Sign Of A Stock Market Bubble? – ETF Daily News
Tara Clarke: Are U.S. markets soaring to new highs for the right reasons, or are we in a stock market bubble?
What Is a Stock Market Bubble?
A stock market bubble occurs when investors drive stock prices above their true market value.
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Remember, markets are a reflection not only of investor calculations, but also of investor emotions and beliefs.
The dot-com bubble of the late 1990s is a classic example. People speculated on the development of the exciting, new Internet sector and began to overlook traditional metrics like the P/E ratio.
The market was so confident in tech profits that companies could simply add “.com” to the end of their names and they’d get a stock price bump.
But then companies began to run out of capital or went out of business. Executives were convicted of fraud for misuse of shareholder funds, and the SEC cracked down on venture firms for misleading investors.
The Stock Market Crash of 2000-2002 obliterated $5 trillion in market value.
Two indices just hit record highs: The Nasdaq Composite reached 5,107 on May 27, and the S&P 500 climbed to 2,130.82 on May 21.
But Nobel Laureate and Yale professor of economics Robert Shiller told Goldman Sachs on May 29 that while he isn’t certain people have the extravagant expectations you’d find in a “classic bubble,” “there is a stock bubble element in what we see.”
Typically, stock market bubbles stem from heightened expectations – but this bubble is the opposite.
Instead, people have extraordinarily heightened fears about markets right now.
“I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically,” Shiller said.
The same thing happened right before the dot.com bubble burst.
You see, Shiller frequently polls institutional and individual investors about confidence in the stock market.
He asks, “Do you think the stock market is overvalued, undervalued, or about right?”
“Lately, what I call ‘valuation confidence’ captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000,” Shiller told Goldman Sachs.
“The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to provide it is a bubble.”
When people are fearful, they tend to want to protect themselves by saving more for retirement and other safety nets.
However, they’re faced with limited options for high return.
And so they invest in overvalued equities, which in turn run up prices even more.
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Sign Of A Stock Market Bubble? – ETF Daily News
