Are we in a stock market bubble? Speculation and observation are essential aspects of online stock trading. Checking out expert opinions and objective data can prove useful in helping make the right decisions, though the future is hard to predict to the dot.
The Bubble Caused by Unexpected Growth
The unexpected recovery of the stock market despite the continuing crisis of Covid-19 has caused investors to think we are in a rising bubble. When the economy started showing signs of recovery, there were well-founded hopes that it could spring back to life. The government had provided fiscal stimuli to help raise the confidence of investors. Back then, Covid-19 infections were decreasing.
But when the second wave of infections showed up, there were fears of the stock market losing its gains. That didn’t happen, and the stock market held on. With the Nasdaq over 17% up for the year and setting record highs, it really seems to be a great time for the economy. The S&P 500 too has only dropped around 2% year to date.
A Stock that Shows Unjustified Hype
Now the big question is, if the market is in a bubble, will it burst anytime soon? Market expert Jeremy Bowman fears that there are some stocks looking particularly bloated. Let’s check out one of these:
The new electric-hybrid truck manufacturer Nikola ($NKLA) is the first stock to come to mind. Nikola has been making the headlines for quite some time, though it hasn’t yet started full scale manufacture of trucks. It has capitalized on the buzz generated by Tesla ($TSLA) in terms of alternate energy. That helped raise its value significantly. In fact, for a short time the company enjoyed a market cap even higher than Ford ($F), a mass production automobile company that’s been around for more than a century!
Nikola’s plan is to manufacture electric as well as hydrogen fuel cell plus electric-powered trucks. But since the company has not yet manufactured a product, or does not have any history to look back to, investors are solely judging it on the basis of assumptions about its future. Tesla may have had success with its electric automobiles, but it isn’t possible to expect the same with every unconventional automaker. Many other electric automobile companies have failed.
A Lot to Live up To
Besides, its direct competitor Tesla has an experience of more than a decade in manufacturing electric cars. It has an extensive Supercharger network, which immediately puts it at an advantage. Its battery efficiency is legendary, and has been known to be better than its competitors. It is also efficient in providing software updates for its vehicles. So, Nikola has a lot to live up to. Without any tangible product on the road, there’s just speculation to rely on. So, there is a possibility of the company’s stock price falling after that.
The Possible Bubble Burst
Bowman admits that it is quite impossible to predict exactly when the bubble would burst, but he reckons the earnings season would be something to watch closely. He fears that the quarterly results wouldn’t be encouraging, particularly because of the Covid-19 infections rising again. By the end of July, he warns that the stock market would be battered by the news of a plateauing economic recovery.
Judging by the brilliant recovery registered by the stock market, that appeared like a distant possibility. But MarketWatch has reported that S&P 500 earnings could be heading for a plunge, with the Covid-19 pandemic affecting all sectors. Earnings could improve, but the improvement could be less than the stock market expectations.
Don’t let that discourage you from stock trading, though. With advanced direct access trading platforms and commission free trading, you can get started easily. Start with small trades and gradually move to the bigger ones.
