I have previously mentioned the vulnerability of the US stockmarket based on three criteria: overvaluation, overconfidence and easy money.
These don’t tell us about the timing of a long overdue major correction, merely they confirm vulnerability. Nevertheless, once you work within this framework it does make it easier to see the cracks emerging, as well as observe the unfolding madness with a little more objectivity.
On overvaluation, you don’t have to go far to sniff 1999 madness. On Facebook’s takeover of WhatsApp it was valued at $350m (£205.9m) per employee – doubtless they are each worth every penny. I hope I come back as a software engineer – what a life.
Or take Tesla Motors. It has sold only 27,000 of its electric cars since its 2010 birth, yet is valued at $31bn. This is a greater market value than born-again General Motors, which sells 27,000 cars every day.
Overconfidence is beautifully caught by the Vix index, which reflects the price of US equity options, and its greatest value for me is as a stupidity, sorry, sentiment measure.
Earlier in May, it fell to an all-time low and the Wall Street Journal celebrated with the headline “The death of volatility” and said “Fear has left the building”.
The beautiful parallel is with the Businessweek headline of August 1979, which proclaimed: “The death of equities.” Guess what happened next? The greatest bull market in stockmarket history.
So guess what might happen now? It is perhaps too glib to suggest the greatest volatility in stockmarket history – but whatever happens, it seems highly unlikely to be a comfortable ride.
Brian Dennehy is managing director at Dennehy Weller & Co
