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Stock market bubble is forming and a 50% plunge is inevitable: strategist

Brian Sozzi
Editor-at-Large

One can’t help but to think the “everything rally that is engulfing Wall Street right now is a classic asset bubble just waiting to explode sometime in 2020.

“I think so,” AdvisorShares CEO Noah Hamman told Yahoo Finance’s The First Trade, referring to whether we are witnessing a bubble form across asset classes. “It will continue on for a while for as long as we see we have an indication that we could have lower rates ahead possibly though with a pause, but with an increasing Fed balance sheet.”

By “everything rally,” we mean assets of all kinds are in major rally mode almost in unison. It’s as if investors — which are being hyped up on a steady dose of Fed rate cuts in 2019 and the signing of a phase one trade deal between the U.S. and China — are beginning to completely misprice asset risk amid fear of missing out on rising markets.

Oftentimes that ends up badly for investors.

Let’s take gold, for instance. Gold prices largely traded range-bound from early September to early December as investors dumped the yellow metal in favor of more liquid stocks. But despite the major equities markets melting up into yearend, even boring gold prices have caught a bid in December.

Gold prices have shot up to seven-week highs.

That momentum has spread to the the VanEck Vectors Goldminder ETF, which Renaissance Macro notes has notched a 5% gain in the past two sessions. Meanwhile, silver prices are up about 6% in the last month. Copper has strengthened to the tune of 7% this month.

Rally on.

“With a drop in extreme bullish sentiment and now a breakout above resistance, we think in the early days of 2020, gold and silver are poised to challenge their highs from September. As momentum begins to build in gold and silver, we are comfortable chasing strength and would absolutely be buying dips,” said Renaissance Macro strategist Jay deGraaf.

What seems to be an inflating bubble of course is evident in stock prices, too. Shares of chip player Advanced Micro Devices have skyrocketed 20% in the last month. Not a day has gone by this month where AMD isn’t one of the hottest trending tickers on Yahoo Finance, an indication traders are chasing momentum here rather than scrutinizing the company’s inflation valuation.

Fed ‘driving up prices everywhere’

Apple (AAPL) and Tesla (TSLA) could be tossed into the bubble camp as well. Apple’s stock is up roughly 10% in December, bringing its year-to-date gain to 83%. Tesla’s stock is hovering around a record after tacking on a cool 32% this month.

At a $77 billion market cap, Tesla is worth almost two times that of Ford (F)...even though its profit outlook remains highly questionable.

Hamman thinks the Fed’s actions are “driving up prices everywhere.” He does caution that if the Fed signals a change in interest rate policy by mid-2020, the bubble could explode.

“It could be a huge bubble, and we could see huge declines — 50% and 60% declines that happen quickly before you have a chance to react to them.”

Until then, Hamman recommends staying long the market.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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