agency.</li> </ul> <h2>Note:</h2> <p>Upbeat synth music plays.</p> <h2>On Screen:</h2> <p>J.P. Morgan Wealth Management logo.</p> <h2>On Screen:</h2> <p>A man with dark hair and blue eyes, Jake Manoukian, speaks from his home office.</p> <p><strong>Text on screen:</strong><br> Jake Manoukian, U.S. Head of Investment Strategy, J.P. Morgan Wealth Management.</p> <p><strong>Jake:</strong></p> <p>These days, with stocks and records and volatility elevated, we're hearing a lot of talk about bubbles. But is the stock market in a bubble? And is it ready to pop? Spoiler alert: we don't think that the stock market is in a bubble – even if some investors do. Let me show you what I mean.</p> <h2>On Screen:</h2> <p>Mr. Manoukian writes in his notebook, takes a sip of coffee, and moves his laptop computer.</p> <h2>On Screen:</h2> <p>Bird's Eye View. Popping the Stock Market Bubble Theory.</p> <h2>On Screen:</h2> <p>A montage shows people monitoring stock market prices using computers and mobile devices. Then, a close-up of Mr. Manoukian.</p> <p><strong>Jake:</strong></p> <p>But what even is a stock market bubble anyway? Let's use an example from the turn of the millennium: the infamous dot-com bubble. We all know the story. Investors piled into any company that was internet related. Their prices increased dramatically. But the internet wasn't quite ready to deliver on its promise. It <i>was</i> dial-up after all; pop goes the bubble.</p> <h2>On Screen:</h2> <p>Bloomberg News Search: &quot;Bubble&quot;. News stories of a market bubble has surpassed the 2000 Dot Com peak.</p> <h2>On Screen:</h2> <p>A line graph appears, showing the number of Dot Com Bubble news stories at about 900 in the year 2000.</p> <p><strong>Jake:</strong></p> <p>Fast forward to today.</p> <h2>On Screen:</h2> <p>The graph shows the number of “Bubble” news stories at over 1000 between 2020 and 2021.</p> <h2>Note:</h2> <p>Small print text appears.<strong></strong></p> <h2>On Screen:</h2> <p>Source: Bloomberg, J.P. Morgan Private Bank, as of February 4th, 2021.</p> <p><strong>Jake:</strong></p> <p>Even after the rally from the March lows, we still don't think the stock market is in a bubble. And there are two main reasons why. First, let's talk about valuations by considering how much investors are willing to pay for every $1 of earnings in the year ahead. There's no denying that stock markets look expensive relative to their own history. But that's not the whole story. Stocks aren't a bargain, but relative to bonds, you'll actually find that stock market valuations are actually pretty reasonable.</p> <h2>On Screen:</h2> <p>By some measures the stock market hasn't been this expensive since the Tech Bubble! Investors pay approximately $22 for every $1 of earnings expected this year.</p> <h2>On Screen:</h2> <p>A line chart appears marked &quot;S&amp;P 500 price to next 12 months earnings ratio.&quot; The chart shows the S&amp;P P/E ratio (NTM) at:</p> <ul> <li>about 21 in 2000;</li> <li>down to just over 10 in 2008;</li> <li>up to about 16 in 2016;</li> <li>and up to about 22 in 2021.</li> </ul> <h2>Note:</h2> <p>Small print text appears.<strong></strong></p> <h2>On Screen:</h2> <p>Source: FactSet, as of February 9th, 2021.</p> <p><strong>Jake:</strong></p> <p>So how do you compare the stock market to the bond market anyway?</p> <h2>Note:</h2> <p>Funky synth music plays.</p> <p><strong>Jake:</strong></p> <p>First, you need to figure out how much the earnings in the stock market are yielding you. Then, you can compare to the yield from the bond market. Right now, the yield from the earnings on the equity market are about 3 and a half percent higher than the yield from the bond market – right around the 20 year average.</p> <h2>On Screen:</h2> <p>Relative to bonds, stocks are not expensive.</p> <h2>On Screen:</h2> <p>A line chart appears, labeled &quot;S&amp;P 500 earning yields minus 10 year treasury yield.&quot; It shows Equity Risk Premium (ERP) at:</p> <ul> <li>about negative 2% in 2000;</li> <li>up to a high of about 7% in 2012;</li> <li>(and) at about 3.5 in 2021.