Is the global share market in a bubble?

I think that’s a key question that many investors should be asking themselves.

There are many phrases to keep in mind with investing. The market tends to price in all known information into the share price. Investing in shares is (or should be) a long-term idea. Shares have historically returned an average of around 10% per annum over the long-term. It can be futile to fight the US Federal Reserve.

But it’s also a part of investing that the current share price should reflect some uncertainty. The best outcome isn’t necessarily the most likely outcome. The S&P 500 Index (INX) is currently higher than it was six months ago. The NASDAQ is higher than it was in the first half of February 2020. Is that reasonable?

Other areas of the global share market haven’t recovered as strongly, such as Europe, but there is a recovery there too.

I do think that the Australian and New Zealand share markets are justified in their recoveries. The coronavirus is almost gone and the economies could bounce back fairly quickly with the large government support, though there is still pain out there. Places like South Korea and Taiwan are also in good shape.

Is the global share market in a bubble?

Momentum can be a strong force in lifting share markets, gathering steam by itself. But protests combined with a pandemic could be a real hit to confidence in the US. There could be a second infection wave there, although the first hasn’t really ended yet.

There are plenty of US shares that now look as though they’re valued as if everything is fine. Unless there is more government financial support, there could soon be a painful period of missed rental payments, credit card payments, mortgage payments and so on in the US. I certainly hope there isn’t, but the ongoing issues may make it more likely. I’m not confident about the US share market over the next six to nine months.

Perhaps the market is already pricing in these possibilities. Maybe there is no global share market bubble at all considering how low interest rates are? There is a lot of investment money out there wanting a home. 

It can be a mistake to be too cautious. That’s why I have kept investing during this period. But I wouldn’t sell all my belongings to invest in global shares at these prices. There are a few overseas-focused shares I’d consider like MFF Capital Investments Ltd (ASX: MFF) where the stronger Australian dollar helps. But I’d prefer to stick to Australian businesses through ASX shares.

More reading

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• Why it’s a good week to buy international shares
• Should your share portfolio actually be 50% cash right now?
• Why I’m not afraid to invest in shares during this recession
• 10 top ASX growth shares to buy in June for strong returns

Motley Fool contributor Tristan Harrison owns shares of Magellan Flagship Fund Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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When you hear about ‘the share market’ on the news or when scrolling on your phone, it’s likely you will actually be hearing about the movements of the S&P/ASX 200 Index (ASX: XJO).

See, the share market is made up of over 2,000 different companies, all being bought and sold in one marketplace. As such, it’s very difficult to ascertain what the ‘entire market’ is doing by just looking at these thousands of different company names.

How the ASX 200 really works

That’s why the concept of an index is so useful. An index like the ASX 200 is really a collection of a select group of shares, usually those with the highest market capitalisation (or value).

The thinking goes that if we look at how the biggest companies are fairing, we’ll get a good idea of how the market is trading as a whole.

The ASX 200 index does just this by selecting the largest 200 public companies trading on the ASX.

But most indexes, including the ASX 200, don’t treat each company equally but rather adopt a system known as ‘weighting’. Weighting involves giving the larger companies a higher ‘weight’ or value within the index. By doing this, the movements of the largest shares are going to influence the overall index much more than the movements of the smaller companies.

So if we look at the index today, we can see how the largest companies come to dominate. Here’s a table of the top 10 shares within the ASX 200, and how much weight each share has.

All-stars of the ASX

ASX 200 share name	Index weighting (%)
CSL Limited (ASX: CSL)	8.12
Commonwealth Bank of Australia (ASX: CBA)	7.09
BHP Group Ltd (ASX: BHP)	6.57
Westpac Banking Corp (ASX: WBC)	3.72
National Australia Bank Ltd. (ASX: NAB)	3.60
Australia and New Zealand Banking Group Limited (ASX: ANZ)	3.29
Woolworths Group Ltd (ASX: WOW)	2.94
Wesfarmers Ltd (ASX: WES)	2.94
Telstra Corporation Ltd (ASX: TLS)	2.41
Transurban Group (ASX: TCL)	2.40

Table: Author’s own

As you can see, it’s really only the largest few ASX 200 companies that have significantly different weightings to the others in the top 10. As you move further and further down the table, each company’s individual ability to influence the overall index diminishes.

A massive 43% of the power to affect the overall movement of the ASX 200 index resides with these top 10 companies. Therefore, when you hear about the index rising or falling on any one day, it’s usually because a combination of the shares you see above are doing so.

So when you next hear about what the ASX 200 index or ‘ASX shares’ are doing, you’ll know that it’s the movements of the above companies that are really being discussed most of the time.

More reading

• Employees rewarded with $50 million in Woolworths shares and gifts
• ASX shares are in a bull market. What should investors do now?
• Telstra shares and 2 other ASX companies to buy in a low-interest rate world
• Top brokers just upgraded these 3 ASX 200 stocks to buy
• Is the Qantas share price a buy?

Sebastian Bowen owns shares of National Australia Bank Limited and Telstra Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Transurban Group, Wesfarmers Limited, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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