“We think there is a 60% to 70% chance that we end up in an equity bubble in the medium term, albeit with the inevitable road bumps along the way.”
That’s according to stock market analysts at investment bank Credit Suisse, in a note sent out this morning.
They’re not calling anything historically unusual, in their opinion, adding that “bull markets in most assets end in bubbles.”
The authors want to be clear — they don’t think stocks are in a bubble right now. Though some people have fretted about the length of the current bull market (which Credit Suisse defines as any unbroken period without a slump of 20% or more), but there are comparable historical periods that lasted much longer:
However, the authors note that it has been a long time since a smaller 10% correction in US stocks — that hasn’t happened since back in 2011. Though there are some examples of longer periods without a dip of that size, there are fewer:
Here’s are three of the main forces mentioned which could drive a bubble:
- Loose monetary policy: “In our view, the risk is that central bankers, not knowing whether the fall in core inflation is a reflection of a demand shortfall or supply side driven, will keep rates abnormally low.”
- The impact of oil: Falling oil prices can provide both a boost to spending if consumers believe they will be permanently lower, and they keep policy interest rates from central banks low. Credit Suisse uses the example of the European Central Bank doing QE in response to falling inflation — largely driven by tumbling energy prices.
- There’s scope for a big rise in retail buying of stocks: The authors not that retail investors are far less sophisticated than their institutional rivals, and they typically buy in more when stocks are relatively expensive, providing a boost to frothy valuations. Retail investors haven’t piled back into stocks in a major way to date — except in China.
They have also provided their list of things to look out for in a frothy market — for the time being, they don’t see a bubble in most of them, but they’re the ones to watch:
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