Ray Dalio’s bubble indicator finds that US equities are not dangerously high – but 50 of the 1000 largest companies are in ‘extreme bubbles’

Ray Dalio.

  • Ray Dalio’s bubble indicator suggests that the US stock market is not dangerously high.
  • However, it found that 5% of the top 1000 US companies are in “extreme bubbles.”
  • It also identified foam in stock prices, new buyers, bullishness and the use of leverage.
  • Visit the business section on Insider for more stories.

Ray Dalio’s bubble indicator suggests that US equities are not trading at unsustainable prices and may climb higher.

The billionaire head of the world’s largest hedge fund, Bridgewater Associates, said in a research note this month that his market meter is at the 77th percentile for the total US stock market. Its readings for the bubbles of the 1920s and 1990s are in the 100th percentile.

However, Dalio noted that 5% of the top 1000 US companies – including several new technology players – are currently in “extreme bubbles”. Still, it is less than half the percentage at the height of the dot-com boom.

Dalio’s bubble indicator combines six measures of the stock market. They are:

  • How high are the prices compared to traditional measurements?
  • Do prices discount unsustainable conditions?
  • How many new buyers have entered the market?
  • How big is the feeling?
  • Are purchases financed with high indebtedness?
  • Have buyers made exceptionally extended futures purchases to speculate or protect themselves against future price gains?

The Bridgewater chief’s meter shows that US equities are priced in the 82nd percentile by traditional standards, and the 77th percentile in terms of the earnings growth required to outperform bonds.

Its reading for new buyers is in the 95th percentile, largely due to the boom in retail investment. Bullishness is in the 85th percentile, partly due to the “exceptionally hot” IPO market, which has been charged by a flood of specialty companies or “SPACs”.

Dalio’s benchmark found that leveraged buyouts, which are driven by day traders who raise record volumes of call options on individual stocks, are in the 79th percentile.

On the other hand, futures purchases are in the 15th percentile – compared to the 100th percentile in the late 1990s – as the pandemic has reduced corporate investment and weighed the number of mergers and acquisitions.

The hedge fund’s billionaire indicator flags some foam in the shares. But it is positively optimistic compared to Warren Buffett’s favorite meter and “The Big Short” investor Michael Burry’s latest warning that the stock market “dances on the edge of a knife.”

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