The recent strong gains on Wall Street has prompted a number of prominent economic commentators to speculate that the US – and with it, the world – is headed for another 1987-style share market crash.
High-profile Swiss investor Marc Faber said that the US share market could fall as much as 40 per cent if the bull market was left to run without a significant pull-back.
“These types of bull markets without a correction usually lead to more than just a correction,” the author of the Gloom, Doom & Boom reporter told broadcaster CNBC on Thursday.
“Just in the last six months there has been euphoria for US equities. My view is that it’s not a good time to buy US equities … It’s a better time to get out of stocks than into stocks.”
My view is that it’s not a good time to buy US equities
Mr Faber’s comments coincided with a dismal week on Wall Street, amid growing concerns that the Federal Reserve’s aggressive economic stimulus policies – such as low interest rates and bond-buying programs – are artificially inflating the value of the US share market.
Elsewhere, much-lauded investor Jeremy Grantham, co-founder of investment firm GMO, said that Janet Yellen, Chair of the US Federal Reserve, was wrong to assume that that Wall Street was not overvalued.
“My guess is that the Fed will play its usual game till we’re in good old-fashioned bubble territory,” he told the New York Times.
Further inflaming the doubters, the Nasdaq, the US index for tech stocks, has fallen seven per cent since peaking in March, prompting comparisons with the start of the dotcom crash in 2000.
Local commentators, however, are less concerned about the outlook for Wall Street and, by extension, global share markets.
Australia’s Shane Oliver, chief economist at AMP Capital Markets, said that the world was not poised on the brink of a tech-driven share market crash.
“Our view remains that a 10 per cent to 15 per cent correction in shares is to be expected at some point along the way this year – but it would be just a correction in a still-rising trend,” he said.
“There is no doubt some tech stocks have run too hard with a return to 1999-style price to sales metrics being used to justify silly valuations.
My guess is that the Fed will play its usual game till we’re in good old-fashioned bubble territory
“This and the general outperformance of tech stocks over the last few years had left them at risk and the fall could still go further as hedge funds that were levered in to tech overweights are forced to close their positions.
“However, price earnings multiples on the Nasdaq are one-third their tech boom peaks and the broader US market is trading on a forward [price to earnings ration] of 15 times, which is a long way from 24 times at the time of the tech boom and is in line with long-term averages.
“Other major share markets are trading on lower [price to earnings ratio].”