Markets approaching a boiled frog moment

Markets have a whiff of simmering frog about them. Investors are growing adept at ignoring the warning signs like the proverbial amphibian in a pot of slowly heated water, not recognising the dangers until too late.

But on a near daily basis, something extraordinary crops up to remind us that the whizz-bang rush into risky bets may be getting out of hand. 

The more cautious investors out there have been wringing their hands for nearly 10 months now, and they have been thoroughly beaten up in the process. Global stocks have climbed 74 per cent since last March.

Betting that asset valuations will fall back to meet the dire global economic picture has proven to be a fool’s errand in the face of overwhelming support from central banks. Fund managers have largely mentally moved on from the coronavirus crisis that is still jamming up hospitals and locking down economic activity around the world. Faith in vaccines has taken over.

Optimists quite reasonably point out that once we all have jabs in our arms, those of us lucky enough to have amassed savings over the past year are itching to go out for a meal, catch up with friends in a bar, splash out on a holiday, or fill the wardrobe with clothes that fit our slightly more padded lockdown physiques. Companies are going to have to work fast to meet demand, and central banks are in no hurry to spoil any recovery, as US Federal Reserve Chairman Jay Powell reminded us this week. 

Still, what Mr Powell's predecessor Alan Greenspan might have referred to as pockets of “froth” merit close attention.

One is the surge in stock market speculation among retail investors, particularly in the US. The explosion in this space drew most attention last summer, when the “stocks only go up” crowd demonstrated more bravery (or foresight) in buying the coronavirus dip than many more sober professional fund managers.

But they have not gone away. Far from it. Data tracked by Vanda Research shows that retail buying of US stocks has kicked off the new year in rude health. The first two weeks of 2021 can rival even the most exuberant weeks of last year, its figures show, and that is before the next stimulus cheques land in Americans’ bank accounts.

Buying is focused on a tiny clutch of stocks, particularly in the electric vehicles sector. Tesla remains a favoured pick. Its scorching 900 per cent rally since the start of last year may not be entirely down to retail punters putting their stimulus cheques to work on a bet, but it is hard to imagine the army of fans has not helped. Similarly, penny stocks popular with have-a-go investors are in hot demand. Analysis by Themis Trading shows that trading in stocks valued at less than $1 accounted for almost a fifth of all equity trading in the US on January 11.

The screaming rally in bitcoin — 300 per cent last year and a further 35 per cent in the opening days of 2021 — is another symptom of a powerful wave of retail enthusiasm, despite increasingly noisy protests from policymakers. Christine Lagarde, who heads the European Central Bank, has railed against “funny business” in cryptocurrencies and UK regulators have reiterated their advice that anyone betting on them must be prepared to lose everything. But one 22-year-old TikTok influencer has built up a million-strong following partly by divining the next steps in bitcoin’s wild ride based on astrology. 

Does that add up to a reason for professional fund managers to bet on a pullback now? No. But if and when a reckoning comes, we will look back on it as a bizarre fever. As Jeremy Grantham, the famed founder of GMO, warned in his widely read new year note, “really crazy investor behaviour” especially on the part of individuals” is one of the more reliable signs of unsustainable bubbles.

Lively risk-seeking behaviour is not confined to individual investors, of course. Drawing together two of the frothiest aspects of 2021, a blank-cheque company, or Spac, this week announced plans to launch Bakkt Holdings on to public equity markets. Bakkt, a cryptocurrency platform, had zero customers last year, its regulatory filings show. It is hoping to get that tally up to 30m in five years. It will boast an enterprise value of more than $2bn when it lists, according to current owner Intercontinental Exchange.

Fund managers are desperate for places to park their cash. Low-cost European airline Wizz Air, fresh from recording an 80 per cent slide in passenger numbers in the year to December, this week issued three-year debt for a coupon a little over 1 per cent. Bankers say borrowers have never had it so good.

Again, this is no reason to bet the farm on a crash. But complacency is a clear danger.

katie.martin@ft.com