Questions about the stock market exhibiting signs of irrational exuberance once again are starting to creep into the minds of many investors right now. The valuation of the broader market in relation to Gross Domestic Product in the United States is right around all-time highs right now.
Stocks are more expensive on some metrics than at any other point in history. Some investors, seemingly, may eventually take any negative economic news as a reason to sell, and some long-term investors are getting understandably concerned with where valuations are right now.
One sector many investor are pointing to now as looking like another potential bubble formation is the cannabis sector. Last week, shares spiked dramatically higher intra-week, before settling down near the end of the week, as retail investors began piling into this crowded trade once again.
The publicly traded cannabis sector is one I’ve viewed as highly volatile and one that has represented a bubble in the past. It looks like the bubble we saw inflate in 2018/2019 is reflating again. The last time we saw this bubble form, speculation about rising pot demand linked to Canadian legalization was the primary catalyst.
This time, the potential for U.S. legalization has taken cannabis stocks on an incredible ride. The incoming Biden Administration in concert with a Democratic win in the Senate has stoked the potential for cannabis legalization on a fast-tracked timeline.
I think these catalysts remain highly speculative and would encourage long-term investors to avoid momentum investing right now. Underperforming the stock market in the near-term could prove to be wise, if we see this momentum turn around in the wrong direction over the medium-term.
Invest wisely, my friends.
