It has been almost a year and a half since I last explored the question…

“Is this the end of the bull market?”

The article was posted in June 2019 and in it I concluded that it probably still had some legs to run (as we still had not seen the “animal spirits” in full force). I also mentioned at that time that we were not optimistic as the stock market was de-synchronized from the economy.

Then COVID-19 happened and shook global markets.

But it was terribly short-lived as they began to recover quickly – even reaching new all-time highs in the recent months.

However the climb up this “wall of worry” has been filled with lots of uncertainties.

Will there be a second wave? A third? How about growing global trade tensions? How will the US elections affect this market? Are we in a bubble? What does the Ant IPO delay mean for markets?

So here we are, back at it again asking “Is this the end of the bull market?”

Updating Our Data

If you’ve read our first article on this, we used IPO data as a lens to gauge where the stock market is.

Basically, some studies have shown that IPOs occur during ‘hot periods’ when markets are clearly on a rise and conditions are positive. Peak years were shown to coincide with market tops with the unravelling of markets soon after.

We present you our updated chart as of end October:

Few things to note:

• (1) In 2019, IPO deal sizes and number increased from the previous year, despite record number of direct listings (or DPOs) that were not captured and that many “unicorns” that were supposed to debut in 2019 were delayed or cancelled (ie. Airbnb, Postmates, WeWork, Palantir, Instacart…)
• (2) 2020 Year-to-Date saw a record surge in IPO deal sizes and number since 2000 despite the COVID-19 pandemic, as we see SPACs come online as well as the unicorns which were taking advantage of the tech tailwind from the pandemic (ie. Palantir, Warner Music, Snowflake).

It is also interesting to note that most of the surge actually began from June, just when America was experiencing their “second wave” in new COVID-19 cases.

Some notable debuts since June were Bill Ackman’s Pershing Square Tontine (a blank-cheque company set to woo Bloomberg into its portfolio), Snowflake (made even famous with the investment by Warren Buffett), Unity Software (a popular gaming platform), and Palantir (the mysterious surveillance data company).

With YTD 2020 data, this may as well trigger alarm bells to go off as IPO sizes have surpassed even that of 2000 during the tech boom.

Our views since the first article still stand – we aren’t optimistic. There may not be as much room to run for global stock markets.

Others Sounding the Alarm

While we may not have the best gauge of a bubble / market top, other investors have through their own lenses come up with similar views of the market at this time.

It is crucial to note that some are perma-bears who have been “calling a bubble” for a long time.

For instance, in their September 14 print edition, Barron’s had this on the front cover…

The piece by Deputy Editor and former stock trader Ben Levisohn acknowledges the existence of market bubbles but states that there are still reasons to ride the wave – including Jerome Powell’s promise to keep rates low, and not-as-frothy conditions compared to the dot-com bubble.

Even more controversial is fund manager David Einhorn’s letter to investors on October 27.

Einhorn had first “called the bubble” in 2016 – and reinforced the rhetoric in the latest letter stating that he sees all the classic signs of a market top including low interest rates, an IPO mania, extraordinary valuations, high trading volumes in speculative instruments, and market concentration in a select few stocks.

However, the manager has not significantly exited any stocks as at the date of the letter and instead has only added to his “bubble basket” of shorts.

Time to Worry?

While some of these views can cause investors to second-guess their portfolio, we need to understand that they are simply opinions or educated guesses.

While most investors acknowledge that there is a bubble, no one can truly predict exactly when the market will top (it only becomes obvious in hindsight).

Coming back to our data – I cannot emphasize enough that this does not mean we will see a crash in the next few weeks or months.

While we showed studies that correlate IPO peaks to market peaks, we cannot draw the conclusion that just because we see IPOs at an all-time high we should expect a market top to follow.

To put it more technically, correlation does not imply causation.

The phenomena also only seems to be strongly applicable in the US markets.

If we look at IPO data for the Hong Kong Exchange (top exchange for IPO funds raised in 2018 and 2019), the correlation does not seem to be as evident…

For instance, the financial crisis of 2008 affected international banking and caused a global downturn, even for China and Hong Kong. However we see IPO deal size peaking prematurely in 2006.

If an investor had acted rashly based on this data, they would have kicked themselves in the foot as markets ascended even strongly for another year.

The huge spike in deals in 2010 also seemed to imply another major crash – but on hindsight we can see this is not the case.

Keen observers might argue that there was a 20+% “crash” from early December 2010 to end October 2011, but compared with major crashes which saw the market tumbling 50% or more, this seems more like short-term market pessimism due to the debt crisis in Europe and the US.

The only correlation that was accurate was in 2015 when the Chinese market bubble burst due to speculation and heavy margin trading. Even so, IPO deals did not surge and the market only went down 30% peak-to-trough.

It is also interesting to note that while the Chinese market bubble popped around the middle of the 2015, the IPO deal size in 2015 at that point of time was only at 147b HKD with 51 listings (as at July 31).

This is far lower than in 2014 and 2013… and only 55% of what the final numbers would turn out to be in 2015.

This means that companies had still filed for listings even after the crash – a finding that does not corroborate with the results of the study in the US.

Data for 2020 was supposed to give us pause due to Ant Group’s scheduled IPO on November 5 (the world’s largest IPO).

As it stands right now, Ant’s IPO suspension means that 2020’s deal size is still lower than the prior 2 years.

However, that does not mean Chinese markets are in the clear.

In recent months, I’ve found it harder to identify attractive stocks in China or Hong Kong for our Growth Dragon newsletter subscribers (click here to learn more about it) and wrote this statement:

Many companies on the Hong Kong or Chinese exchanges have seen phenomenal stock price rises since China’s effective handling of the COVID-19 outbreak and I do believe these markets are presently in a bubble as well.

So What’s the Conclusion…Comandante?

I think it’s easy to get caught up with predictions and forecasts of when the market will top / crash.

We can have a general sensing or idea about a bubble – but I don’t think anyone (expert or not) has a clue exactly when a crash will happen.

It is wiser to simply set up your portfolio such that you’ll still feel good about owning your portfolio if a crash happens the next day.

For now, investors around the world are still enjoying the party…

“Normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

Warren Buffett, in his 2001 Letter to Shareholders