The circumstances seen in today’s market will be looked back on with awe. From a purely historical sense, being able to watch what’s happening on a day to day basis is amazing because it is a case study in how markets can go awry. Investing is much more difficult because the bubble sucks you in, no matter how hard you try to avoid it. One example of how bubbles suck everyone in was the housing bubble of the early 2000s. I know a person who bought a house responsibly, putting 20% down and buying one he could afford. His house fell 40% in value. He still lives in the house, but it must’ve hurt to know he could’ve bought it much cheaper a few years later. The problem was he needed a house to live in to start a family. He couldn’t wait for the bubble to pop, especially since he didn’t know when it would pop; the housing market could’ve risen for another 10 years. Bubbles don’t exclusively hurt people taking high risks.
Snap is an example of a bubble stock as it is trading at about 74 times 2016 revenues. Facebook trades at 14 times revenues. If 100% of Snap’s revenues dropped to the bottom line, the stock would still be expensive. Anyone who is buying Snap stock recognizes they are speculating and can lose 44% of their money as quickly as they made it today (if they bought at the IPO price). My point is that Snap isn’t the only bubble stock in the market. The entire thing is a bubble. Pension funds who have been forced into the market because bond yields are low are going to get hurt. Everyday investors who are getting less than 1% interest on their savings account will be hurt if they plow money into an index fund hoping to get a decent return.
As I mentioned the current market is getting absurd. One example of this is the VIX which continues to track the market even though it’s supposed to be the inverse of the stock market. It decoupled on Wednesday’s rally, but recoupled on Thursday. The S&P 500 was down 0.59% and the VIX was down 5.02% to an 11 handle. The other big change today was the odds for a rate hike in March. The odds increased from 66.4% to 77.5%. The chart below shows how quickly the odds changed. The chart uses Bloomberg’s WIRP function which overvalues the odds. I showed the chart to visually explain how fast the move has been. With the rally in equities, Fed officials have free reign to raise rates. It appears that’s what they’ll do on March 15th.
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