The stock market, crypto market, real estate market — even Pokémon cards are hovering around all-time highs. Meanwhile, the real economy is facing 30-year-high inflation rates, ongoing supply chain challenges, and a way of life that remains very much impacted by COVID-19.
There are different viewpoints on the disparity. But when investors see companies like Lucid Group (NASDAQ:LCID) and Rivian Automotive (NASDAQ:RIVN) valued at a combined $200 billion — it raises some red flags. Here’s why Lucid and Rivian could signal a market top, how to approach those two companies, and what to do if you’re worried about a downturn.
Symptoms of an unhealthy market
If there ever were a sign of a market top, then seeing Rivian blast to a market cap of over $150 billion at its peak is probably it. Older investors may painfully remember the dot.com bubble of 2000 to 2002 where tech companies with little to no sales fetched valuations in the billions for little more than a business plan. Rivian isn’t even delivering its vehicles yet, but it’s already the second-most valuable U.S. automaker behind Tesla (NASDAQ:TSLA).
By comparison, Lucid is valued at around $100 billion. It’s a little more understandable considering the company is producing and delivering cars and has the six highest range ratings of any EVs rated by the environmental protection agency (EPA). It also offers versions of its Lucid Air luxury sedan that sport over 1,000 horsepower. Lucid also has some incredibly impressive technology that can go toe-to-toe with Tesla. However, even Lucid is looking more and more expensive as its stock price strays from fundamentals.
Did the bubble burst?
The euphoria seemingly peaked, at least for now, on Nov. 16 when Rivian reached an intraday high of $179.47 per share. The stock is now down around 30% from that high as investors take profits.
Meanwhile, Lucid was down around 30% from its all-time intraday high of $64.86 per share before Friday’s 17% gain. Investors looking for high-risk, high-reward options in the EV sector could consider Lucid over Rivian, or buy other leading EV names like Ford or Nio that have lower valuations despite being more established.
No one knows where Rivian or Lucid is headed in the short term. But we do know that sky-high valuations, even for companies with a lot of potentials, are cause for concern.
What to do now
Even if you think the Rivian and Lucid bubble signaled a market top, you’re still probably better off staying invested in the U.S. stock market (which has proven to be one of the best ways to generate wealth over time). A good pivot could be to transition toward stocks that don’t give you a meme stock migraine. Foundational companies like Microsoft or Amazon offer a lot of growth without nearly as much volatility.
Stick to investing fundamentals
Ultimately, the best way to approach a market top is by investing in companies you understand, are interested in, and will stick with through thick and thin. Investing in growth stocks like Lucid to make a quick buck is probably a bad idea. But if you believe in the company and want to let the investment thesis play out (and are willing to stomach the volatility), then it could be a good move.
However, for most investors, choosing companies that are industry leaders on a slow and steady growth trajectory is probably the best bet.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.