Barry Ritholtz on Market Values, Cycles & Bubbles

Video & Slides

On Thursday, April 29, Barry Ritholtz joined Markus’ Academy for a lecture. Barry Ritholtz is co-founder, chairman, and chief investment officer of Ritholtz Wealth Management LLC.

Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

• A bear market is widely misunderstood as a market that is down 20% while up 20% is a bull market. This 20% cutoff is primarily arbitrary. A bull market is characterized by expanded economic activity, rising stock prices, rising investor sentiment, and extended trend. Specifically, investor sentiment in a bull market can be understood as how much are people willing to pay for a dollar of earnings — in other words, what is the value of the stock market? In long bull markets, investors are willing to pay more and more for a dollar of earnings. 

• The current environment is that narratives drive economic and investor decision making. Perhaps it always has, but we understand this more today and social networks amplify this effect 

• Changes in the S&P500 can be small even when real economy tanks. The S&P 500 index is market cap weighted, giving large companies + tech stocks an outsized influence, while department stores, hotels, airlines, travel, oil and gas — which suffered a lot during Covid — had at most 6% weight in total in the S&P index. This explains why there was a gap between peoples’ perceptions of the stock market versus the overall economy. 

• Buyers should not be treated the same — different buyers have different needs and times. Hedge funds, short sellers, rebalancers, panic retailers, value investors all have different time horizons, risk tolerances and financial incentives for when they buy and sell. Furthermore, there are problems with taking outliers as proof of market conditions. Pink sheets, assets that are traded off the market, do not follow normal regulations and therefore cannot be proof of anything.

• 2020 has been the most volatile year in history, as measured by the standard deviation of the S&P 500. Many believe that a 75% increase in market returns over the past 12 months is evidence of a bubble. However, 1 year is an astronomical, not financially significant time period. Go out of sample, eg, one month longer —  and there is only a 17% increase in S&P 500 when looking at 13 month returns  (34% drop requires a 52% move up just to get to breakeven). This could be explained by new market actors and low Fed rates. Additionally, a housing bubble is unlikely as rising housing prices can be explained by a housing shortage while demand grew during the pandemic. Also, the majority of mortgages in the past year have been prime and superprime, which is a sharp contrast to the high subprime mortgage origination before the GFC.