Bridgeriver LLC - April 2021

Bridgeriver LLC - April 2021

Nest Egg

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APRIL 2021

I get calls from clients asking when the market will crash. It’s a common question not just from clients, but from a lot of people. There is always concern about the next crash. I’ve talked about some of this before, but with the Fed continuing to print money at a steady rate and keeping interest rates low, I’m wondering if we’re riding another bubble. Part of the problem, too, is that we’re seeing something of a market mania. In 1996, the then Federal Reserve Chairman Alan Greenspan used the term “irrational exuberance” as the markets began to inflate. ‘Irrational Exuberance’ Makes a Comeback Is It the ‘90s All Over Again?

When the Fed keeps rates low and pumps money into the economy, it has a tendency to cause asset bubbles. Today, there’s a lot of talk about the bubble that’s about to burst. But we’re also in very unusual times. Pre-COVID-19, if you were worried about an impending bubble burst — and you decided to get out of the market — you likely missed out on huge gains. Last year didn’t play out as anyone expected. One of the challenges investors face is the fact that people have been expecting the bubble to burst for years now. There has been a steady stream of analysts on TV, radio, and online telling us the bubble is about to burst. Then COVID-19 hit, and it turned into a black swan event. It almost seems that we’re in the era of black swan events. Things are happening that no one could have predicted. Now, the “end” of COVID-19 is in sight, and the Fed is continuing to feed into the asset bubble. There are many variables in play. It brings us back to the question: When is the market going to crash?

Part of today’s mania is exactly what happened to the GameStop ($GME) stock in recent months.

When you see a stock go up so fast and so high, you don’t want to miss out on it.

These kinds of situations are not normal. The price of GameStop was inflated and people took advantage of that. GameStop’s P/E ratio was (and is) way off.

The price to earnings ratio, or P/E ratio, is something to take into consideration when investing. The numerator in this ratio (P) is the price of the stock. The denominator (E) is the earnings per share of a company. When you divide P by E, you get the ratio. This is a tool financial analysts use to find if a company is undervalued or overvalued. The average ratio on the S&P 500 is typically around 17. Right now, it’s double that at 35. What does that mean? It usually means stocks are overvalued. Investors are probably paying a premium for companies right now — and that very much includes GameStop. The last time the average P/E ratio was this high was before the crash of 2000 — and only a few years after Greenspan used the term “irrational exuberance.” As the tech bubble of the late ‘90s expanded, many companies were massively overvalued. We all know how that turned out.

The parameters show us it could be happening soon. Does that mean it will? No, but it does mean we can prepare. So, what do we do with our portfolio?

For most people who have money in the stock market, it’s a long-term game, and we treat it as such. You’re not in it to quickly grow and quickly sell. We’re heavy into stocks because that makes sense for our goals. Of course, we monitor the >Page 1 Page 2 Page 3 Page 4

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