Bubble Check

 December 9th Weekly Market Update

Sentiment can be an important tool in measuring risk in the stock market. When investors get too bullish, it can be seen as a cautionary flag that the market may be due for a fall or a bubble is nearing its peak.

Fortunately, investors are not currently displaying signs of optimism that have historically marked a peak for stocks. When we look at sentiment, we focus most of our attention on the actions taken by market participants, rather than how they respond to surveys. A few key measures include: quiet mergers & acquisitions (M&A) activity, the lack of a surge in initial public offerings (IPOs), and only a very recent uptick in inflows into funds that invest in U.S. stocks.

A hot market for mergers and acquisitions has often been a sign of an overheated stock market as confident corporate executives seek to aggressively expand their businesses. The most recent example can be seen in the run-up in deals that took place in the mid-2000s that foreshadowed the 2007 peak in the stock market [Figure 1]. In addition, M&A deal premiums — the amount offered above the pre-deal price — remain around 25%, in line with the 10-year average.

For the full article: Bubble Check