Ray Dalio: Biggest Companies Are In Extreme Bubble

Ray Dalio: Biggest Companies Are In Extreme Bubble

Ray Dalio’s latest research on the U.S. stock market, which found that 50 of the 1,000 biggest companies are in ‘extreme bubbles.’  While the bubble indicator flags other indicators that the markets are entering frothy waters, it overall shows no signs of a bubble bursting, such as those in 1929 and 2000.

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Q4 2020 hedge fund letters, conferences and more

Ray Dalio's Six Indicators To Measure Bubbles

In the research, Ray outlines how Bridgewater measures a bubble, or an unsustainable high price, with the six following indicators:

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  • How high are prices relative to traditional measures? The current read for US equities is around the 82nd percentile, lower than what was seen in the 1929 and 2000 bubbles.
  • Are prices discounting unsustainable conditions? While stock prices in aggregate are high in relation to absolute returns they provide, they are not extremely high in relation to bond market competitors. It is currently in the 77th percentile, while in 1929 and 2000 it was at the 100th percentile.
  • How many new buyers have entered the market? This indicator is approaching bubble territory in the 95th percentile due to the flood of new retail investors into the most popular stocks.
  • How broadly bullish is sentiment? For “bubble stocks” the indicator is around the 85th percentile, brought on by IPOs and the recent SPAC boom.
  • Are purchases being financed by high leverage? The leverage gauge currently reads shy of the 80th percentile, but there is high leverage being deployed by the retail segment using options in bubble stocks.
  • Have buyers made exceptionally extended forward purchases to speculate or protect themselves against future price gains? This gauge is the weakest across all bubble gauges, pulling down the aggregate read.

Do you agree with Dalio on these equities being in a bubblr? Tell us in the comments section.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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