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That’s Not A Bubble, This Is A Bubble

That’s Not A Bubble, This Is A Bubble

July 27, 2020
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“That’s not a knife … that’s a knife!” Paul Hogan in Crocodile Dundee

There is growing talk that growth stocks and specifically technology stocks are in a bubble. But as Paul Hogan showed is in the classic 1986 film, not everything is what it seems, and there is always something bigger and more dangerous.

Yes, there are a few of the large technology and communications stocks dominating the gains, but those companies are also dominating earnings growth, as the COVID-19 pandemic has only intensified their overall leadership.

In this, the 300-year anniversary of the South Sea Company bubble, it’s important to remember what a real bubble looks like. Back then, King George I, the poet Alexander Pope, and Sir Isaac Newton all got caught up in the massive speculation and took huge losses. Sir Isaac Newton even cashed out gigantic profits, watched the stock of the South Sea Company double in a few weeks, saw his friends get rich, panic-bought back in at twice what he sold for—and then the bubble burst and he lost nearly 80%. Bubbles happen, and they can get even the smartest people in the world caught up in them. But the good news is we don’t see a bubble in growth stocks here; in fact, it is far from it.

“The idea that growth stocks are in a bubble has picked up significantly lately,” explained LPL Chief Market Strategist Ryan Detrick. “But what might surprise many investors is that when you compare growth stocks versus value stocks, they are just now above levels from two decades ago, so they likely aren’t actually anywhere near a bubble.”

As shown in the LPL Chart of the Day, growth has had a tremendous run, no doubt; but longer-term, when compared with value, growth is actually just now above levels from 20 years ago. This suggests growth could be due for a well-deserved break, but it likely isn’t in the massive bubble that many claim. We continue to like growth for the rest of 2020 and would use any weakness to add to longer-term holdings.

View enlarged chart.

 

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