Tag Archives: stock market bubble

Stock Market Bubble in 2014?

As of November, Janet Yellen, newly confirmed Chair of the US Federal Reserve Bank, doesn’t think so.

As reported in the Wall Street Journal MONEYBEAT, she said,

Stock prices have risen pretty robustly”… But looking at several valuation measures — she specifically cited equity-risk premiums — she said: “you would not see stock prices in territory that suggest…bubble-like conditions.”

Her reference to equity-risk premiums sent me to Aswath Damodaran’s webpage, which estimates this metric -basically the extra return investors demand to lure them into stocks and out of the safety of government bonds (in the Updated Data section). It’s definitely an implied value, so it’s hard to judge.

But what are some of the other Pro’s and Con’s regarding a stock market bubble?

Pros – There Definitely is a Bubble

The CAPE (cylically adjusted price earnings ratio) is approaching 2007 levels. This is a metric developed by Robert Shiller and, according to him, is supposed to be a longer term indicator, rather than something that can signal short-term movements in the market. At the same time, recent interviews, who recently shared a Nobel prize in economics, indicate Shiller is currently ‘most worried’ about ‘boom’ in U.S. stock market. Here is his CAPE indext (click this and the other charts here to enlarge).

shiller-cape

Several sector and global bubbles are currently reinforcing each other. When one goes pop, it’s likely to bring down the house of cards. In the words of Jesse Columbo, whose warnings in 2007 were prescient,

..the global economic recovery is actually what I call a “Bubblecovery” or a bubble-driven economic recovery that is driven by inflating post-2009 bubbles in China, emerging markets, Australia, Canada, Northern and Western European housing, U.S. housing, U.S. healthcare, U.S. higher education, global bonds, and tech (Web 2.0 and social media).

Margin debt, as reported by the New York Stock Exchange, is also at its all-time highs. Here’s a chart from Advisor Perspectives adjusting margin debt for inflation over a long period.

margindebt

Con – No Bubble Here

Stocks are the cheapest they have been in decades. This is true, as the chart below shows (based on trailing twelve month “as reported” earnings).

PEratios

The S&P 500, adjusted for inflation, has not reached the peaks of either 2000 or2007 (chart from All Start Charts)

10-7-13-spx-inf-adj

Bottom Line

I must confess, doing the research for the post, that I think the stock market in the US may have a ways to go, before it hits its peak this time. Dr. Yelen’s appointment suggests quantitative easing (QE) and low interest rates may continue for some time, before the Fed takes away the punch bowl. My guess is that markets are just waiting at this point to see whether this is, in fact, what is likely to happen,  or whether others in the Fed will exercise stronger control over policy, now Ben Bernacke is gone.

And, as seems probable, Yellen consolidates her control and signals continuation of current policies, then I suspect we will see some wild increases in asset values here and globally.