2020 was a turbulent year for the public markets, but it seems somewhat dull compared to the action we’ve seen in 2021.
We’ve seen SPAC-mania, meme stocks and even NFTs grip the industry, only to fizzle out or normalise into just another asset class. We’re of course continuing to see the impact of a global pandemic and governments’ responses to it, as well as the ensuing inflation and further measures by central banks.
Along with this, we’re seeing record-setting valuations, indicating a decoupling of share price and intrinsic value – demonstrated not least in the median P/E ratio of the 10 largest US stocks, which is now as high as it was at the peak of the dot-com bubble: 37x.
All of this is seemingly fuelled by a huge amount of capital looking for a home in private equity as well as public markets – driven by, among other factors, central banks keeping bond purchases up and interest rates down.
This is all creating unprecedented levels of global M&A too – something we don’t see drying up any time soon. Global IPO volumes rose 87% and proceeds rose 99% year-on-year, according to EY. IPOs of unprofitable businesses are at their highest level in decades.
So, if the harbingers of doom are right, everything is overvalued, inflation is getting out of hand and it’ll all come crashing down in 2022, right?
Not so fast.
As the FT’s Long View outlined over the weekend, many veterans hope this is just the end of the silly phase. The severity of the declines in the riskiest trades indicates that “peak insanity” is behind us, according to Doug Ramsey, Chief Investment Officer at The Leuthold Group.
“We think 2021 has earned its place in the books as the wildest and most speculative year in US stock market history, eclipsing even 1929 and 1999. That doesn’t mean 2022 will bring a panic or a crash, maybe just a degree of sobriety,” he argued.
Doug Ramsey, CIO, Leuthold Group
It’s clear that we’re already seeing more sense coming back into the market with recent listings at more logical valuations and Bitcoin dropping. The question is: is this ‘sense’ going to level the market off in an orderly way or are investors going to keep ‘buying the dip’ until everything finally goes pop?
As the year draws to an end, most indicators show it’s the former. Yes, there’s been froth in the market, but that was inevitable after the hiatus in 2020.
We’re seeing many major players now choosing the IPO path. The reactive M&A frenzy that we saw earlier in the year has been replaced with clearer mandates across buyers and PE funds, showing rational, strategic direction for years to come. Central banks are looking more confident on interest rate rises as they combat inflationary pressures.
Of course, as the FT points out, “the sell-off in silliness could still prove to have been the first quiver of a coming earthquake. Even the dotcom bust was not recognised as such until well after it was a reality.”
As we bring a tumultuous year to a close, let’s hope 2022 continues the trend towards common sense over silliness.