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Is the retail frenzy a sign that the market is nearing its peak?
Edward Smith, head of asset allocation research at UK investment firm Rathbones, is skeptical.
“Often in certain corners [of the market] things are getting carried away, “he said.” In the shorter names, this is clearly what is happening today. “
Historically, bubbles in the broader market have been preceded by a rally of 300% or more in the three years before their emergence, far outpacing the advance of U.S. stocks in recent years, Smith said.
To be sure, the valuations of US stocks are high by historical standards. “But investors who apply a medium reversion approach to valuations are misguided,” Smith said. “We live in a world of structurally low interest rates which have been exacerbated, but not caused, by Covid.”
“Structurally lower interest rates mean structurally higher valuations,” he added, saying future profits are worth more in present value when the rate at which they are discounted falls.
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