Five indicators show that US stocks are not irrational

According to the five indicators proposed by Harvard Business School Finance Professor Malcolm Baker and New York University Finance Professor Jeffrey Wurgler, US stocks are not currently in an irrational glory.

Hertz, the nation’s second-largest car rental company, claimed that two weeks after its bankruptcy, investors sought after, and its stock price rose sharply; Chesapeake Energy hinted in May that it might claim bankruptcy protection, but the stock price was in early June. Jump up more than 180%. Land company Fangdd (Fangdd), because the company’s name is similar to the fang stock FAANG, had a 400% surge in one day.

The former chairman of the Federal Reserve (Fed), Green Span, used the term “irrational glory” in December 1996 to warn that the rise of the stock market was driven by irrationality.

Although the above case shows the irrationality of investors, based on the analysis of the five indicators proposed by Baker and Wagler, US stocks have not fallen into the irrational glory before the dot-com bubble in the late 1990s.

Indicators one and two, the number of initial public offerings (IPOs) of stocks and the increase on the first day of listing. There were 476 IPO cases from the previous year of the Internet bubble to 1999, and the average return rate on the first day of listing was 71%. In comparison, there were only 44 IPO cases so far in 2020, with a return rate of about 34%. Less than half of 1999.

Indicator three, the financing methods of listed companies, selling shares or borrowing. During the period of irrational glory, companies tended to raise funds in the stock market. In 1999, the proportion of funds from the stock market was 18%. In 2020, it was only 7.5%, which was still less than half of 1999.

Indicator 4, the relative valuation of dividend-paying and non-dividend-paying companies. The two professors believe that most of the companies that pay dividends are companies that have been established for a long time and have excellent reputation, but most investors in the irrational glory period prefer fast-growing companies that do not pay dividends.

During the dot-com bubble, the net stock value ratio of companies that did not pay dividends was more than double that of companies that paid dividends. According to FactSet data, the net price-to-value ratio of dividend-paying companies today averages 44%, higher than companies that do not pay dividends.

Indicator 5, the average discount amount of closed-end funds. The current discount rate is greater than historical levels, suggesting that fund investors are more fearful than greedy.

Andrew Beck

Andrew Beck is a 28-year-old writer who enjoys playing football and reading books. He is smart and creative, but can also be very sneaky and a bit lazy.

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