</li> </ul> <p>The chart also shows that:</p> <ul> <li>the 20 year average at 3.5%;</li> <li>equities are expensive at negative 2%;</li> <li>(and) equities are cheap at 6%.</li> </ul> <h2>Note:</h2> <p>Small print text appears.<strong></strong></p> <h2>On Screen:</h2> <p>Source: FactSet, Bloomberg as of February 9th, 2021.</p> <p><strong>Jake:</strong></p> <p>Now let's get to my second reason. The stock market is rising because investors understand the strength of the economic recovery. Yes there are still signs of strain, but there's also a lot of pent-up consumer demand. People can't wait to get out of their houses to go travel, shop, go to a restaurant, maybe even a bar.</p> <h2>On Screen:</h2> <p>A montage shows an airplane landing on a runway by the sea, people shopping at an enormous mall, friends wearing face masks in a restaurant, and a bartender pouring a cocktail.</p> <p><strong>Jake:</strong></p> <p>And the good news is that there's a lot of excess savings on consumers' balance sheets. In our view, this healthy consumer will help drive corporate earnings and help the stock market grow into its valuation.</p> <h2>On Screen:</h2> <p>Consumers have excess cash to spend – which has potential to drive higher earnings in 2021.</p> <h2>On Screen:</h2> <p>A chart appears, showing:</p> <ul> <li>Personal Saving Pre-COVID Level averaging at about 100 billion dollars between January 2019 and January 2021;</li> <li>Personal Saving Exceeding Pre-COVID Level at about 500 billion dollars around May 2020 and dropping to about 250 billion dollars at the start of 2021.</li> </ul> <p>And Cumulative Excess Saving at about:</p> <ul> <li>50 billion dollars in April 2020;</li> <li>500 billion dollars in May 2020;</li> <li>and increasing to 1.4 trillion at the start of 2021.</li> </ul> <h2>Note:</h2> <p>Small print text appears.<strong></strong></p> <h2>On Screen:</h2> <p>Source: Haver, Bureau of Economic Analysis as of February 4th, 2021.</p> <p><strong>Jake:</strong></p> <p>So, based on both of those reasons, we don't think that the stock market is in a bubble. But that's not to say you shouldn't be mindful about how much risk you're taking with your investments. We believe that the global economy will continue to heal in 2021. And you can embrace the optimism by getting – and staying – invested.</p> <h2>On Screen:</h2> <p>J.P. Morgan Wealth Management logo.</p> <h2>Note:</h2> <p>Legal disclosures appear.</p> <h2>On Screen:</h2> <p>Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.</p> <p><strong>Past performance is not a guarantee of future results.</strong></p> <p>Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.</p> <p>The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time.</p> <p>This video and its content have been developed for J.P. Morgan Securities LLC clients and prospects and is for informational and educational purposes only. It is designed to provide general market commentary and information relating to certain services offered by J.P. Morgan Securities LLC, an affiliate of JPMorgan Chase &amp; Co. Opinions expressed herein are those of the author and may differ from those of other J.P. Morgan employees and affiliates. The information in no way constitutes J.P. Morgan research and should not be trusted as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports.</p> <p>The information and views expressed are not intended to provide specific advice or recommendations for any individual. You should carefully consider your needs and objectives before making any decisions. For specific guidance on how this information should be applied to your situation, you should consult your advisor.</p> <p>J.P. Morgan Wealth Management is a business of J.P. Morgan Chase and Company, which offers investment products and services&nbsp; through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provide by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase &amp; Co. Products not available in all states.</p> <p>Copyright {{copyrightCurrentYear}} JPMorgan Chase &amp; Co.</p>

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