Why the Stock Market is Not a Bubble
Stock Markets 2013Nov 24, 2013 – 06:18 AM GMT
Alexander Green writes: In the past week, there have been major stories in both The Washington Post and The Wall Street Journal – as well as a cover story in Barron’s – asking the same pointed question: Is this stock market a bubble?
And my column in Investment U last week raised a warning flag, too, about a bull market that’s starting to show its age. So it’s understandable that people are getting nervous.
But at the risk of spoiling the suspense: No, this is not a stock market bubble.
The current bull market began on March 9, 2009, and is currently up 167%. That is more than the housing bubble, when home prices more than doubled from 2002 to 2007, but not nearly as big as the Internet stock bubble between 1990 and 2000, when the technology-laden Nasdaq rose 417%.
Bears point to the frothy Twitter (NYSE: TWTR) IPO – the social-media company’s shares surged 73% in a matter of days – and the 300% move in Tesla (Nasdaq: TSLA) this year. But a couple of bubbly stocks don’t represent an entire market.
Every bull market is followed by a bear market (and vice versa). And at nearly five years, the current bull market is older than average.
The Signs Aren’t There
But the current stock market doesn’t contain the two factors present in every genuine financial bubble: sky-high valuations and wild-eyed optimism.
Sure, the Dow has recently hit several consecutive all-time highs. But 16,000 is only a number, not a valuation based on sales, earnings, dividends or book value.
For instance, when the Dow hit 11,000 in March 2000, the index sold for more than 30 times earnings. Thirteen and a half years later, while the market is nearly 50% higher, it sells for only 16 times earnings, very close to the long-term average. And most foreign markets – especially European ones – trade at even lower valuations.
So while stocks are near record highs, valuations are nowhere near them.
The other major indicator of a bubble is sentiment. For true believers at the time, Internet stocks represented “a New Era” and real estate was a seemingly can’t-lose proposition.
But that kind of silliness is nowhere apparent today.
Yes, mutual fund cash-flow figures show that ordinary investors are moving back into stocks. But that hardly means the bull market is over.
What a lot of pundits don’t seem to understand is that, historically, everyday investors are right most of the time. They are usually in for bull markets and out for bear markets.
Where they get it wrong is at the extremes: being too pessimistic at market bottoms and too enthusiastic at market tops. So we should be looking for signs of euphoria among ordinary investors.
But I don’t see it right now. Most investors are moving into stocks not because they see nothing but blue skies ahead but because they are earning nothing in cash and next to nothing in bonds. So they are sticking their necks out a bit. And there’s nothing wrong with a bit of prudent risk-taking.
So don’t buy the fear stories that are circulating. Yes, the market can sell off at any time for reasons we can’t foresee.
But are we in a bubble right now?
Absolutely not. We have neither the high valuations nor the overly optimistic sentiment to make that case. So while we are certainly well into this nearly 5-year-old bull market, it still has room to run.
Copyright © 1999 – 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: [email protected]
Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.
© 2005-2013 http://www.MarketOracle.co.uk – The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
Only logged in users are allowed to post comments.