Is the global share market in a bubble?
I think that's a key question that many investors should be asking themselves.
There are many phrases to keep in mind with investing. The market tends to price in all known information into the share price. Investing in shares is (or should be) a long-term idea. Shares have historically returned an average of around 10% per annum over the long-term. It can be futile to fight the US Federal Reserve.
But it's also a part of investing that the current share price should reflect some uncertainty. The best outcome isn't necessarily the most likely outcome. The S&P 500 Index (INX) is currently higher than it was six months ago. The NASDAQ is higher than it was in the first half of February 2020. Is that reasonable?
Other areas of the global share market haven't recovered as strongly, such as Europe, but there is a recovery there too.
I do think that the Australian and New Zealand share markets are justified in their recoveries. The coronavirus is almost gone and the economies could bounce back fairly quickly with the large government support, though there is still pain out there. Places like South Korea and Taiwan are also in good shape.
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Is the global share market in a bubble?
Momentum can be a strong force in lifting share markets, gathering steam by itself. But protests combined with a pandemic could be a real hit to confidence in the US. There could be a second infection wave there, although the first hasn't really ended yet.
There are plenty of US shares that now look as though they're valued as if everything is fine. Unless there is more government financial support, there could soon be a painful period of missed rental payments, credit card payments, mortgage payments and so on in the US. I certainly hope there isn't, but the ongoing issues may make it more likely. I'm not confident about the US share market over the next six to nine months.
Perhaps the market is already pricing in these possibilities. Maybe there is no global share market bubble at all considering how low interest rates are? There is a lot of investment money out there wanting a home.
It can be a mistake to be too cautious. That's why I have kept investing during this period. But I wouldn't sell all my belongings to invest in global shares at these prices. There are a few overseas-focused shares I'd consider like MFF Capital Investments Ltd (ASX: MFF) where the stronger Australian dollar helps. But I'd prefer to stick to Australian businesses through ASX shares.
