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Is the stock market in a bubble? The debate is heating up

What’s happening: “We are receiving numerous questions [about] whether a bubble is potentially forming in financial markets,” Mislav Matejka, JPMorgan’s head of global and European equity strategy, said in a note to clients on Monday.

But the research teams at big banks are hesitant to sound the alarm, pointing to historically low interest rates and the huge sums of cash still being printed by central banks.

“Taking into account the yield on Treasuries, corporate credit, or cash, the aggregate stock market index trades at below-average historical valuation,” Goldman Sachs told clients late Friday.

The investment bank referenced a column written at the end of November by economist Robert Shiller, who is an expert on bubbles and developed the most famous method for valuing stocks.

“With interest rates low and likely to stay there, equities will continue to look attractive, particularly when compared to bonds,” Shiller wrote.

That doesn’t mean there aren’t reasons to be wary. Goldman noted that “pockets of the market have recently appeared to demonstrate investor behavior consistent with bubble-like sentiment.”

“This is not to say that the ‘hot’ areas of the financial universe might not get much more volatile, and be subject to bouts of profit taking, which could even spread to equities more broadly,” Matejka wrote.

Both Goldman and JPMorgan highlighted special-purpose acquisition companies, or SPACs, as one potential problem area. In 2020, 229 US SPACs — or “blank check” funds that investors back while they look for takeover targets — raised $76 billion, six times more than in 2019, per Goldman. In the first three weeks of 2021, an additional 56 SPACs raised $16 billion.

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JPMorgan also observed that 2020 was the best year for IPOs since the dot-com boom, while those that have made their public market debuts “have recorded unprecedented gains in a short span of time.” Matejka called the moves “startling.”

There’s no sign that such enthusiasm is settling down. A short-form video app that competes with the Chinese version of TikTok is preparing for what’s expected to be the world’s largest initial public offering since the pandemic began, my CNN Business colleague Laura He reports.

Kuaishou, a tech company based in Beijing, is seeking to raise as much as $6.2 billion in a stock market listing in Hong Kong, according to details of the planned IPO shared with CNN Business by a source familiar with the deal.

Step back: Big-time investors like Carl Icahn and Jeremy Grantham have expressed anxiety about the state of affairs.

“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” Grantham wrote in a letter earlier this month. “Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history.”

But banks — while outlining some areas of concern and weakness — aren’t going so far, and think systemic risk remains limited.

Foreign companies give up on the US and bet big on China

Foreign companies are turning their backs on the United States, taking advantage of China’s booming economy and superior management of the Covid-19 pandemic, my CNN Business colleague David Goldman reports.

The details: Direct investment in the United States by foreign companies plummeted 49% to $134 billion last year, according to a report released Sunday by the United Nations Conference on Trade and Development. By contrast, foreign direct investment in China grew by 4% to $163 billion in 2020.

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2020 marked the first year in history that foreign direct investment in China topped the United States, the UN said. China is now the world’s largest recipient of foreign companies’ investments.

Remember: China’s economy grew 2.3% last year while the rest of the world’s major economies shrank. The country’s ability to control the spread of the virus “helped stabilize investment after the early lockdown,” per the report.

It’s worth noting that the drop-off in foreign companies’ American investments began well before the pandemic. After hitting a high of $440 billion in 2015, according to the US Commerce Department, foreign investment in the United States has been on a sharp downward slide.

Former President Donald Trump’s go-it-alone trade policies hurt foreign investment — particularly from China, which represented the sharpest drop in US investment over the past several years. Growing economic uncertainty around the globe has also been a contributing factor.

GameStop shares skyrocket as Reddit cheers

An army of day traders coordinating on Reddit has powered shares of video game retailer GameStop (GME) to an all-time high.

The latest: Stock in GameStop, a legacy company whose stores are often located in struggling malls, skyrocketed 51% on Friday to $65.01. They’re up another 41% in premarket trading Monday as investors tout the stock on social media with growing zeal. The value of the stock has more than tripled in the past month.

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Hype around GameStop has jumped since the company added Chewy founder Ryan Cohen, who has been pushing a digital overhaul, to its board. Last week, investors on social media plugged GameStop with increased ferocity as short seller Citron Research outlined the reasons it believed shares would drop to $20.

Citron said Friday that it will stop commenting on GameStop following the actions of “an angry mob,” per Bloomberg.

“We are investors who put safety and family first and when we believe this has been compromised, it is our duty to walk away from a stock,” managing partner Andrew Left wrote in a letter, citing harassment and hacking attempts.

My read: We’ve spent the past 10 months talking about how no-fee trading apps like Robinhood are affecting market dynamics — and this episode provides a clear example.

It also speaks to what’s happening in financial markets more broadly. Day traders, watching a meteoric stock boom despite the pandemic, are convinced that bets like GameStop can pay off. But such moves are, of course, incredibly risky — and Wall Street points to retail frenzy as an area of major concern when asking if stocks have gone too high, too fast.

Up next

Kimberly-Clark (KMB) reports earnings before US markets open.
Coming tomorrow: Results from 3M (MMM), American Express (AXP), Johnson & Johnson (JNJ), Verizon (VZ), Microsoft (MSFT) and Starbucks (SBUX).

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