The ASX 200 is trading near record highs – time to worry about popping bubbles?

Every bull run in history has been followed by a market correction. The big question is when.

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The S&P/ASX 200 Index (ASX: XJO) is edging higher in morning trade, up 0.1%

At 7,363 points, the ASX 200 is only 0.3% off its all-time highs of 7,386. It reached that peak just last month on 16 June.

What’s even more noteworthy in the case of the ASX 200 – and indeed most major global indexes – is that just 16 months ago, it had crashed hard in the initial panic selling as COVID-19 morphed into a pandemic.

In a single month, from 21 February through to 20 March 2020, the ASX 200 plummeted 33% to bottom out at 4,817 points.

A bit of back of the napkin maths tells us the index rocketed more than 53% from that low to the 16 June 2021 high. Its fastest growth in history.

Is the ASX 200 in bubble territory?

New record highs are noteworthy achievements. They’re usually greeted with celebration, unless you’re short the market. Yet new records also tend to stir investor anxiety.

How high is too high? Can the bull run really keep going?

These types of questions can keep investors up at night. And depending on their conclusions, can lead to rash and potentially costly decisions.

With that in mind, we look at the recent global share market crash prediction from legendary investor Michael Burry. Along with some moderating insights from Josh Gilbert, market analyst at global multi-asset investment platform eToro.

The greatest speculative bubble of all time?

Burry, if you’re not familiar, gained recognition in the financial circles after he spotted issues with subprime lending in the United States housing market in the mid-2000s. Issues that would lead to the global financial meltdown in 2008. He took up short positions and, eventually, made a fortune for himself and his clients.

Burry really became famous after the blockbuster movie The Big Short – he was portrayed by Christian Bale – hit the screens in late 2015. Or early 2016 Down Under.

In his most recent bubble prediction (he’s made a few) Burry tweeted, “People always ask me what is going on in the markets. It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude.”

Notably, Burry posted the tweet on 15 June, 1 day before the ASX 200 hit its current record high.

So, are global markets in a speculative bubble? One where investors have been drawn in chasing high returns in a low interest rate environment, and paying more for shares than they’re fundamentally worth?

eToro’s Josh Gilbert told the Motley Fool that indeed, “Over the past 18 months, more retail investors have entered the market than ever before.”

With share markets around the globe at or near record highs, many of these investors are buying shares for the first time, driven by the age-old fear of missing out (FOMO).

But when asked if he believes we’re facing the biggest bubble in history, Gilbert replied, “At the moment, I’d say no.”

He continued:

Yes, valuations are high in specific sectors, but this is supported by solid earnings growth, where we continue to see revenues climb. As these fundamentals improve, the bubble theory, therefore, becomes less apparent. Moreover, earnings growth is continuing, and in many companies’ Q2 earnings of 2021, we expect to see a 65% year-over-year increase.

Gilbert points to investor excitement with all thing tech as having driven markets in bubble directions earlier this year:

As tech assets boomed at the start of 2021, it felt as if we were potentially heading towards bubble territory. Stocks such as Tesla [Tesla Inc (NASDAQ: TSLA)] and Nio [Nio Inc (NYSE: NIO)] saw their share prices soar as the euphoria around growth stocks rippled through the market. During this time, both assets’ share prices were increasing at a rate that earnings couldn’t match.

But it looks like a bursting bubble scenario may have been averted. “Since this period, we have seen growth in the tech sector slow down substantially, as investors have rotated towards cyclical equities,” Gilbert told us.

He added that, “There are many assets in the market that are still currently undervalued, such as the financial sector.”

Similar activity on the ASX 200

We’ve seen much the same thing play out on the ASX 200.

While tech shares led the recovery rally in 2020, they’ve been lagging the broader index this year.

The ASX 200 has gained 10% so far in 2021. By comparison the S&P/ASX All Technology Index (ASX: XTX) – which tracks 50 of Australia’s leading technology shares – is down 1% year-to-date.

As one example, tech darling and BNPL share Afterpay Ltd (ASX: APT) gained 290% during the 2020 calendar year, including the meltdown month. In 2021, however, the Afterpay share price is down 12%.

Turning to the financial sector, which Gilbert says remains undervalued, Commonwealth Bank of Australia (ASX: CBA) gained only 2% in 2020. As for 2021, the CBA share price is up 18%.

What now for global share markets and the ASX 200?

Looking ahead, Gilbert said:

This year, it’s appearing likely that the S&P 500 will hit its third year of straight gains, a rare achievement that has only been experienced twice since the 1970s. In the second half of this year, it’s plausible to see lower returns, given how strong the markets have been to date. Volatility is also expected to increase, with the VIX currently trading at pre-pandemic lows and the Federal Reserve pondering over its tapering decision.

Gilbert left off with this valuable piece general advice, “For investors still worried about a market bubble, it’s crucial that they diversify their portfolios in order to protect themselves from any potential losses.”

In other words, don’t put all your eggs in 1 basket.

Happy investing!

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO, NIO Inc., and Tesla. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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