By Mark Hulbert
A growing “wall of concern” that US stocks are entering a period of irrational exuberance
For those with short memories, Reddit's successful IPO raises concerns that the US stock market is entering a period of irrational exuberance like in 2021.
It's understandable to see signs of exuberance. Reddit (RDDT) has priced its IPO at the top of the $31 to $34 range the company had set just a week earlier. The stock opened at $47 per share and ended its first day as a public company even higher, at $50.44 – 48% above the IPO price.
It's also understandable why excessive optimism is a cause for concern. The stock market has historically delivered subpar returns when investors have been exuberant, according to a groundbreaking study by Harvard Business School professor Malcolm Baker and New York University finance professor Jeffrey Wurgler.
Two sentiment indicators they use to measure exuberance are based on the IPO market: the number of IPOs coming to market (NIPO, in professors' shorthand) and the average first-day return of IPOs (RIPO).
By these standards, the recent IPO excitement is little more than a blip. Neither NIPO nor RIPO are high enough to trigger even a mild anxiety attack.
The following graphic provides 40-year context for the latest NIPO and RIPO numbers, courtesy of data from University of Florida Professor Jay Ritter. Let's take NIPO for example: The number of IPOs shown in the graphic for this year so far would be 39th in a ranking of the last 44 years, even on an annual basis.
The same applies to this year's RIPO at 10.4%. If that turns out to be the average for all of 2024, it would be the lowest value of any calendar year since 2010, when the market was still struggling to recover from the global financial crisis. In a ranking of RIPOs for calendar years since 1980, this year would rank 32nd.
Of course, this discussion doesn't mean there aren't other reasons to worry about stocks. But when it comes to the potential warning signs of a supposedly overheated IPO market, rest easy.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that charge a flat fee to review. He can be reached at [email protected]
Also Read: Reddit's debut made a splash, but caution is still needed in the IPO market
More: What could trigger the next stock market sell-off? That's what history tells us.
-Mark Hulbert
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03/30/24 0658ET
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