- An analysis of asset bubbles over the past 40 years suggests investors should buy into them rather than avoid them, JPMorgan said in a note on Friday.
- The bank found that 80% of expensive markets that crash spectacularly eventually make new all-time highs.
- "When I see a bubble forming, I rush in to buy it," George Soros famously said.
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Whether it's bitcoin or the stock market, countless market observers have warned investors in recent months (and years) that a bubble is forming.
But rather than avoid bubbles, JPMorgan outlines the merits of investing in them, according to a Friday note that examined several extremely expensive markets over the past 40 years.
Bubbles, or extremely expensive markets that often lack a rational explanation for their rise, form with a compelling narrative that lead analysts to discard previous valuation yardsticks because "this time is different," JPMorgan explained.
"Occasionally times have changed, but often they haven't," the note said, pointing to the dot-com bubble ultimately living up to its expectations in the long-term, whereas the Japanese Nikkei has yet to fully recover from its 1989 peak.
JPMorgan's analysis led to three big findings, according to the note.
1. "Overshoots from apparently extreme valuations are common, though more in equities, commodities and currencies than in bonds."
2. "These overshoots can endure for an average of 9 to 12 months but sometimes for many years."
3. "80% of expensive markets that crash spectacularly eventually make new all-time highs."
JPMorgan's research lines up well with billionaire investor George Soros' famous saying, "when I see a bubble forming, I rush in to buy it." Bubbles can last a lot longer than most expect, and even then, a majority of them have eventually recovered to make new record highs.
The ultimate question when it comes too bubbles is whether they are irrational and propped up by easy monetary policies from central banks, or "just markets that front-loaded a long-term improvement in fundamentals," JPMorgan said.
The bank pointed to the current cohort of the most expensive markets, being US large and small cap stocks and commodities like copper, as "too early in its overshoot cycle to justify turning defensive," adding that current high market valuations lack balance sheet leverage from corporations and households.
And if an investor is uncomfortable owning expensive markets, "focus instead on those with a policy backstop that will renew the cycle (DM equities and credit) rather than those which no policymaker feels obliged to support (crypto)," JPMorgan concluded.